Astronics Corp (ATRO) 2011 Q2 法說會逐字稿

Greetings and welcome to the Astronics Corporation Second Quarter 2011 Quarterly Results Conference Call. (Operator instructions) It is now my pleasure to introduce your host, Ms. Debbie Pawlowski, Investor Relations for Astronics Corporation. Thank you Ms. Pawlowski, you may begin.

Thank you Robin and good morning everyone. We appreciate your time and interest in Astronics. On the call with me today is Peter Gundermann, Astronics' President and CEO; and Dave Burney, Chief Financial Officer. They will be discussing the results from the second 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 is 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.

Good morning everybody. Thanks for tuning in. We have a number of things to talk about today, in addition to our second quarter results, we announced a B share distribution last week; we'll talk about that for a minute. And just moments ago, we actually made a shelf filing with the SEC for general corporate purposes; we'll talk about that a little bit. We have a new banking arrangement. We announced a pretty significant award for our Test Systems business that we'll talk about in a couple of different ways throughout this call.

But all in all, the second quarter was another very good quarter for Astronics. Revenue of $55.5 million set a new record; it was up 18% over the 2010 second quarter. We continued our historical ratio of being 94% plus or minus Aerospace and 6% plus or minus Test Systems; that's a ratio that we expect to continue through the end of the year.

We were profitable on net revenue; net profit of $4.5 million which was 8.2% of sales and $0.39 per diluted share; that's up significantly from the second quarter of last year, when we had net income of $2.4 million. We were up in our most recent quarter like 87% or something. But that was down slightly from the first quarter earnings, when net income was $5.2 million or 9.4% of sales. The difference between the first quarter and the second quarter can largely be attributed to an increase in legal expenses of all things.

We were hit with kind of a wide range of issues in the second quarter; those included the legal work required for the purchase of a couple of facilities. We ended up getting involved in the Eclipse bankruptcy proceedings which are ongoing. We ended up getting involved in a patent infringement suit and we ended up getting involved with some protest for government awards in our Test Systems business, specifically the VDATS program. The difference between our first quarter earnings and second quarter earnings are attributable to the summary of those legal expenses, which mostly hit in the second quarter.

Year-to-date, revenue of $110.6 million; that's up 17.5% from our first half 2010, again 92% Aerospace; 8% Test Systems. Net income for the first half of 2011 has been $9.8 million, which is up 70% from the equivalent number last year. Our net income for the first half was 8.8% of sales and $0.84 per diluted share. We achieved all that while maintaining our engineering and development investment of over $17 million during the first half, which is up from $14 million in 2010 and we feel is indicative of the pipeline of products that we continue to work on and will bode good things for our future.

We ended the second quarter with a pretty healthy cash level of $16.1 million; that's even after buying one of the two facilities which closed in the second quarter. We bought our Fort Lauderdale facility for $5.1 million or so. And as kind of a sneak preview, in July we also closed on a facility in the Seattle area for our advanced electronics systems business, again another $5 million plus purchase and at the end of July we still had cash balances of about $16 million. So we've managed to work our way through those two facilities without a significant impact to our cash balances.

We have available credit of $35 million and we have revised our banking arrangements or we're in the process of doing that. Dave will talk about that in a minute.

Our bookings year-to-date are also very strong. Year-to-date bookings of $112.9 million, exceeding shipments by $2 or $3 million and giving us pretty good confidence for the second half. We've raised our shipping guidance or revenue guidance and we'll talk about that at the end of the call.

Our Aerospace segment, year-to-date revenues of $102 million; that's up a substantial 17.5% from the first half of 2010. Aerospace contributed all of the margin and then some and our outlook continues to be positive. Our bookings for the Aerospace business were almost $104 million in the first half and I won't drag everybody through kind of the market analysis but commercial transport orders continue to be real strong with the OEMs and for fuel efficiency reasons and general fleet upgrade reasons.

Business jet traffic is growing, even though the production volumes at the OEMs are not reflecting that at this point, but the development projects kind of across the board continue to be pretty strong. So we continue to feel that things are falling in place despite the craziness in the world, for our main customers and our main markets.

Our Test Systems segment had revenues year-to-date of $8.5 million; again about 8% of total and up 17% from 2010. We continue not to be profitable at that level. We know that. Our Test Systems business is a business that we can make profitable due to the high variable cost nature of the business at pretty much any profit level we want. But we are expecting and hoping for much bigger things and we are staffing the business accordingly, as much as we can, to capitalize on the opportunities that we come across.

Our bookings in the first half were $9.2 million, which exceeds shipments by a pretty comfortable level and that booking level excludes an announcement that we had during the quarter for a program called VDATS, and VDATS stands for Versatile Depot Automatic Test Stations and this is a program for the US Air Force. The idea here is that the US Air Force obviously has a bunch of equipment that they use on a regular basis and they have historically relied on kind of an array of test systems to test that equipment.

The VDATS program is a new effort where the US Air Force wants to standardize and cut cost involved in maintaining all those dedicated test systems from the past, and we were fortunate enough to be part of the winning team on this program. The award was exercised as a small business program; a company called Patrick Wolffe Group or PWG is a company that we've teamed with to win this program and it's three years contract with two option years.

I'll get to our content in a second, but first I want to say that the program is under protest at the moment with the GAO; it's kind of standard in programs of this stature and we've been involved in the defense of the program on a number of levels over the last few months and our expectation is that the protest will be resolved successfully in our favor, as time goes on here, probably in September.

Our role in the program is logistics and systems support for the test systems which will be built by PWG, so the Air Force will order the boxes or the hardware from PWG; our role will be to provide logistics and systems support to those systems as they're fielded in the future.

What that means is that we'll be responsible for maintaining spares, for maintaining or assisting I should say, with configuration control and maybe even with technical upgrades of the boxes into the future. And to do that, we have developed some pretty interesting internet based tools that the customer was pretty impressed with, that allows them to quickly and easily order what they need, get what they need and monitor the status of the systems in between. Feedback we got from the Air Force is that they really appreciated our contribution to the PWG proposal and we were instrumental in helping PWG win this award.

Our estimate of value in our press release was $5 to $20 million. It's really a little bit of a wild guess at this point. $5 million I think is the guaranteed low level of the program; $20 million is the best indicated value from the customer but the real value will depend on how many systems get fielded, which is a little bit of an unknown at this point. It could be substantially higher.

So, for a bunch of reasons, we're pretty excited about this one. First of all, it's a big one; it's the biggest one we've had since we've been in the Test Systems business. Second of all, it's a significant program with the US Air Force, which is not exactly a new customer to our Orlando Test Systems business but is the first time we've been involved with US Air Force on this kind of scale.

We believe that the logistics support piece that we contributed to the PWG effort is potentially a differentiator in the future, that the way that the US Air Force is managing logistics on this program, may be an indicator of how things are going to go and our ability to win this program with PWG we think bodes well for future similar competitions where logistics becomes an important criteria for award.

And finally, to the extent that the VDATS stations within the US Air Force become their mainstay, they're going to have to transition from the existing infrastructure of dedicated older test platforms to VDATS, that could involve a fair amount of TPS work or Test Program Set work.

Though that effort is not contemplated by the current award here, it is something that we think we are well suited to compete for, based on our involvement in the program. So we look forward to those opportunities as time unfolds here. Again, the whole program is under protest, pretty standard protest as far as we can tell and we expect it to be resolved in September and we expect to be turned on shortly thereafter.

Other news, last week we announced a 10% B share distribution. This is something we've done a few times in the past. The record date will be August 16th; holders on that date will receive one D share for every 10 shares of common or B that they otherwise hold. B shares, as most of you know, are not tradable but are convertible to common at any time. Our purpose for this distribution as our purpose has been in the past, is to increase float.

We often hear that there are people who'd like to get into our stock but there isn't enough volume trading every day to allow that easily, so one of our objectives over time is to try to fix that or alleviate some of that pressure. And also we want to encourage long-term interest in the company. We believe that we benefit by having people who own our company and know our stock and know the story and follow us over the long-term, so this is one way to encourage that.

We also just this morning, in fact I think moments before we got on this call, filed a universal shelf filing with the SEC. I'll let Dave talk through more of the specifics here in a minute, but it's $150 million universal shelf and it's for general preparedness purposes, I guess I'd call it. We do not have an immediate need for liquidity and we have no immediate plans to pull down on the shelf. It's just one of those things that we felt we should do to be prepared for whatever the future may bring. So don't expect anything immediate related to that shelf.

I think with that, I will turn it over to Dave.

Thanks Pete. As Pete mentioned this morning, we filed a $150 million universal shelf registration. The registration, once it is approved, will allow us to tap capital markets when needed, if needed, with a more compact timeline. Under this shelf, we may issue a range of securities, including stock debt warrants and any combination of these.

I want to emphasize, at this point we have no plans at this time to go to the markets. The purpose of the filing, as Pete mentioned is pretty straight forward; simply another financing or liquidity tool for us. By reducing the lengthy registration process, each time capital is needed we can be more opportunistic with regard to the timing and the sizing and structure of future capital raising, as well as responding to investment opportunities as they're presented.

On another note, I expect over the next several weeks we'll close on an amendment to our existing senior credit facility, extending the revolving credit facility for five years. The plan is for the revolver to remain at $35 million and to have some minor beneficial changes to some of the covenants.

As Pete mentioned, our balance sheet continues to be strong. Our debt to equity is about 1 to 2.5. We're levered at just over 1 time EBITDA and our cash flow remains strong and we are expecting to be positive for the year, even given the $10 million that we'll be investing in the two buildings for the year. That summarizes our balance sheet activity and where we stand there. Pete?

Looking forward, we started the year with revenue guidance of $205 to $215 million; in April we raised that slightly to $210 to $225 million based on where we are today and the bookings we've had and the prospects we see for the rest of the year. We're now expecting revenues to be in the $220 to $230 million range. We're expecting the Aerospace/Test System mix to stay consistent. There are a number of variables, obviously affecting where we will end up in that range. I think that if things go right, we'll be at the very high end of that range, but obviously there's room for things to fall out and we'll update it again on our next quarterly release after three quarters.

With all that, Robin I think we'll open it up for questions now.

(Operator instructions) Tyler Hojo, Sidoti.

Just first question on the E&D expense it looks like you took your expectation for that up a little bit for 2011. Can you talk about where that incremental money is going and what your outlook is perhaps as we move into 2012?

Sure. Well, 2012 is a little bit murky. We haven't got into too much detailed planning there, but part of what's driving our thinking with respect to our development expenses is the electrical distribution system that we developed for business jets and we've talked a lot about the Lear 85 program and those who have followed us for a while know that we did the distribution system on the Eclipse airplane. We're finding that that system is kind of selling itself in the industry and we are getting a lot of attention from a lot of manufacturers around the world.

We haven't won too many of those programs at this point, but we're in the running and if we win them all, our prospects in 2012, we could be spending quite a bit more money. We'd have to get to the point where we decide whether we really want to do that or not or how we finance it.

But our overall objective is to kind of ride this tide as best we can, to the extent that we've got some novel technology and we have customers clambering for it, we think we've got a good opportunity to capture a large portion of tomorrow's business jets and despite the travails in that industry right now, we're pretty bullish on it long-term. So I would say a fair amount of our investment is in that at this point.

Dave, you want to add anything to that?

I think that captures it.

Just given your products and how advanced they are on a relative basis, are you finding that customers are coming to you and perhaps willing to foot some of the bill to develop some of these products or is it really all coming out of your pocket and that's just how it's going to be for the foreseeable future?

That's an interesting discussion. In some cases we are getting funding. I wouldn't say that's the common way it's done these days. So, one of our challenges is to modularize the system as much as possible, which gets hard the smaller the airplane gets. But if we can do that, we can minimize the cost of developing the program to a point.

One of the realities about our system in a business jet is that we touch everything. We touch all the other systems on the airplane. We touch the avionics, we touch the engines and so there's a fair amount of integration that frankly only we can do. Our customers are not even really in a position to do that. So even a perfectly modular system, where we're pulling equipment off the shelf, the level of integration is going to be substantial.

And to some extent, some customers are willing to pay at least a portion of that bill, but some of them are not. And so it's going to be one of those products over time where we're going to have to weigh pretty heavily which programs we want to invest in and which ones we won't and in those cases we won't, if the customer won't pay a portion of it, we'll end up passing on it. That's the way it's going to be.

But, what we are finding right now is that for a variety of reasons, one of which is just turmoil in the industry, engineers and the people in the know are kind of floating around, moving from company to company at an unprecedented level. It started with Eclipse's bankruptcy and people from that company ended up popping up in Aerospace companies around the world, but even most recently with the substantial downsizing that's happened in some of the prominent players, people have been moving also.

So we find that those people who worked at Eclipse and those people who have worked at other places that are familiar with our system, are taking that knowledge to new OEMs and we're being brought in on an advanced basis on development projects in a way that we never had before. So timing is a little hard to predict. Our actual winning a program is a little hard to predict, but it could be that the level of investment that we're putting in the E&D today, I guess I'd be a little surprised to see it go down. It may well go up over the next year or two.

I was hoping that perhaps you could quantify what exactly the legal expense was in the quarter?

I won't quantify what the expense was in the quarter but I can tell you that compared to the first half of 2010, it was up between $800,000 and $900,000 for the first half; most of that occurring in the second quarter. That's the delta between the two periods.

Between the first half and the second half?

Between 2010 first half and 2011 first half.

Then the one thing you didn't comment on was what Panasonic was in the quarter and what your tax rate expectation is for the year and that's all I got.

Panasonic revenue was about 31% of our consolidated revenue for the quarter. Our expectation in the long run, and again, Tyler, you've followed us for a while but the quarterly tax rate bumps around a little bit but in the long run we're still looking in that 31, 31, 33% over the long-haul but from quarter to quarter there will be some ups and downs depending on closing of some open tax items and what not.

Dick Ryan, Dougherty.

Dave, the legal expenses, will they continue into the second half of the year? I didn't catch your earlier commentary.

Yes, I think at least -- it's hard to predict what's going to happen going forward, but most of the things that are driving those costs are still open issues right now.

Pete, there was a contract award from the Air Force, I think recently; can you talk a little bit about that, in Lighting Systems?

Airfield lighting? Yes, we won a IDIQ program. I've got to tell you Dick, I don't know a whole lot about this one yet, but what I gather is that we won an IDIQ program for LED lighting for airfield for defense applications, military applications which essentially means that -- well, if you look out on an airfield at night there are a number of lighting systems and they have traditionally used traditional technologies and there's a lot of interest among the FAA and the MOD also or the defense industry now to upgrade those to LEDs specifically, which are more reliable and use less energy. The energy consumption is actually a big deal.

So, there was an IDIQ awarded to us and to a competitor for a series of lights and we don't know or I don't know what the intention of the Department of Defense is in this matter. They're going to compete both of us for releases time to time, in which case we may win nothing or if the IDIQ envisions splitting the award roughly in the proportion that they split the IDIQ, because the IDIQs are for different quantities.

But I think it's safe to say that over time, when you step back and you look at airfield lighting, next to none of it at all anywhere is modernized to LED technology and we think that over time it all will be, just like it's happening in cars, just like it's happening in air traffic exterior lighting. The advantages of the newer technology are just so superior that there's just no reason not to do that. And we think that represents an opportunity for us and this is kind of the first shot across that bough. But we need to learn a little bit more about the award before I can talk to you definitively about it.

Have you been working on the LED system for a while?

Oh yeah, absolutely. It's part of our development. It's one of our development programs, specifically out of our Fort Lauderdale operation.

Anything happening with the Tomahawk missile for opportunities for you guys? Has that come back at all?

It is and I'm going to pull in Mark Peabody, who's sitting on the line to answer that question. Mark, you there?

We're building a couple hundred a year of those and expect that to go on for a few years.

As color, you're asking Dick because there was a lull there for a while, right?

Yes. There was a soft spot, kind of a lull and I wasn't sure where that currently stands.

That was actually an arrangement that we negotiated way back, where we actually delivered that program on an accelerated basis. So we do the power conditioning unit and we basically got ahead of the end production rate so there was a lull. Now I think we're kind of back in tune and back in line. Would you agree with that Mark?

Yes.

For those who don't know, I didn't introduce him properly. Mark Peabody is an Executive Vice President. He runs our Seattle business and our power systems business.

One last for me, Pete. The inside entertainment systems, can you kind of give us a sense of where the health of that industry is? Is that retrofit or is that still growing business for you guys or what's the current state of that?

About In-Seat Power? We continue to be pretty bullish on it. It's our biggest product line and it continues to show a lot of strength and a lot of success. We think it's increasingly becoming a standard requirement on the part of the serious business traveler, for example. It's more and more common for me to go out and do investor meetings for example, and people will comment that that's a basic requirement that they have when they pick an airline to fly with.

I think as people bring on more and more of their own electronic devices and their personal devices and their computers and their phones and their iPads and the whole array of things that people travel with these days, that's becoming a key differentiator for airlines. And we think that's going to continue. We don't see too many things standing in the way.

Now, our competitive situation in that product, we think also continues to be fairly strong and we're winning our share of programs and we're certainly not resting on our laurels. We're doing what we can to continue our product offering and continue to develop it and continue to maintain our technical lead. And the best indications we have is that customers appreciate that and they're kind of voting with their feet. So we keep growing in that area.

(Operator instructions) There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Okay, well I guess everybody maybe is pretty absorbed with the craziness out in the world, so we'll get back to it. We thank you for your interest and we'll talk to you again after our third quarter. Have a good day.

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