Astronics Corp (ATRO) 2011 Q3 法說會逐字稿

Greetings and welcome to the Astronics Corporation third quarter 2011 quarterly 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)

It is now my pleasure to introduce your host, Debbie Pawlowski, Investor Relations for Astronics Corporation. Thank you, Miss Pawlowski. You may now begin.

Thank you, Shay, and good morning, everyone. We appreciate your time and interest in Astronics. On the call today is Peter Gundermann, Astronics' President and CEO, and Dave Burney, Chief Financial Officer. They will be discussing the results for the third quarter of 2011, as well as the outlook for the rest of the year. The call 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.

With that, let me turn the call over to Peter. Pete?

Thanks, Debbie. Good morning, everybody, and thanks for joining us.

The second quarter was another pretty strong quarter for Astronics Corporation. We had revenue of $56.4 million, which is a new quarterly record. So that totals up 13% over the comparable quarter of 2010. And for the quarter, our revenues were 95% aerospace and 5% test systems.

Bottom line, net profit was $6.7 million equal to 11.8% of sales and $0.52 per diluted share. Our bottom line was up 43% from the third quarter of 2010 when we recorded net income of $4.6 million. Our bottom line benefited in this quarter from a $1.3 million R&D tax credit which was essentially earned in previous years. We lowered a reserve to account -- to close out accounting for those previous tax credits.

Bookings for the quarter were $64.5 million, exceeding sales by 14%. This did not include anything from the VDATS program, which we talked about in the previous call, which has still not been awarded.

So all in all, the second quarter for us was really great, we felt, with three records for revenue, net profits and bookings.

2011 year-to-date numbers so far through three quarters, we have revenue of $167 million. That's up 16% from $144 million in the first three quarters of 2010. Net income was $16.4 million, up 57% from the first three quarters of last year. For the first three quarters, our net income was 9.8% of sales and $1.28 per diluted share. Our mix for the first three quarters was 93% aerospace and 7% test system. That's a ratio that's been pretty consistent.

We continue to spend pretty heavily in engineering and development, another $9.5 million in Q3, bringing our year-to-date total to $26.6 million, which is up from $21 million for the first three quarters of last year. We're expecting our 2011 total for engineering and development to reach $34 million to $35 million by the end of the year.

Legal expenses are up. If you look at the detail, about $1.1 million on a range of issues having to do with facility purchases, a customer bankruptcy, a patent suit we have going, and some government protests.

Cash is healthy, $20.6 million at the end of the quarter, even after buying two facilities earlier this year for a total of $10.2 million, one down in Fort Lauderdale and one in Kirkland, Washington.

We left the quarter with available credit of $23 million plus the ability to expand our credit facility if necessary.

For the first three quarters of the year, our bookings totaled $177 million, which exceeds shipments by about 6%, or $10.4 million, which gives us confidence going forward.

Looking at our segments, aerospace $155.6 million through three quarters. That's up 17% from the first three quarters of 2010, and, again, making up 93% of our total. Aerospace contributed all of our margin. And the trends and outlook in our various segments continue to be pretty positive.

We divide our sales into transport aircraft, military aircraft, and business jets. Transport sales are up 27% over 2010 and make up 61% of our total -- total consolidated sales, that is. Military sales are up marginally, 3%, and make up 16% of the total. And there's a good sign, from my perspective -- business jet sales are up 18%, but make up only 12% of the total. Business jet revenues have benefited from some nonrecurring charges for certain development efforts in certain projects.

Aerospace bookings consolidated are $165 million through three quarters, exceeding shipments by 6.3%. Our test systems segment revenues were $11.4 million through three quarters. That makes up 7% of the total and up 2% from 2010. Our test systems business is not profitable at that level. We believe that the breakeven for that business is somewhere in the $21 million to $25 million range as currently configured. We believe we have the prospects to get there, hopefully in the near future.

One program that we continue to wait on, I mentioned earlier, is a program that we call VDATS for the US Air Force. It stands for Versatile Depot Auto Test System. This is a program that we won with a partner company called Patrick Wolffe Group earlier this year. That program has gone through a series of protests. All of those protests, as we understand it, have been dismissed either by the Small Business Administration or by the GAO, but the Air Force was left with some tasks. We don't know the details of those tasks, but it's taken them a while to get their tasks done. Once those tasks are done, we're expecting and hopeful of an award which, as best we can tell, should happen by the end of the year here.

And again, we believe that's a program which will have a stated value -- or an indicated value of somewhere between $5 million and $20 million. We believe it'll be towards the higher end of that range.

Looking forward, we're tightening our guidance for revenue for the rest of the year to $222 million to $225 million. If we hit the midpoint of that range, we will for the year have turned in organic growth of about 14% plus or minus compared to 2010, which would certainly be a solid performance from our perspective.

An early look at 2011 [sic] based on bookings that we've seen and production rates that we anticipate is that we'll see another year of pretty good growth. We're not banking on it being another year of 14% growth. It could be lower than that, but the signs are positive that we'll continue to see pretty good demand, pretty good reception from the markets in 2012.

So those are my comments, short and sweet. Shay, why don't we turn it over for questions at this point?

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question comes from Tyler Hojo from Sidoti & Company.

Hey, good morning, everyone. First question, just in regards to the reduced guide in test. Is that exclusively based on the VDATS order, or was there something else in there that drove that expectation down?

I'd say it was a series of things. Certainly, earlier this year we expected to have VDATS well under way by now, and it's an IDIQ kind of contract, so it's a little hard to predict what the annual rate is going to be until we can start talking more freely with our customer. But we're thinking that could be pretty easily a $3 million to $5 million, $6 million program over the next four years -- I mean, each year. So obviously, tucking that much revenue in this year would have helped our results down there quite a bit.

Okay. All right, that's helpful. And then just in regards to the booking that I guess you're hopeful that you get by the end of year, would you expect a booking that would kind of satisfy a full year's sales outlook for that program? Help us think about that.

We don't know. At least, I don't know. The way our contribution will occur on that program depends on how the customer wants to provision the program and how many systems they put in the field and at what rate. So until we have answers to those things, we just don't really know what to expect at turn on. But again, we expect the program to be a pretty significant contributor to our overall results over the next three or four years.

Okay. And then just sticking with test for a little bit, could you maybe just maybe comment a little bit more in depth what you think the overall growth prospects of that segment is, particularly in context with some of the recent developments in regards to the overall Defense budget?

Well, I think it's a challenging environment. It has been for a while, and I think not only for us, but for most companies who compete in it. And I would -- I guess I'd have to say that, overall, it's difficult to see that overall picture changing a whole lot. At the same time, for better or for worse, we're a relatively small player in that segment, so if we can get a couple of pretty good sized programs, the VDATS as one, our fortunes and our little operation can change significantly. So our goal is to identify and kind of bring home those programs, survive the inevitable protests and kind of survive this period, and I think we've got a pretty good chance of doing that and doing it pretty successfully. We've just got to get these protests out of the way.

Okay. And would you say that you're optimistic in regards to the prospects of that business when we talk about 2012? I know you talked about 2012 just in the context of the overall business.

Yes, I would think 2012 would be a much better year for that business, certainly compared to this year.

Okay, great. And let me just squeak one more in. Did you say legal expense was $1.1 million in the quarter?

I think it's an increase of $1.1 million over last year, for the year to date.

Could you give what the aggregate number was in the quarter?

Dave, do you have that?

No.

Okay. Well, that makes it easy. All right, great. I'll hop back in the queue. Thanks.

All right. Thanks, Tyler.

Thank you. Our next question comes from Richard Johnson from RBC Capital Markets.

Hi. Good morning.

Morning.

I'm somewhat familiar with the business. I have two questions. One, on the capital expenditures for 19 -- I'm sorry, 2011, which totaled maybe -- on your press release, like maybe the better part of $20 million on buildings. Is any of that related to test systems? And on the Redmond, Washington, facility that you bought for $5 million and are going to put another $8 million into it, is that for increased productivity to support a higher level of sales? Could you kind of give me a little bit of information on that? Then I had one other question after that.

Sure. The two facilities that we purchased, neither of them were for our test systems business. One was for a lighting and safety business we have in Fort Lauderdale, and one is for our Redmond facility, AES. And the situation in both cases, they're kind of opportunistic purchases. Both operations have been, up until now, operating in leased facilities. The situation came up to buy the exact facility we were working in out of Fort Lauderdale and a new one down the street in Redmond. And we believe that once we're in, those two operations will save us money quite a bit because we'll be swapping depreciation costs for -- or rental costs for depreciation costs. I don't think I have those numbers in front of me. Maybe you do, Dave.

We talked about it last quarter. I didn't bring them with me today.

Yes, but we expect them both to be pretty good deals.

Okay, I'll catch up on that. The other thing -- this is a little touchy, I'm sure, but on the test equipment business -- and I know that -- I forget exactly when you purchased it, and then you wrote most of it off. I mean, is that -- I just wonder, at some point it seems to me you need to throw the towel in on it. I mean, it just doesn't look like it's going anywhere. Could just comment on -- I know you mentioned that you expect 2012 to be a much better year, but I don't know what to say other than I just wonder whether it's ever going to make it.

I think it's a fair observation, certainly from the outside. That's -- it's been a challenging go. I guess I'd remind you that it's only 7% of our business right now, and at any given time, we have a range of products and a range of initiatives, some of which go really well and exceed our expectations and some of which struggle a little bit. This is one that's been struggling a little bit.

Yes. Well, that's fair enough. I just hope it's not taking 27% of your time and energy.

Personally, no, it's definitely not. Definitely not.

All right. Thank you very much.

All right.

Thank you. Our next question comes from Scott Lewis from Lewis Capital Management.

Hey, good morning, Pete. Good morning, Dave.

Hi, Scott.

Hey. Just on the engineering and development expenses and prospects, I wonder if you could talk a little bit about some of the things you're working on that aren't contributing today but might in the relatively near future. I don't know if anything is going on with the brushless motor or anything else you can talk about.

Okay. Well, there are a range of things in that -- consuming those dollars or getting that attention, as usual. We talked a while ago or announced a new general aviation business jet type airplane that we're doing some electrical systems work on that we were not at liberty to disclose. We have subsequently won another one, so now we have two of them, both unnamed. These are efforts similar to the Lear jet program, the Lear 85 that we've been working on. And we expect in the coming year both of those programs to get more and more attention, ideally as Lear jet matures and dries up a little bit.

The other part of your question as to brushless starter generators, this is something that we've talked very lightly about in these calls in the past. The idea is that most aircraft engines use traditional brushed electrical motors to start the engine and then to generate electricity. Those brushed motors are kind of a traditional construction and a relatively high failure -- exhibit a relatively high failure rate and are a little bit of a maintenance headache in business jet aircraft and general aviation aircraft. And we have some design concepts that we think could significantly improve the reliability and performance in certain areas for starter generator motors.

And in fact, we are kicking off a program. We think that we have a launch customer signed up for that. Again, it's one that we can't disclose at this point, but we think it's going to be a pretty good platform, and we're trying to develop a contractual arrangement that will allow us to develop that program competently -- or confidently, I should say. And it'll be a -- we've been at it for a while, and we do have hardware flying, but this new program could well be another year, year and a half development effort before it gets put on another airplane.

Okay, thanks for that. And then lastly, Eclipse Aviation, an old name -- they say they're going back into production on a slightly modified -- I guess they're calling it an Eclipse 550. I'm just wondering if you've had discussions with them. Is that going to be a profitable program for you at the kind of lower production rates they're talking about?

We have been in discussion, and we are signed up for somewhat modernized versions of all the things that we provided before. We did cockpit lighting, we did exterior lighting, we did the entire electrical system. And if they do go into production, it should be quite profitable for us because most of the material associated with that will have very little cost. We took a big write-off on the inventory.

Right. So you still have that inventory.

We still have it, yes. And some of it's become obsolete and some of it we feel the need to change, as our design concepts have matured over the years. But we're hopeful that the program is successful. It's a touch environment to launch it, but certainly with Sikorsky's backing, we think that they might find a home for that product.

Great. Thanks a lot, Pete.

Sure.

Thank you. (Operator Instructions) Our next question comes from Dick Ryan from Dougherty & Company.

Hi. Good morning, guys.

Hi, Dick.

A couple of segment questions, Pete. Military seemed a little stronger than what I was looking at. Anything new flowing through the military line?

It was the Tactical Tomahawk.

This year, we've been shipping more Tactical Tomahawk. Last year, if you remember, we didn't -- through the three quarters, we didn't have any Tactical Tomahawk last year.

Okay. Okay. What's the kind of swing factor for that going forward? How much is that contributing?

It was -- I think it was a little over $1 million year to date.

Okay.

$1.9 million, maybe. Somewhere between $1 million and $2 million.

Okay. And is there any kind of numbers you can put around what you think that could contribute next year, or is this a finite program or --?

I'm not sure if -- I think it might terminate or we might deliver on this current batch of units that we're delivering later this year in the fourth quarter. I'm not sure that there's anything for next year.

Okay. Okay. On the transport, commercial transport, what was Panasonic's contribution, Dave?

Sales to Panasonic for the quarter?

Yes.

Sales to Panasonic for the quarter were about 39% of our consolidated revenue.

Okay, so that seems higher than what we've seen in the past few quarters. How do you -- what do you think we should -- how do you think we should model commercial transport going forward? I mean, do you see that kind of growth continuing in the near term here, through the rest of '11?

I think it'll be consistent with what we saw in the third quarter.

Okay. Now, is that just still mostly retrofit, or is it new aircraft or is it retrofit?

I think I would steer that one over to Mark if Mark's on the line.

I am on the line. It's really difficult for us to answer that. We deliver to Panasonic, and then they distribute that to their customers. So we don't necessarily have insight to what customers are actually going to, therefore don't know whether it's actually retrofit or line fit.

Okay. So, Pete, I appreciate the commentary on 2012. What do you think our E&D spending could be next year if it's $34 million, $35 million this year? Do we see that level for next year, do you think, [based on] what you're working on?

Yes. I wouldn't expect it to go down. Our best guess at this point -- we're putting the finishing touches on our planning for next year, but we would expect it, I think preliminarily, to be right around that same range.

Okay. And Dave, a quick one on taxes. How should we look for taxes going forward? That 32% range, is that feasible?

Yes, I think that's a fair -- 32% to 33%, 34% in the long run. We had this -- as Pete mentioned, we had this nice pickup from some prior years' R&D tax credit claims that were resolved during the quarter. Those are behind us, so going forward, I'm thinking 32%, 33%, 34%.

Right. Okay. Thank you, guys.

Sure.

Thank you. (Operator Instructions) Our next question is a follow up from Tyler Hojo from Sidoti & Company.

Yes, I was wondering if you could talk to us about free cash flow. Do you have a number for the quarter? And maybe -- I saw that your CapEx expectations are down a bit. Maybe you could talk about that.

Well, the CapEx expectations were down a little bit mainly -- it's been more of a timing thing. If we go back earlier in the year, I had a little bit more built into doing the build-out on the facility that we bought in Redmond. It looks like some of that is going to slip more into next year, and then some other odds and ends of things that'll slip into next year.

I think what we've seen year to date, our cash flow from operations was just under $13 million, and I think going forward, the CapEx -- we typically run at a rate of between $4 million and $7 million, $4 million and $8 million, depending on what's going on -- what's being demanded of our new programs in terms of tooling and new equipment. But I think we'll see probably another $7 million to $8 million in addition to our normal run rate of CapEx as we build out the facility up in Kirkland. Much of that is going to happen next year. We'll see a little bit start later this quarter, but the vast majority of that will occur during 2012.

Okay, so kind of a maintenance CapEx level of $4 million to $8 million, and then just in terms of building out the facilities, another $7 million to $8 million on top of that?

Yes. Yes. The maintenance CapEx of that $4 million to $8 million is actually closer to $4 million. Once we get up into $8 million, we're talking about adding capacity or specific equipment to deal with specific programs that we have won. For example, we will invest some money -- we have been -- in fixed assets to deliver on the Lear 85 program, and there will be more of that.

Okay. All right, that sounds good. And then just lastly for me, I mean, you commented on E&D expense for 2012, but it looks like your guidance implies a bit of a sequential drop in the fourth quarter. Is that just timing, or what's going on there?

Timing. No, just timing.

Okay. Great. That's all I had. Thanks.

Thank you. At this time, we have no further questions. I'd like to turn the call back over to Management for any closing comments.

Okay, no real closing comments. Thank you for your interest. We look forward to talking to you at the end of the next quarter. Have a good day.

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