Astronics Corp (ATRO) 2010 Q1 法說會逐字稿

Greetings and welcome to the Astronics Corporation first quarter 2010 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, investor relations for Astronics Corporation. Thank you. Ms. Pawlowski, you may begin.

Thanks, Rob, and good afternoon, everyone. We appreciate your time and interest in Astronics. Here with me today is Pete Gundermann, President and CEO of Astronics, and Dave Burney, Chief Financial Officer. They will be covering the results, outlook and prospects of the Company on the call and then we'll follow up with a question-and-answer period. Should you not have the release that went out this morning it is available on the Company's website at www.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 the 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, www.sec.gov, as well as the Company's website.

So with that, let me turn it over to Peter to start the discussion. Pete?

Thanks, Debbie, and good day, everybody. Thanks for tuning in. We are pretty pleased with our first quarter results. We think it provides a pretty strong start for our fiscal 2010. Revenues for the quarter were $46.9 million. That's down quite a bit from $50 million in the first quarter last year, and pretty much in line with the recent quarters. $43.2 million, or 92% came from our Aerospace segment. For our Aerospace segment that's the strongest shipping quarter we've had since the end of 2008, when we had shipments of $44 million. 2008, for those who can remember, was the tail end of the good old days, it seems. Our Test Systems segment had revenues of $3.7 million. That's only 8% of our total for the quarter just passed. However, on that shipment level, we were fairly profitable, with a net profit of $3.4 million. That's up from $1.4 million in the first quarter of last year. The results are basically due to pretty strong efforts at cost management over the last year and favorable product mix. We'll talk about each of those in due course, but basically on a slightly reduced revenue level, we managed to make quite a bit more money and we're pretty pleased with that result.

Perhaps the most encouraging thing, though, at least from my perspective, was our bookings level. We took in orders during the quarter of $54.3 million. That's up substantially from $30.8 million in the first quarter last year, and in fact, was our strongest booking quarter ever. We've never had bookings as high as $54.3 million before. It's a book-to-bill ratio of 1.16. Don't have to look back too long, though, to remember that our fourth quarter of 2009, the immediately preceding quarter, we only had bookings of $30 million, so to go from $30 million in one quarter to $54.3 million the next quarter obviously makes one's head turn just a little bit and it makes us -- it encourages us for the year ahead of us, but obviously throws some questions in the air about how to predict in this environment when bookings can vary so substantially from one quarter to the next.

Looking at our segments briefly, our Aerospace segment, as I mentioned, had revenues of $43.2 million, 92% of our total. Aerospace essentially contributed all of the margin. That will probably be the way it is for a little while here. We did have a favorable product mix in the sense that some of our programs -- as they migrate, some of our lower-margin programs are being replaced by higher-margin programs, especially demand for our cabin electronics products, which with the volumes that we generated in the first quarter tends to have a pretty high contribution to our combined total. It's hard to quantify, but we're also experiencing some pretty significant production efficiencies. We, again, just had a quarter of $47 million. We did that with approximately 200 less people than we had a year ago in the first quarter when we did $50 million in revenue. So in order to generate that kind of increased productivity we've taken some pretty substantial steps and we are very pleased to see the results roll through in our income statement like they did in the first quarter.

Again, our outlook in Aerospace is pretty positive based on the quarter just achieved. Our bookings for the Aerospace side alone were $50.7 million. That's our second best Aerospace booking quarter ever. Again, you have to go back to the second quarter of 2008 to find our only quarter that was higher. And again, we view that as a pretty positive sign. And kind of qualitatively, there seems to be a ground swell of strength across the aerospace industry these days and the commercial transport world load factors are up pretty strongly.

I expect somebody will ask about mergers in the industry sweeping through North America. We generally feel those mergers are positive in the sense that it'll allow some rationalization of the industry and hopefully result in some stronger airlines. Combined with the trend towards increased electronic services basically for passengers, and our strong competitive position, we feel that that's a positive dynamic. But in addition to that, business jet traffic is growing by most measures and that bodies well for production of private aircraft, which we're pretty heavily dependent on. And again, qualitatively we have been getting quite a bit of interest in longer-term development programs, which about a year ago a lot of them kind of went on the shelf. So it's good to see these preliminary discussions and general level of interest from our OEM customers picking back up.

As far as our Test Systems segment went it was a little bit of a disappointing quarter. Revenues were $3.7 million, 8% of our total. We were break-even on that revenue level with the help of some warranty reserves, which were reversed back, so we don't expect necessarily to stay profitable at that kind of production level, but we were in the first quarter at least break-even. The big issue there continues to be bookings. We had bookings during the quarter of $3.6 million, which is quite a bit lower than expected. We have some prospects. We continue to be hopeful that we'll be able to increase that booking level. And the timing was such, though, that those slid -- obviously slid out of the first quarter and we're hoping to capture -- catch back up in the second quarter. The folks in that segment are doing the best they can to push those orders along.

It was a pretty quiet quarter in terms of our balance sheet. We generated cash from operations during the quarter of $1.6 million, paid down about $3.1 million in debt. At the end of the quarter, we had $12.7 million cash on hand and we have about $32 million of room on existing credit vehicles should we need it. But, again, for the quarter, it was a pretty quiet quarter in terms of balance sheet.

So where does that leave us in terms of our expectations for the rest of the year? In February, a couple months ago, we gave guidance of $170 million to $190 million. We said that we expected Aerospace to be in the $145 million to $155 million range and Test Systems to be in the $25 million to $35 million range. For now we're leaving those forecasts alone, we're sticking with them. If we had to guess right now we would say that it's possible Aerospace will be on the high end of their range, maybe a little bit above it. It's possible that our Test Systems segment will be at the low end of their range or a little bit below it, but at this point, the overall consolidation, we think, stays in that $170 million to $190 million range. We're obviously going to watch our market situation very carefully and we'll watch our bookings rates pretty carefully, and we'll see if there's an update to those numbers due next time we talk.

And given the first -- that it's the first quarter of the year I think that's it for my prepared comments, kind of short and sweet. I think we would like to open it up for questions now, Rob, if anybody has anything.

Thank you. (Operator Instructions). Our first question is from the line of Tyler Hojo with Sidoti & Company. Please proceed with your question.

Good afternoon, everyone.

Good afternoon, Tyler.

The question's just on the E&D expense. You guys are tracking a little bit above the $20 million to $25 million guide that you gave for the year. Just wondering if maybe you could update your comments there.

Do you want to go ahead?

Yes, you're right, Tyler, it's a little bit higher. I expect it to be -- by the end of the year, we'll be in a $25 million to $26 million range. First quarter was a little bit higher than we expect the last three quarters to be, but I'll put a caution on that, that it depends on -- it's very program driven and if there's some opportunities that come up during the year that we decide -- that we win, the number could be at the higher end. And likewise, if there is opportunities that we don't win or that don't, don't come our way it could be at the lower end.

Okay, okay. And just in regards to -- I think, Pete in, your prepared remarks you were indicating some kind of increased conversations with customers just in regard to some of these development programs. I guess what I'm wondering is, where do you think you stand in this development cycle? Would you expect $25 million to $26 million to be a go-forward range from here, or any comments you could provide would be helpful?

It's a little bit speculative to go out years, but I guess I would assume that that's a reasonable level. It's possible that it could drop a little bit next year, depending on what programs we win towards the end of this year. And -- but the other side of it is we have some internally-driven development ideas that we could fill in a void with if there aren't so many customer programs to work on instead. So part of it is we feel like we've got a pretty capable group on the technical side across the Company right now, and with the downsizing we've done we certainly don't want to downsize any more if we don't have to. We'd like to retain the expertise that we have. So if we win a lot of customer-driven programs that overall development number could possibly go up. If we don't, I have a hard time seeing it going down substantially, but it could go down slightly for a while.

Okay, that's fair. And then on the Test Systems business, would you be able to quantify what kind of benefit the warranty reserve added in the quarter?

It was -- yes, with pretax it was $700,000.

Okay. Got you, okay. And just in regards to how you think things kind of shake out from here, you guys indicated back in the last conference call that Q1 would probably be in the $40 million to $42 million range. Any idea where you think Q2 might be? What I'm trying to get at is does it seem like perhaps some business got pulled into Q1 relative to Q2, or how should we look at that?

It's a very good question and we're wondering the same thing. So far, we would tell you that the second quarter demand from a booking perspective, we're continuing to see some of the momentum we saw in the first quarter, so that's a positive. What we don't know is whether customers are pulling things in from Q3 and Q4 into the first half for some reason, or whether this trajectory is going continue. You're right. We expected when -- just a couple months ago we expected that Q1 would be relatively slow and that we'd pick up momentum as the year progressed and we're trying to get a handle on that. A fair amount of our business is in our cabin electronics side to airlines and to our big IFE customer, in particular. We don't always have perfect insight into their expectations, but so far in general, that part of our business has -- demand has exceeded what they said they were going to do. So if that continues then it will be a pretty positive boost for the year.

I see, okay. And just a follow up on that thought, what was Panasonic as a percent of sales this quarter?

We're going to have --

Not at my fingertips, I can get that for you, Ty.

Okay, that sounds good. Maybe when you get it you could yell it out. I'll hop back in queue. Thanks.

Okay.

Thank you. Our next question is coming from the line of Scott Lewis with Lewis Capital Management. Please proceed with your question.

Thanks, good afternoon and nice quarter, guys.

Thank you.

Just a couple questions. On the mix shift you talked about, Pete, that sounds like it was more of a -- could it be -- is more of a trend? It wasn't just a quarter thing, given it was old programs dropping off, is that correct?

Yes, we have some older programs, a couple that come to mind. Historically we're doing quite a bit of work for Eclipse and that was lower margin business for us. We had a tactical Tomahawk conditioning unit that we were building and some pretty significant volumes. That had a little bit more touch labor than we're working on today. So that kind of mix change is going to help our financials these days.

Okay. And then secondly, I wanted to ask, in one of your recent presentations you've got a slide with the various kind of platforms you're on from 2006 to 2016 and you added a new design business jet and I was wondering if that was a power distribution or a lighting win?

Which presentation are you talking about?

The one from February.

February of this year?

Yes.

I would have to -- that's what I'm wondering. Is the Lear 85 on that chart somewhere?

The Lear 85 is on that and then you have a separate box for -- I think you just say new design business jet and it's right on towards the right end of the --

I'm drawing a blank, Scott, I'll have to get back to you.

Okay, okay. I'll touch base with you afterwards. Then just lastly, Pete, I'm wondering if you see any bookings yet on 787?

Not substantially, no. Just a refresher on that one, we provide in-flight entertainment, both to [Talus] and Panasonic. Talus, just the way the mix fell Talus had a whole bunch of the early programs, early deliveries on the 787, and when Boeing was still representing they're going to build at a certain rate they had all their suppliers, including Talus, including us providing hardware. So we've already delivered -- I don't want to say something like 20 chipsets to Talus and so we're not going to see a whole lot more activity until that airplane ramps up. My guess is we'll start building again in the second half of 2011l, if they start flying and delivering at the end of 2010 like they say.

Right. I only ask because it seems like they've I think they've already produced, or at least they have on the line 20 or 30 planes.

Yes.

So maybe it'll happen soon. Okay. Well, thanks a lot, guys.

Sure thing.

Thank you. Our next question is from [Kevin Chiapatoni] with Boenning & Scattergood. Please proceed with your question.

Good afternoon, guys, thanks for taking my questions. A little bit of a follow up on the mix question. Since it seems to be a trend, do you think gross margins can stay relatively close to what they were this quarter for the rest of the year? Or is it going to trend down a little bit?

It might trend down a little bit, but it's a standard quarter in many effects. There wasn't a lot of stuff happening so if we continue to get the demand we did in the first quarter, even with our relatively high E&D load we're able to turn in some pretty good results. So we 'd like to think we can stay in the neighborhood.

Okay. And then with regards to the business jet market, obviously things have been difficult there, what are you guys seeing in terms of quote activity, et cetera, through the second half, end of the year? Are you envisioning a pickup there, or is going to -- are we looking more into 2011?

Well, to us at this point, seeing production forecasts from our customers that don't show repeated and continuous declines is really, really good news. We're pretty excited about that. And we are, in some cases, starting to see some increases in certain models. But at this point, I don't think it's -- nobody's expecting a 10% or 20% increase and it's too early to predict what's going to happen in 2011. I think all of our OEM business jet customers are a little gun shy about what happened to them last year in terms of forecasts.

Okay, that's all I had. Thanks, guys. Sure.

Thank you. (Operator Instructions). Our next question is from the line of Dick Ryan with Dougherty & Company. Please proceed with your question.

Thanks. Say, Dave, on the SG&A line can you kind of give us a characterization of the cuts you've made, variable versus permanent? If we continue to see a ramp, how much may come back into the equation?

I'll try. A lot of the headcount reduction was not SG&A, it was cost of sales, touch labor. It was really across the board. But I think it's fair to assume that if the business comes back to where we're growing again that we're going to go through another ramp-up like we did a few years ago and that we're running pretty hard right now with what we have in terms of our headcount.

Okay. And on the tax line, what will you think that trends?

I think we vary a little bit, as you know. I think 33% to 30% today is, is what I expect for the year.

Okay. Pete, on the Test business, I think, if I recall past conversations you talked about other opportunities and I'm not sure if it was either in other branches or if it was overseas. Any progress being made there?

I think so. We're working it pretty hard. We have -- I talked about a shipment forecast, the $25 million to $35 million. We have an internal booking forecast that's bigger than that, and it's -- it seems to be what I'd call a pretty target-rich environment. So it's a question,in my view, of timing, and, what's getting urgent is we don't have the backlog at this point in house to support $25 million to $35 million of production in 2010, so there's some urgency there. But I'll continue to maintain that I think it's a, market that has some pretty serious potential and we have some pretty strong capabilities, so if we can line up the capabilities with the potential where it exists I'm hopeful of good news. And you're right, a lot of the opportunities are foreign. One way to think about this is where are all the military radios being sold these days? That's where we think we sell test equipment.

Now would this -- these opportunities, are they knocking down onesy-twosies, or are there some large RFPs hanging out there?

I'd say fairly large. For us in our line of business something over a couple million dollars is pretty large and there are a number of those.

Great. And on the cabin electronics side, can you give a sense if it was new build or retro fit opportunities there in the quarter? Or what you're seeing in the retro fit side?

Well, we're seeing higher-than-expected demand. In our business the part of it that's linked to aircraft production is fairly predictable and fairly stable. There was a time when we were really good at predicting at where we were going to be. It's the after-market or field-modification side that is a little harder for us to predict, especially in our cabin electronics products line,where we have an off-the-shelf family of products and we have some fairly significant customers, including Panasonic and Talus, who order as they will based on what their book of business looks like. So we do get forecasts from those customers and we build those forecasts into our forecast and they're, frankly over the first quarter here especially, ordering at rates in excess of what they said they were going to do. So that translates directly in increased volume for us and it flows right through our income statement. As best we can tell they're not stealing from the later quarters to feed the earlier quarters and so far in the Q2 we continue to see some pretty good strength there. So we're hopeful that continues.

Great. Thanks, guys. Good quarter.

Thanks.

Thank you. Our next question is a follow-up question from the line of Tyler Hojo with Sidoti & Company. Please proceed with your question.

Yes, just on headcount, you said it was -- you were down about 200 heads, do you have a number there?

More specifically than 200?

Well, just an aggregate number of employees.

Oh, where we are today?

Yes, that's correct.

We're still digging up your last number, Tyler.

No, we have it.

Well, we do have your last number. Panasonic was a good 30% of our revenues in the first quarter.

Wow, okay. ,

We're a little over 1000 people.

Okay. And in terms of the CapEx budget, does that change at all? I think last time you said $2.5 million to $3.5 million.

No, that remains.

Okay. All right, very good. And just lastly, just more of a strategic question in regards to the Test Systems business. I thought it was actually quite positive that the business was profitable this quarter, but just wondering if, given the current run rate of business, even if it is a $25 million to $30 million business, assuming that some of those bookings do indeed go through, does it make sense to have a separate facility for this business or is moving this into one of your other existing facilities perhaps something that's on the table today?

I would say that that's probably not on the table in the sense that it's very dependent on the people, intellectual property that's the entire business. You walk through that facility and largely what you see are a bunch of cubicles. It's the people that sit at the cubicles that make the thing work and that area where that business is, in the greater Orlando area, happens to be kind of a hot bed of this type of activity on a national basis. So I think that facility belongs where it is. I think the bigger question is how do you get a contribution out of that Company if it's running at $25 million to $35 million and I don't know if you do really. That's not -- we didn't buy it to run at that rate and I don't think it's necessarily going to be real successful at that rate.

That being said, it's a high variable cost business, and so once we figure out where things stabilize and what the opportunities are, it's one of those businesses that you can manage any of a number of ways. If the opportunities continue to be pretty good it's probably worth maintaining the infrastructure to handle those bigger opportunities, and if it doesn't, you have to respond accordingly, but we're still learning. I do know that at the current run rate we do not expect it to be profitable and I think if it gets up another $30 million rate I think we could expect some reasonable returns out of it. And I think it's proven that if it can get beyond that under the right circumstances, it can be a pretty good contributor.

Right, okay. And -- okay, thanks for that color. And just in regards to Panasonic, did you say before that you thought the bookings strength thus far in the second quarter was where it was in the first?

Yes, so far. We -- just to be clear, we've seen solid bookings really across the entire Aerospace side in the first quarter, but the cabin electronics part of the business, in particular, seemed to be the strongest and, obviously, Panasonic's our biggest customer in that segment. So there seems to be a willingness to spend on the part of airlines that's helping us a lot right now.

And you're saying that basically the strength from Panasonic, and I guess Talus, isn't related to any of the new widebody builds? Because I'm just looking and it looks like this is the highest quarterly rate that you guys have had at least since March of 2008 and it seems like it's kind of up there in terms of what you were doing in 2007. I'm just trying to understand where the strength is coming from if -- current production rates are, call it down 2% this year and you look at the widebodies ramping up next year where you guys seem very well positioned. And with these bookings coming on line and the revenues, I'm just trying to get a feel for why?

Yes, and so are we, especially in the face of our fourth quarter performance last year, where bookings were among the lowest we've seen in a couple years. So it's probably safe to blend the two together a little bit and take a little bit more of a moderate perspective on it. Now, one of the dynamics that's happening kind of behind the scenes apparently is that some of our customers are changing their ordering habits. Instead of ordering repeated small orders they're ordering fewer big orders. And when you think about that transition from a bunch of smaller orders to a few bigger orders you almost have to front load your ordering, at least temporarily, right. So it could be that some of that is playing out in the first quarter also. But again, we're watching it on a pretty close basis and we're a third of the way through the second quarter and we're continuing to see pretty good demand across the business. So if we put another quarter of bookings like this together, given that 787's really not in there, given that arguably A380's still at a pretty reduced rate, it should set us up pretty well for 2000 -- the end of 2010 and 2011.

Yes, certainly seems that way. All right, great. Well, appreciate all the color.

Okay.

Thank you. Our next question is a follow up from the line of Dick Ryan with Dougherty & Company. Please go ahead with your question.

Great, thank you. Say, Pete, when you look at the tactical Tomahawk, is that completed now?

For the moment.

Okay. Can you give a sense of what that contributed, maybe on a run rate, the past few quarters, and what's the opportunity for that product -- or that program to come back?

We've been, over the last couple years, running at a neighborhood of $6 million or so a year in revenue on that program, And it was one that was won by our Seattle operation prior to our ownership of it, and it was originally set up to be a fairly accelerated program in the sense that the Redmond operation wanted to deliver it as quickly as possible and set it up with the customer, ultimately Ratheon, to work that way. As a result, we got ahead of production of the missile and so our part of the current build is done. We expect that, as production continues, that we'll be brought back online to build more hardware in the future, although we don't have a contract to do that today and it's a little bit of a chance that that won't happen. But we're expecting we will get back into that business over the next year or so.

Does that program have funding in the current bill? Or the current budget?

I believe it's a pretty safe program.

Okay. Okay, good. Thank you.

Sure.

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

Okay. Well, thanks, everybody, for tuning in. Again, we're pretty pleased with our first quarter results, and while we got a lot of moving parts, we're cautiously optimistic that the year's going to turn out towards the higher end of our range and we look forward to updating you at the end of the second quarter. Thanks for your interest.

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