Astronics Corp (ATRO) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Astronics Corporation First Quarter 2011 Financial Results Conference Call. (Operator instructions)

It is now my pleasure to introduce your host, Ken Housnik, Investor Relations for Astronics Corporation. Thank you. Mr. Housnik, you may begin.

Thank you, Melissa, 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. They will discuss results from the first quarter of 2011 as well as the outlook for the Company. And the will conclude with a question-and-answer session. If you don't have the release that went out this morning, it's available on the Company 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 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.

Thank you. Good morning, everybody. Thanks for tuning in.

I'd like to, I guess, apologize in advance, as I'm struggling a little bit with a cold. So I'll try to keep the interruptions to a minimum.

We feel like we're off to a pretty good start. The first quarter was an excellent start for 2011. Revenue was $55.1 million, which for us is a new record; up substantially about 17.5% from $47 million experienced in the year-ago quarter, and up 6% from $51.8 million in the previous quarter, the fourth quarter of 2010.

As has been our practice recently, 91% came from our Aerospace segment -- $50.2 million -- and 9% came from our Test Systems segment -- $4.9 million. We'll talk about the demand a little more specifically a little later. But it really was very comprehensive in nature. It came from all of our major product lines in all of our major markets, and was very encouraging for us, for not only the quarter just experienced but also what we expect to happen over the rest of the year.

On that revenue, our net profit was $5.2 million, which is another record for the Company; or [$0.45] per diluted share. Our profit levels were up substantially -- 53% from the year-ago quarter to $3.4 million in net income, and also up 17% from the fourth quarter of last year, when our net income was $4.5 million. Profits were basically driven by the increased volume and the -- I guess I'd say the efficiencies or the cost management processes that we've put in place over the last couple of years. The combination led to a disproportionate tick in profits based on the revenue increase.

The third leg of the stool that I always pay pretty close attention to is our bookings level. And again, our bookings were very strong in the quarter also. We had total bookings of $54.4 million, which is not a record, but pretty close. It's our second-highest level ever -- slightly higher than shipments and up significantly from the preceding quarter, the fourth quarter of 2010, when we had bookings of $42 million. On a trailing 12-month basis, our bookings were $210 million for the 12 months ended with the first quarter, and it left us with a backlog of just under $100 million, which we consider to be very comfortable and very adequate.

Looking at the Aerospace segment first -- our revenues for the first quarter were $50 million -- that is also a record -- 91% of total, as I mentioned. Our Aerospace segment contributed all to margin, which we expected. The interesting thing, I think, to point out from our Aerospace segment -- if I can call your attention to our charts on page seven of our press release -- specifically the Sales by Market chart, which is the one on the top of that page -- if you look at the percent change over the course of this quarter versus the year-ago quarter, you see pretty strong growth in every one of our major areas -- 20% growth in our commercial transport sales, 10% in the military market; even 19% in the business jet market, and 33% in our Test Systems segment. That helps explain and show the broad nature of the strength we're experiencing across the Company in the current environment.

Our outlook for our Aerospace segment is also positive. We had bookings of $48.7 million in the quarter, about equal to shipments. And we won't go into a whole lot of detail about those markets that I just talked over, other than to say that the positive trends which we've been seeing and experiencing over the last year or so continue to evolve and continue to progress, and leaves us fairly optimistic for the foreseeable future.

Our Test Systems segment had revenues of $4.9 million for the quarter -- about 9% of our total. This revenue level is about in line with our expectations. And that segment pretty much operates at a breakeven level at that sales volume, again as we expected.

The good news out of that segment is that our bookings for the quarter were $5.8 million. That's the highest level we've seen in quite awhile and, we believe, is indicative of the strength that we're also beginning to see in that market. We continue to have some pretty exciting opportunities that we're pursuing around the globe. And though we don't have a whole lot specifically that we can talk about today, I guess the message is that we continue to think that we've got significant signs of life in the market for our Test Systems segment. And we're, at this point, pretty optimistic we'll be able to meet our expectations for the year and set up a good foundation for the future with orders that are on the horizon.

Our balance sheet looks very unchanged from previous quarters, other than our working capital has increased somewhat due to the sales volume. Our receivables were up $7 million over the previous quarter. And that is due to the -- not disproportionate, but the heavy level of shipments towards the tail end of the first quarter. And also, our inventories are up $2 million. Even with that increase in working capital, our cash at the end of the first quarter was $17 million, which we feel is pretty comfortable given our needs.

We mentioned in the press release that we're under contract to buy a couple of facilities. And we expect those acquisitions or purchases to close in the coming quarter. Long story short -- we're going to -- we plan to spend a little over $10 million to buy two facilities -- one in Fort Lauderdale, one in Seattle. And the one in Seattle will require another $5 million to $8 million to fit out and to occupy. We think these purchases are opportunistic given the current real estate market, especially in those two locations. And we expect that once we get out of our current leases that these purchases will benefit our bottom line to the tune of $1.5 million to $2 million a year or so.

Looking forward -- again, given the strength of the first quarter, given the bookings that we've had and the prospects that we see, we are raising our original forecast for 2011, which was $205 million to $215 million, to the new level of $210 million to $225 million. We are going to expect $190 million to $202 million come from our Aerospace segment, and we're going to expect our Test Systems forecast to remain unchanged from the $20 million to $23 million that we originally came up with.

We are hopeful, and it's quite possible, that the first quarter that we just experienced will be indicative of what we're going to see over the next three quarters for the rest of the year. We may bounce around above and below that level. But we're pretty optimistic that the first quarter was not necessarily a real fluke, but rather an indicator of how we're situated right now and what we expect to achieve.

The other thing I might add qualitatively is that towards the end of the year, it's possible that our expense structure may change a little bit, in that we may be starting a series of new programs which we're pursuing. If those programs proceed as we hope, we may end up having to spend some more money on development expense and engineering expense, which could color the third and particularly the fourth quarter going forward. But we'll fill you in more on that as time progresses.

I think those are my prepared comments -- kind of short and sweet. Melissa, let's open it up for questions.

(Operator instructions) Tyler Hojo, Sidoti & Company.

I was hoping you could just provide a little bit of information just to start. What was Panasonic in terms of revenue in the quarter? And then also, I was just kind of curious on -- you mentioned -- when these building leases expire, it should add a fairly hefty amount to the bottom line. Just wondering when those leases expire.

The smaller of the two, our Fort Lauderdale facility, is -- we're buying the facility we're actually renting right now. So that lease would end immediately upon purchase. And the larger one is going to be a little bit of a slower process. Because our Seattle business is housed in a leased facility which currently goes through or into 2013 -- it's like February or March of 2013.

So the working plan is that we will transition from the current leased facility to the new facility sometime late 2012. The one thing that may accelerate that is if we're able to sublease the existing building, which we're going to try to do. But if we can do that, and then we can get the new building kind of ready and built out, then we'll accelerate that. But the working plan is that that may not be real possible.

Panasonic sales were about --

36% of our consolidated sales.

Okay. And just looking ahead, would you expect that that Panasonic stays pretty steady at that level? Or did you see some kind of a bump up in shipments this quarter?

I think the current level that we achieved or had with them is about consistent with what they say their annual plan is. So we'd expect it to stay about that level.

Very good.

And I guess, just lastly, just a clarification on the commentary on E&D expenses -- were you saying that basically you expect that you could see some incremental expense beyond what you've already kind of increased the guidance for in kind of the back half of the year? Or were you kind of just speaking to the increased guidance?

I was intending to say that we may have to spend more than we had budgeted if we are successful closing a number of deals that we're out promoting right now.

Could you perhaps just maybe talk a little bit about to what extent you could see that kind of increase?

I think it's a little premature, Tyler. I can tell you that we've got three or four programs we're pursuing pretty aggressively, primarily in the business jet arena. And if we win all of those, it has a pretty different effect than if we only win one. And it's just too early for us to predict that at this point.

Okay. Maybe you could talk about what increased the E&D plan thus far in the year.

It was largely business jet, some of the business jet efforts, that we've been working on.

They just kind of hit within the last three months or so?

We've had some changes to some existing programs also, which tends to change our workload and change our costs a little bit.

Understood. All right, great. I'll hop back in the queue. Thanks.

Bob Sullivan, Satuit Capital Management.

Congratulations on a solid quarter and great outlook.

Thank you.

Had just a question -- this is more maybe anecdotal, I guess, than it is sort of quantitative -- maybe more qualitative, I guess. But if you look at overall on the Aerospace side, and if you look at the capacity that you have to produce outright -- where do you think you are right now with your capacity utilization on that? I'm trying to get a sense for -- as the cycle moves forward, are you running at 70% capacity, 80%? In other words, how high can this go in terms of revenue? How much more room do you have to keep producing?

Well, short answer is, if we can find the demand, we'll find the capacity.

Fair enough.

We don't think of ourselves as being capacity-constrained.

Okay.

If you were to walk through our facilities, I would think you'd find that from a physical plant standpoint, we've got lots of room. And I would just, off the top of my head -- I'm kind of walking through in my mind, but I'd say we're maybe 65% or so.

Okay.

On a personnel front, it's a little bit of a different story. And we're definitely pushing the limits of our current staffing level. And we're starting to do quite a bit more hiring in certain areas than we have in the past. And some of the programs that I was talking about with Tyler -- if we win those, we're definitely going to be in a situation where we're going to need to beef up, especially in some of our technical resources, to make those programs happen.

Yes.

But I think the way to answer it -- probably the cleanest -- is to say that we don't view ourselves as capacity-constrained. And we will shape the organization to satisfy the demand that we can find.

Okay. And I guess to follow up or tag along with that -- you had some really nice margin expansion, both on the gross and the operating margin. And given that capacity, given some of the projects that you've got in the queue, is it fair to say that we could see some of this margin expansion continue? I don't want to commit you to like a 30% gross margin, a 20% operating margin. But we can move incrementally higher from here, given the capacity and given some of the things that you are seeing.

I don't know if we'd be comfortable doing that. What I would -- one of the things we do is we, at the cost-of-goods line, expense our development costs.

Right.

And if we are, like we hope, successful, we'll actually see some margin drop a little bit there.

Understood.

But I think our -- we don't have a real good idea or plan for how or for why margins wouldn't stay -- other than that -- wouldn't stay kind of where they are right now for the foreseeable future. We don't see any significant shifts happening in our business structure or the demand coming from the market. So we think that what we demonstrated in the first quarter may well be possible going forward here.

Okay. Thanks. And again, great quarter.

Thank you.

Scott Lewis, Lewis Capital Management.

I'll add my congratulations -- very nice quarter.

Thank you, Scott.

I guess I'll focus on the Electronic Power Distribution segment. Wondering if you could say who -- if you're free to say yet who that second contract is with for the small business jet.

No, we're not. We probably won't be for awhile. The issue there is it's an existing airplane. And our contribution's part of a plan to upgrade, and the manufacturer doesn't want to pre-sell the unannounced upgrade. But it is a second platform. We have been and continue to work on the Lear 85. That's pretty widely known. This second platform is also underway. And that EPDS, Electronic Power Distribution System, is something that we're finding a lot of demand for in the market and is the subject of some of the new programs that I was talking about earlier.

Great.

And then, just lastly -- you guys have some projects with Embraer, and then, like we just talked about, Bombardier. And they've been doing pretty well in the market lately as far as some large orders with NetJets. And I'm just wondering if you have any comments on your overall relationship with those two companies -- they've got a lot of other larger business jets -- that you see opportunity there.

We do see opportunity there. I think we -- I would say we enjoy -- all the business jet manufacturers are -- they vary from one another, just like people -- they all have their own different personalities. And we have different programs and different content on different models. But I think we're pretty well situated across the board.

Probably the one exception to that rule, more than anything else, is probably Gulfstream. We're not as well situated with Gulfstream, although we do have some content on Gulfstream. We have ongoing discussions with Gulfstream. But they're kind of the one that has evaded us more than the others so far. But we're on most other aircraft at most other manufacturers, to some extent.

And we're optimistic that over the long term, especially from today's lows, that the overall business jet market will continue to develop and continue to mature, and continue to grow and become a much bigger portion of the pie for us. Today, 20% of our revenues are in business jet. We definitely expect that base revenue level to grow substantially over the years.

All right. Thanks a lot, Pete.

Thank you.

(Operator instructions) Dick Ryan, Dougherty & Company.

Dave, on the E&D and the cost of goods -- is that all aerospace, or is there some defense spending in there as well?

There's some Test Systems spending in there, too.

Okay.

I don't have the breakout in front of me on that.

Okay.

On the defense test business piece -- sounds like that's doing better. Is that with existing customers? Are you breaking into some other branches or getting any foreign sales there?

I'd say it's both, Dick. It's across the board. Our company has traditionally been largely focused on the US Marine Corps. And we're continuing to do well on kind of a maintenance level with the Marine Corps. But a lot of the bigger opportunities are elsewhere.

Okay.

And how should we look at the FAA lighting market? That looked down for the quarter. How should we be viewing that, going through the year?

That's a little bit of a lumpy product line. So I guess, probably the best way to do it would be to look at it from a rolling 12-month basis and assume we're going to continue to do what we've done in the past. The lumpiness comes from projects to do what we call design-build programs with certain airports, where municipalities will be adding new runway or reworking an existing runway, or something like that. We tend to [get] a boost of sales. Below that, we've got an ongoing relationship with the FAA where we sell a lot of products. So that part tends not to vary all that much.

But I guess the best thing I could advise is you look at kind of a rolling 12-month basis and you build that in your model.

Okay.

And on the In-Flight Entertainment and In-Seat Power business -- anything that's currently going on; i.e., maybe higher fuel costs? Is that causing any pressures or any concerns from the customers, moving that forward?

I think everybody in the industry is certainly watching fuel costs. But I think that there are real good tailwinds driving IFE in general. It continues to be an area of investment on the part of airlines around the world. And airlines around the world generally have been doing pretty well. They're not shying away from those kinds of investments these days. And we haven't sensed that changing at all.

So the dynamics that drive our In-Seat Power, we think, are solid and in place. Even the low-cost carriers are, as you know, experimenting more and more with electronic entertainment for their passengers, if nothing more than just Wi-Fi or something like that.

Yes.

So we think that the health of the airlines, the consolidation in the US industry, the advent of new technologies like Wi-Fi, all point to a pretty good picture for In-Seat Power.

Okay, thank you.

Thank you.

Tyler Hojo, Sidoti & Company.

Just wondering -- did you guys ship any product to Iberia in the quarter? And, I guess more broadly, I was just kind of wondering how that contract ramped as we look at 2011.

I do not -- we're looking for that data -- I don't think we've shipped anything substantial on that program. Usually those programs are scheduled out a year or two. So I would guess that's more a 2012 program.

Okay. But if memory serves, my thinking there was that it would begin shifting in 2011. Is that accurate, or --

I just don't have that in front of me. And unfortunately, [Mark Peeley's] not on the phone, so I can't throw it to him.

Understood. Maybe you could talk about opportunities like that. Are you talking to more airlines? What's kind of the contract flow look like?

I tell you, it continues to be a pretty positive picture. One of the things that frustrates me personally is that the airlines tend to be real publicity-shy. They're a strange combination of an industrial company and retail companies. And they just don't like having anybody else use their name in the market from a publicity standpoint. So we rarely get approval to issue press releases at all.

But I can tell you that in the last -- about a month ago, there's an interiors-based trade show for aircraft in Germany that's a major trade show for us, probably -- well, not probably -- it is bigger than Farnborough or Paris, or MDA or anything like that. And we have a pretty big presence there. And it was a very positive show. A lot of new innovations, a lot of new interest to get airlines around the world there.

And we have some pretty meaningful discussions. And I think we're pretty optimistic that our opportunities to the airlines directly, and also through the IFE companies as we have been working -- that order flow, that enthusiasm in that market, remains intact.

Thanks for that color.

And just lastly -- has there been any change in terms of the tax rate expectation for the full year? I think you were at like 33% to 35%.

Yes, I expect the -- it'll be a two-part answer. First part is -- I expect overall a long-term tax rate to be in the 31% to 34% range. But we are in the -- I do expect, at some point this year, that we will have a resolution to some pending R&D tax credits that have not been fully realized through our income statement or on our balance sheet. So assuming a favorable resolution on that, we could see a lower rate in the quarter that those get resolved.

But net of that, you're still going to be in that low 30% range?

Yes, 31% to 34%. Yes.

Fantastic.

Scott Lewis, Lewis Capital Management.

I just wanted to ask about Tactical Tomahawk revenue. Did that interim contract kind of kick in this quarter, or is that later in the year or next year?

It'll be more later in the year. To the extent that it affected this quarter, it was probably just a buildup of inventory.

Great, thanks.

Thank you. Mr. Gundermann, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Well, thanks for tuning in. We certainly enjoyed our first quarter, and we're looking forward to what we expect will be a strong rest of the year. And we'll talk to you next time. Thanks.

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