Astronics Corp (ATRO) 2010 Q4 法說會逐字稿

Greetings and welcome to the Astronics Corporation fourth-quarter 2010 financial results conference call.

At this time all participants are in a listen-only mode. A 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, [Ken Housnik], Investor Relations for Astronics Corporation. Thank you, sir. You may begin.

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

On the call with me today is Pete Gundermann, Astronics President and CEO, and Dave Burney, Chief Financial Officer. On the call they will be covering the fourth-quarter and full-year 2010 results as well as the outlook for the Company and will conclude with a question-and-answer period. If you don't have the release that went out this morning, it's available on the company website at Astronic.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 the documents filed by the Company with the Securities and Exchange Commission which can be found at our website or at SEC.gov.

So with that let me turn the call over to Pete.

Thanks, Ken, and good morning, everybody, and thanks for tuning in. We are going to talk about our fourth quarter and do a brief summary of 2010, the year just completed. We feel both the quarter and the year were pretty strong for our company.

Then we are going -- I am going to turn it over to Dave at that point to talk through some balance sheet issues. And then we will do a brief preview of what we see coming down the pipe for 2011.

But before we get going I feel I should tell you that Dave and I are doing this call from the road; we are both on cell phones. We have no reason to think our signals will give out on us, but if all of a sudden you hear us goes silent, it means that we will call back in shortly one way or the other.

So our fourth quarter was a very strong quarter, especially in terms of revenues. We have revenues of $51.8 million, that is a record for our company, up nearly 14% from the fourth quarter of 2009 and up by a much smaller 4% from the consecutive third quarter in 2010. 90% of the volume or $47 million came from our Aerospace segment; 10% of the volume or $5 million came from our Test Systems segment.

That kind of volume mix is pretty profitable. We had net profits of $4.4 million or $0.39 per diluted share for the quarter. That is down marginally from our third-quarter results where we had net income of $4.6 million, but up very significantly from the fourth quarter last year.

Comparables to the fourth quarter last year are difficult to make because we had a fairly significant intangible asset write-down related to the acquisition we did two years ago now. That breakdown happened in the fourth quarter of 2009 and wrecked our results for that quarter.

If there was a chink in the armor for our fourth-quarter results, it was our bookings level. Our bookings came in at $41.6 million and a book-to-bill ratio of 0.8. However, even at that -- that is our lowest booking level of any quarter in 2010, but we feel pretty strongly that that is a result of timing issues much more so than any indication that the market is going south on us.

We don't think that is the case at all. In fact, our annual bookings for 2010 -- I will talk about this more in a minute -- but our annual bookings for the year were $210 million, a very positive booking level even relative to our high shipping levels for the year. Our results of our booking and our shipments in the fourth quarter left us with a near-record backlog of about $100 million, which for a company our size we feel pretty comfortable with going into 2011.

So 2010 as a summary was a pretty strong year for us. When we started the year Dave and I told you that we thought revenues would be somewhere in the range of $170 million to $190 million. We came in at $195.7 million; we beat that range slightly.

$195 million is up a couple of percent from $191 million in 2009, but the big difference in 2010 was again at the bookings level. We had bookings in 2010 of $210 million, that is up 44% from our bookings levels in 2009.

2009 we had $146 million in bookings, and when we were sitting at the end of 2009 staring at 2010 we were hopeful that the market was turning around. But we have been pretty pleased to see bookings go from $146 million all the way up to $210 million. That obviously drove the volume increase for the year, which drove our profitability and all kinds of good things.

For the year to our Aerospace segment generated revenues of just shy of $180 million, that is 92% of our total volume, and up 15% from our Aerospace revenues in 2009 which were $155 million. So aerospace went from $155 million to $180 million.

Our Test Systems sales totaled $16.2 million, that is down pretty substantially from $35 million in 2009. That is the result of some big programs coming to a conclusion and not being replaced by bookings in time. Test Systems had [around] about 8% of our total revenues for 2010.

Our net income for the year was $14.9 million or 7.6% of sales. We feel that is pretty strong. Profit level that resulted in earnings of about $1.32 per diluted share. We did all this while maintaining our E&D, engineering and development, investment of about $28 million for the year. That is pretty much at the same level we achieved in 2009.

I think I will turn it over to Dave at this point to talk to some balance sheet issues. Dave?

Thanks, Pete. Balance sheet issues probably isn't the right description, but balance sheet items.

As we go into this year, our plan is to work on extending our credit facility. The credit facility that we amended last December is scheduled to terminate in February of 2012, and we believe that the situation is good for our company and for the market to go out and redo the credit facility. So we are working on that over the next three to six months.

So turning to cash flow from operations, we had a very strong year (technical difficulty) last year with a $16.5 million increase in cash for -- from cash flow from operations in 2010 leading to an increase in cash of about $7.8 million for the year. I wanted to note over the past two years [we have been] able to pay [down] over $21 million of our long-term debt and now have net debt of just $15.8 million or 17% of our total capitalization.

Currently, we are (technical difficulty) 6% rate on our -- composite rate on our various debt, senior debt and subordinated debts. We expect our CapEx for next year this year 2011 to be in or for this year, [actually] 2011, to be in the $5 million to $8 million range. And that was all of my notes [that I can read] from our balance sheet. Back to you.

Thank you. I am going to talk a little bit about our segments for 2010. Aerospace again was $180 million in revenue, up 15% over the previous year. Aerospace contributed all of our margin and the real story within the Aerospace segment continued to be our capital electronic sales to the commercial transport market.

Our transport sales for the year were $110 million, 56% of our total and up a substantial 25% over 2009. A majority, but not all, of our transport sales come from our cabin electronic product line, that is our in-seat power franchise, trademarked EmPower. That product line's sales were $86 million or 45% of our total and up 35% over 2009. So our strong Aerospace sales largely came from commercial transport and largely from cabin electronics sales to commercial transport.

Our military aircraft sales were down 8%, but 20% of our total or 18% of our total largely due to the termination of Tactical Tomahawk power conditioning product that we had on that missile. Our business jet sales were actually up a little bit, up 4% to $22.5 million over the year, 12% of our total. And I would say, just qualitatively without dragging everybody through all the different segments, we continue to be pretty positive on our Aerospace prospects really across the board.

We think commercial transport is strong and will continue to be strong, and we think the military -- our business will always be subject to certain big programs coming and going, especially in the military side of things. And we think we continue to be pretty well positioned going forward on the military side.

Business jets, even though the production rates aren't necessarily rebounding like everybody might have hoped, we continue to see a pretty strong uptick in development projects and development efforts. We see that industry from two different perspectives. One is what they are producing right now and the other one is what they are planning to produce in the future.

And we are encouraged by the resumption of development efforts really across the board. There clearly is long-term expectation for positive developments in that market.

Our Tests Systems segment had $16 million in revenue for the year, that is 8% of our total. Again, our Test Systems business will not be profitable at that level; we know that. We had an operating loss of $1.8 million for the year.

We continue to believe, though, that we have got good prospects and we continue to believe that customers want our product. It's a question of the budgets and the timing working out appropriately. We are expecting an increase in that revenue level in the new year and we expect that that operating loss will largely disappear as a result of the increased shipments.

So while we are talking about the future, let's talk specifically about 2011. I mentioned earlier that our 2010 bookings were $210 million. We think bookings are an excellent predictor of where our shipments are going to be, and we are at this point opening the year with a forecasted revenue range of $205 million to $215 million.

We expect Aerospace to make up $185 million to $192 million, that is up from $179 million, again in 2010. We believe that Test Systems will make up somewhere between $20 million and $23 million, up from $16 million in 2010. $205 million to $215 million is a relatively narrow range compared to where we started this last year at. That is a result of a relatively stable market and, we believe, pretty good insight into where our customers are going.

But there obviously is room to exceed that range and there is possible room to miss it on the low side, so we will keep everybody updated as the year progresses. But we think at $205 million to $215 million we should be poised for another pretty strong year. We certainly feel like we are getting off on a pretty good foot in the first quarter so far.

That ends my prepared remarks, Diego, so I think we will open it up for questions now.

(Operator Instructions) Tyler Hojo, Sidoti & Co.

Good morning, everyone. So first question, what were Panasonic-related revenues in the quarter?

About 26% of total for the quarter, Tyler.

26% of the total; okay, good. I guess just looking at the guidance, in the press release it was kind of spelled out that most of the growth was really tied to basically new aircraft production, which certainly makes sense. But I am just kind of wondering what are you anticipating in terms of aftermarket-related sales in terms to retrofit type work, which I guess would be a more book-and-ship in nature. If you could help us out there.

We are expecting -- well, there is a long-term and a short-term answer to that question I guess. I would maybe start out by saying that it doesn't -- we don't look at it as a significantly different sales effort or pricing effort, for example.

And we think long term that we will continue to have a pretty good balance between aftermarket sales and new production sales, but we happen to be in a situation right now where we have some visibility in the short term about what our aftermarket prospects are. It's a little bit of a drier array of opportunities. That can change pretty drastically in six months, but at this point we are expecting our aftermarket sales to drop marginally and us to become more and more dependent on OEM sales, at least for 2011.

I wouldn't call it a significant change though. We typically say that about maybe one-third of our sales are aftermarket, and we would expect that to trend down just a little bit.

Okay. Were after -- so you are saying about one-third of 2010 sales were aftermarket, is that accurate?

Roughly in that range, right.

Okay. And would you say -- it certainly sounds like aftermarket was up quite a bit in 2010, but could you maybe just characterize that or confirm that?

It was definitely a big boost to 2010. I don't know if I have the numbers in front of me to tell you qualitatively. One of the things we struggle with is that a lot of our aftermarket sales are to airlines and airlines are very touchy about press releases; that might indicate to their competitors what they are actually doing. So we are in a little bit of a handicapped situation.

But I guess our perspective is that the airlines generally continue to be pretty healthy and getting healthier and so we expect that we will continue to have good prospects there. It's just that right now we know what kind of proposals we have outstanding. But we don't expect significant growth, certainly in the aftermarket side, right now.

I have Mark Peabody on the line who runs our electronics business. Mark, I don't know if you want to cover these comments any more specifically than what I have done?

I think you are pretty accurate, Pete. From time to time we may get a major retrofit program with a specific airline. Right at the moment what we are looking into 2011 is more follow on from fleet retrofit programs from our current customers on the retrofit side.

Okay, all right. Thanks for the color there.

Then I am just trying to understand what is driving the optimism in terms of the Test Systems business. If you look at the backlog ending this year within that addressable segment it's actually lower than it was in the year-prior period. So just kind of trying to think about what is making you more optimistic in terms of the prospects for growth in that business.

Well, it's a good question and I think the short answer is we have a prospect list that easily exceeds in dollar value the shipping forecast that we have for 2011, almost double. We get constant feedback from customers saying that they really like our products and they really want it.

And I would go further to say that all indications are that we have competitive advantages in terms of the technology. In some critical areas our technology works, and we don't see competitive threats who actually do what we can do right now.

The challenge is that we just have been unable to convert that interest and that technical advantage to actual orders. We think some of that is budget related and some of it may just be timing related. But as long as we have that demand and we have those advantages and we do see prospects that we can put our fingers on and [proposals] for, we think sooner or later a dam is going to break and we are going to start getting some substantial orders.

So it's hard to answer your question without being a whole lot more specific, but it's kind of the crux of where we are with that product line.

Okay. My guess is is that in terms of the downside to the guidance that you mentioned it would predominantly stem from test, is that --?

I think that is right. I think the downside, if you want to try to quantify that, might be a bookings level similar to what we have been seeing, which would imply a shipping level similar to what we have been seeing.

Okay. All right, that is helpful. Just last question for me, what should we anticipate in terms of tax rate for 2011?

I would anticipate somewhere between 33% and 34%, 35%, in that range. That is what we use for our planning purposes is 33%, 34%, 35%.

Okay. Sounds good, thanks.

Thank you.

Scott Lewis, Lewis Capital Management.

Good morning, Pete. Good morning, Dave. Very nice quarter for you guys.

Thank you.

A couple questions. In the cabin power business I have noticed that there seems to be some emerging kind of IFE hardware providers with a new type of architecture. I have heard it called a fiber to the screen. And I am just wondering if that is something that could affect your power business.

Yes, just to back up a second, the in-flight entertainment or IFE business is largely dominated by two competitors, Panasonic and [Ellis], and we have pretty strong working relationships with both of those companies. But there are a number of other companies that compete in various ways, either by having a different architecture or a different delivery technology. The fiber optics, as you are implying.

We maintain dialogue with those companies and we have prospects where we think we can work with them cooperatively as customers or as kind of co-sellers, so to speak. But we don't view those other companies -- we view them as prospects, I guess I would say, much more than, say, threats. We don't view them as threats necessarily at all.

Mark, do you want to agree with that?

Yes, I totally agree. We have been working with them for probably three or four years and none of them at this point have captured significant market share. But we have been talking with all of them.

At this point in time, the couple of customers that they have have already had in-seat power in their aircraft and so the systems go side-by-side. The opportunity to put them together that is just something we talk about but no customers yet.

Okay, thanks. Then, Pete, you mentioned that there seems to be R&D dollars among some of your customers flowing for new business jet designs. I am wondering if you can comment at all about your power, your electronic power distribution system. Are you seeing some interest there among any or several of those OEMs?

That is absolutely correct. We have a pretty unique technology from smaller aircraft that we internally referr to EPDS, electronic power distribution system. It's based on electronic circuit breakers and it was originally fielded (technical difficulty), which perhaps most people on the phone call are aware of. That company obviously did not succeed.

The people associated with that development effort scattered far and wide, and that (technical difficulty) because of (technical difficulty) for example, we are getting a lot of interest in that particular technology and are involved with a number of OEMs around the industry. Our hope, our objective is to make that technology a pretty basic and expected feature in small airplanes in the future.

It will take some years for that to play out, but we think we have got the technology and we have the capability and [we have] the prospects. We probably will have more news on that shortly. I think I can say that we have, at this point, signed up another customer for a smaller airplane for an electronic power distribution system.

It's (technical difficulty) and it's a smaller airplane so it's a smaller program, both in terms of development cost and expected revenue at the other side. But we view it as an important program because it shows -- it broadens the reach of the size and type of airplane that this system will go on and it's certainly a successful namebrand company and platform.

We hope to be able to talk about it, but it very well may be a year before we can actually (technical difficulty). We are entertaining a wide range of companies that want to know more about it, wanting to get quotes, want to see trade studies. I am thinking that as we go down the road here we are going to (technical difficulty) resources in this particular technology. Again, our goal is to make it a standard in the industry in the future.

And if that did become a standard, that is potentially a bigger market for you, right, than cabin electronics and commercial transport?

I don't know, that is a hard one. I would say that we would put, just for standard pricing, a small airplane might see a system of anywhere from 50,000 to 75,000 (technical difficulty) airplane, could see a system up around 0.5 million.

You would have to run the math and do that. It would take a long time to get there, but it would be a significant contributor to our company's results for sure.

Okay, super. And then just last question, Pete, are you seeing any inflationary pressures at all, either on your materials or labor?

No, not really. It seems to be pretty under control. Most of the markets we operate in from a labor standpoint are real hot markets right now, which helps. And I think -- no, I wouldn't say that is a major concern of ours at this point.

Great, thanks a lot.

Sure.

(Operator Instructions) Dick Ryan, Dougherty.

Good morning, guys. Pete, on the test side, the pipeline, are you having success moving across other branches of the military?

We are.

Is that where some of the (multiple speakers) is coming from?

We are finding (technical difficulty) across. Obviously the orders aren't there yet but we are certainly (technical difficulty) [pursuing] other branches pretty heavily.

Could you go ahead and repeat that answer please?

Yes, you kind of broke up there, Pete.

Oh, did I? We have traditionally been pretty dependent on the US Marine Corps as a customer for our Test Systems segment. We are continuing to pursue them and we are having some pretty good success with (technical difficulty), but we are also branching out as much as we can.

And we are getting a pretty good audience, pretty good reception at various armed forces. Not only across our country, across the US, but in other parts of the world also.

Okay. On the Tomahawk that program completed, what does the budget look like for that? Is there any life for Tomahawk going forward?

We think there is. In fact, we are starting to ramp that up again later on this year. We went through a little bit of a lull where we were shiping at a certain rate to our customer, which -- Raytheon, which then built the missile. Now we are starting -- their drawing down their inventory and we are ramping back up again.

Mark, I don't know if you want to say anything more about that?

Yes, we will do a couple hundred units this year and next year, and then look for follow-on orders after that. So it will be more of a -- we anticipate more of a steady pace thing than a multi-year buy as we had in the past.

Okay. Say, Pete, you talked about or Dave mentioned the Panasonic 26%. Can you give us a sense of Talus?

We did revenues -- it was less than $10 million, but pretty significant, and we expect Talus to continue to grow as a customer.

Is that for the year?

Correct.

Okay. And a couple of housekeeping. Dave, depreciation and amortization, I don't know if you have it for the quarter and where the year ended up.

For the year it was about $4.9 million. I don't have [it with me for the quarter].

No, that is good, that is good.

Do the math.

Yes, but that is fine. I think you said ER&D should be $28 million flattish 2011 over 2010. Can you give us a sense where you think we should be looking for operating expense trends to fall into place?

Well, I think we typically (technical difficulty). I would not expect significant changes from what we have been seeing over the last couple quarters here. We may see some pressures as we start to add in some program management and things like that that we didn't do over the past (technical difficulty).

I am still here; I guess Dave dropped off.

I think I caught some of that. Pete, are you seeing any pricing issues with your in-seat power at this point?

Not really, no. We have got long-term contracts and we continue to enjoy -- well, I guess from my standpoint I would tell you we are pretty good at it and our customers, I think, realize that. We create a lot of value and we have long-term agreements, and I think we are in pretty good shape there.

Okay, great. I think that is it for me. Thanks.

[Brendan Walsh].

Congratulations, great quarter. And a wonderful year.

At the risk of digging in old mines, the write-off last year to which I think you made passing reference this year or in your statement earlier is that business dead dead or do you see it coming back or what? The write-off of the goodwill.

You mean for our Test Systems segment, Brendan?

Yes.

We are hoping to have a come back there, absolutely.

But if your question is an accounting question, once you write it off it's gone, Brendan.

I understand that. (technical difficulty) [I am wondering] is there any more factors to -- or is there any resurrection in the business itself?

Okay. We are hopeful that we are going to have good prospects. We feel we do have good prospects there and we are hopeful to have good news. If we can do what we think we are going to do for this year in 2011, we will have a sales increase of 30% or so, or something. So if we can get the bookings, we think we have got the customer demand and we think we will bring the business back.

Okay. Again, I congratulate you. I think you all are doing a wonderful job.

Well, thank you.

Dan Abramowitz, Hillson Financial Management.

Great job on this year and the quarter. I know it's not like me to ask a question on the conference call but I just have a quick one.

With the -- the SG&A was actually down from the cost cutting and you had a nice expansion in the gross profit margin on the higher sales and E&D is going to be flat for the year. So if, assuming you hit your higher sales forecast for the coming year -- I know you have got some changes in mix and maybe a somewhat higher tilt towards new production versus retrofit and so forth in aftermarket. So what does that do to the gross margin line?

Normally with that kind of higher sales we should see some expansion like we did the previous year. Is that a trend that should continue?

I would caution that a little bit. We have -- we were very pleased with the improvement in gross margin that we had in 2010. Part of it, frankly, is because we were scaling the business to run at $170 million to $190 million. We exceeded that and so we are probably playing a little bit of catch up on our infrastructure right now.

The big variable probably though in my mind is what is going to happen with some of sales prospects that we are pursuing and how much engineering effort will it take to execute those programs. So we are in one of those situations where the more successful we are on the sales front the more engineering and development expense we are probably going to end up pouring into those efforts. That will be more a second-half issue perhaps than the first half.

I think for the foreseeable future we should be able to run the way we have been running over the last couple quarters. In the second half things get a little bit fuzzier, but I don't think we are sitting here thinking that we are going to continue to see improvement along the lines of what we saw from 2009 to 2010.

All right. So gross margins should be probably be similar then on a percentage basis?

Yes, that is about as accurate as we can say at this point.

All right. Great job on the year and we will look forward to another good one.

Dick Ryan, Dougherty.

Thanks for another try here, Pete. On the new aircraft is there anyway we should look at that from the demand side, whether it's more narrow-body, wide-body, or any discernible trends there?

The unnamed airplanes?

Yes.

It's a business aircraft.

Okay.

Our electronic power distribution system, let me clarify it. When we talk about cabin electronics we are typically talking about power for passengers, either through the IFE system or direct to their portable electronic device.

When I talk about electronic power distribution or EPDS, I am really talking about an airframe power system. It's the system that distributes power across the entire airplane to all the systems that use the power.

I was thinking of the in-seat power, if you are talking moving from the aftermarket to new aircraft, if there is a tendency there.

Oh, I don't know if there is one that we would call attention to right down.

Okay.

But we do think that that trend has got momentum and it's underway and it's continuing. We think -- in-seat power has traditionally been a wide-body, long-haul type of amenity. It's increasingly becoming something that the narrow-body fliers are actively considering, and in some cases putting on their fleets. So we think that trend is going to continue.

So you are seeing that with some of the new aircraft that you talked about earlier, that business shift? Okay.

Yes.

Okay, great. Thanks, Pete.

Sure.

Thank you, ladies and gentlemen. There are no further questions at this time. I will turn the conference back over to management for any closing remarks.

Well, thank you for your interest in our company. We will look forward to giving you a progress report on 2011 in a few months here, and thanks for your interest. Have a good day.

Thank you. This concludes today's conference. All parties may disconnect now. Have a great day.