Astronics Corp (ATRO) 2012 Q3 法說會逐字稿

Greetings and welcome to the Astronics Corporation third quarter 2012 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you, Miss Pawlowski. You may begin.

Thank you, Phil, and good morning, everyone. We certainly 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 of the third quarter of fiscal 2012 as well as the Company's strategy and outlook. We will conclude the call with a question and answer session. If you do not have the release from this morning, it is available on the Company website at www.astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation and the question and answer portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today.

These factors are outlined in our earnings release as well as in documents filed by the Company with the Securities and Exchange Commission, which can be found at our website or at www.sec.gov. So, with that, let me turn the call over to Pete. Peter?

Thanks, Debbie, and good morning, everybody. Thank you for tuning in. We feel our third quarter was another in a series of pretty good quarters for the Company, though there were quite a few moving parts that are worthy of some discussion and some mention.

Our revenue for the third quarter was $68.9 million, a new quarterly record. That's up 22% over the comparable quarter from last year and up 6% sequentially over the second quarter of 2012. We were in terms of our segment split 95.5% Aerospace, 4.5% Test Systems.

Our expenses during the quarter were a little bit complicated in some respects. Our E&D expenses were $12.8 million. That's an increase of about $2 million from our run rate over the earlier part of the year and $3.3 million over the comparable quarter from 2011. The increase is somewhat schedule-related. We had some customer pull-ins that caused us to accelerate some things. But it is also an increase -- an indication of increased workloads, and we'll talk more about that in a moment.

We also had increased warranty reserve -- or an increase in our warranty reserve for the quarter of about $750,000. That's something we wouldn't expect to repeat and is related to a specific problem on a specific part that we need to address.

Compared to last year, our SG&A expenses were up pretty substantially, $9.1 million or 13.2% of sales versus $6.4 million or 11.3% of sales last year. That's an increase of about $2.7 million. About $2 million of it is related to the two acquisitions we've done in the last 12 months, that of Ballard Technology and Max-Viz.

The $2 million related to those acquisitions are about $1.1 million in higher compensation costs, particularly in the sales structure. Those two companies are structured a little bit differently than the rest of our company, so their impact on our SG&A line in terms of compensation is disproportional. And acquisition-related amortization of intangibles accounted for the remaining $900,000 of increased SG&A costs.

Those $900,000 of amortization also largely explains the increase in depreciation and amortization, which is spelled out below our income statement of $2.1 million in the recent quarter versus $1.2 million in the third quarter of 2011.

We expect going forward that the observed depreciation and amortization of $2.1 million will stay roughly the same for the foreseeable future. The intangible expense load will go down as we move through the coming quarters but it'll be replaced largely by increased facility depreciation as we occupy a new facility in our Seattle location.

Finally, when you compare the most recent quarter versus the quarter a year ago, you have to take into account that we had very different tax rates. We had a rather normal tax rate of 33.2% in the third quarter of 2012 versus an abnormally low 11.2% in the third quarter of 2011 and that was due to some R&D tax credits which we recognized in that quarter.

So with all those things taken into account, we still earned a net profit of $4.9 million, 7.2% of sales and $0.33 per diluted share. $4.9 million is not as good as we might have hoped for on that volume, but given all the things that happened in the quarter we were reasonably content.

Bookings for the quarter were pretty strong; $66.8 million, that's our second best quarter ever after only the previous quarter, the second quarter of 2012, where we had bookings of $77.2 million. So year-to-date, that leaves us with revenue at $199 million, up 19% over 2011, net income of $16.2 million or 8.1% of sales. That's pretty comparable to where we were this time in 2011. 2012 earnings per diluted share of $1.07, down from $1.11 last year.

And again, hitting those major expense items, our engineering and development expense so far this year is $33.9 million, up from $26.6 million last year. We now expect our 2012 total to be in the $44 million to $46 million range, and with an eye to 2013 we are expecting to be in that same range next year.

It's a common discussion point as to what we're doing with all that money and I don't have anything major new to announce today, at least in terms of specifics. But I can tell you directionally that we continue to win new programs and be involved in new programs. We talk a lot about our electronic power distribution systems, or EPDS systems, and the current project that we typically highlight is our work on the Lear 85.

At this point we're actively involved in two other EPDS programs which we are not allowed to name at this point. And we're working towards a finalized contract for a third one. So I expect at this time next year or pretty close to the end of next year, anyway, we'll be able to identify those three other programs.

And I think I can safely say at this point that they pretty much corner the market or the industry in terms of general aviation. I think they'll be a pretty impressive list when we can put them all up. We also are working on a major lighting program that we won which we also are not ready to announce yet at this point.

SG&A expenses so far this year are $27.2 million or 13.7% of sales. That's up from $19.8 million or 11.9% of sales. The increase there is $7.4 million, and again, our acquisitions alone in terms of amortization and increased compensation costs account for about $4.4 million of the $7.4 million. Year-to-date bookings are strong, $204.8 million; that's up from $177 million in 2011 and gives us an optimistic perspective as we close out 2012 here in the fourth quarter.

In terms of our segments, our Aerospace segment again is the major driver for our results. Year-to-date revenue of $190.2 million, up 22.2%, and 95.5% of our total, contributing all the margin. Within our Aerospace segment, all of our markets are up. Our Commercial Transport sales were $133 million, up 30% over last year and 67% of our total. We clearly have benefitted from being in the right place at the right time in the commercial transport market these days.

But our Military sales are up, also, up 7.3%, making up $27.8 million of our total 14%. And our Business Jet sales are up 6.6%, $21.8 million and 10.9% of our total. In terms of our products, Cabin Electronics is our major driver. About 52% of our total sales, up 28% for the year. Aircraft Lighting is a little more than a quarter of our sales, 27% and up marginally 3.5%.

Our Aircraft Lighting products are largely concentrated in the Business Jet arena and the Military market, two of the slower moving markets these days that we serve. Airframe Power -- this is where the Lear EPDS program comes in and the other programs that I alluded to -- at this point are only 7.5% of our total and actually down for the year. But we have high hopes for those products going forward.

And a new product line we're spelling out, Avionics, which includes the Max-Viz and Ballard acquisitions, year-to-date $10 million, 4.5% of total. Ballard has been part of us all year; Max-Viz only since the end of July. Next year we expect those two combined to be somewhere in the $20 million to $25 million range. So they will be together significant in our results. And then our Airfield Lighting product line is our smallest product line; 3.6% of our total, up 8% for the year.

Test Systems segment year-to-date revenue is $8.8 million, 4.4% of the total, down a third from where they were in 2011. We continue to struggle in the market with this product line, but we also continue to see some exciting opportunities. And I like to think of this as keeping our line in the water. And we are targeting some programs and putting the -- working hard on our budget for next year.

Our current look next year shows a substantial increase in revenue. So we'll see how that pans out and we'll talk in more details about that at the end of our next quarter when we go into 2013 expectations in some detail.

So as we close out 2012, our 12 month bookings are $261 million. That leaves us with a backlog at the end of the third quarter of $115.6 million, which is another new record. We started the year expecting total revenue of $235 million to $250 million. That subsequently was raised in a couple of steps up to $260 million to $275 million. And today we are tightening that slightly to $267 million to $275 million.

That obviously suggests a fourth quarter that's on the top line about the same or slightly better from what we achieved in the third quarter. And I know everyone's interested in what 2013 is going to look like at this point, but we're not quite ready to talk about that specifically. We'll roll out our 2013 numbers when we release our fourth quarter results, which will be sometime in February.

So that ends my prepared remarks, Phil. Why don't we open it up for questions?

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment, please, while we poll for questions. Tyler Hojo, Sidoti & Company. You may proceed with your question.

So just firstly, I was hoping you could give us a little bit of an update on some of the narrow-body opportunities in the in-seat power market. I don't think you hit those in your prepared remarks, Pete.

Yes. I don't think I have anything specific to add on those today, Tyler, other than we continue to see a trend where the narrow-body opportunity is materializing for the Company. We, as you know, have introduced and are developing some new products specific towards that market. And those are in kind of the testing and kind of final development stage.

I'm hoping we can announce something in terms of launch customers right towards the end of this year. But I think it's pretty safe to say that there's a widespread interest in and recognition that USB-based power systems will be a strong part of the future and today are really taking hold.

I just spent a few days at the NBAA trade show -- National Business Aircraft Association. It's kind of the world trade show -- best trade show for the business jet and general aviation community. And one of the things that's happening in that community is not only passenger amenities are important, obviously, for the Gulf Streams of the world, but also pilots increasingly are taking their iPads into the cockpit. And they want ready and available power.

And we've adapted some systems specifically towards the business jet community. And I walked away from that trade show increasingly convinced that not only are passengers in commercial transport but pilots and passengers in the business jet community also are really interested in this USB capability. And I think we've got the right products at the right time. But at this point I don't have specific awards to talk about.

Okay, that's fair. And just in context, with kind of the increased E&D guidance that you gave, it sounded like it was more outside of kind of in-seat power. I mean, is that accurate or, I mean, has the kind of spending budget for kind of narrow-body and business jet in-seat power kind of gone up here?

It's a good question. We don't break out our engineering and development expenses by our product lines. But I can tell you that we do spend money where we see opportunities. And those opportunities may or may not line up with where our existing revenues come from. And your observation is correct in that we are spending a disproportionate amount of money, say, in our business jet endeavors in general and in our aircraft power product lines specifically.

I mean, I think airframe power at this point is only 7.5% of our total revenues. It's getting a lot more than that in terms of our investment. But, again, our vision there is that we think we can bring new technologies to a class of airplane which really needs it and doesn't otherwise get it. And we think that if we can apply our technology effectively to the new generation of airframes as they're being introduced and developed, that someday we will have a very strong market position and franchise in that area.

And I think that's largely happening. You know, airframe development efforts don't happen every day and they take a long time to complete. But I'm pretty pleased with the progress we're making there. That's not to say that we don't do whatever we can do to support our more major product lines. And certainly anything that we can do to support our in-power franchise -- our in-seat power, which is basically a passenger amenity in commercial transports -- we do it. No doubt about that.

Okay. Great. And just one last question from me. You mentioned an aircraft lighting award that you won but you can't really discuss yet. I'm just curious if maybe you can just comment on what end-market it addresses? I know you're predominantly focused on some of the military and business jet markets within that product line today.

Yes, this is a foreign military venture.

Huh. Okay. Great, thanks.

Sure.

Kevin Ciabattoni, KeyBanc Capital Markets. You may proceed with your question.

Just going back to the E&D expense, your outlook for the year has kind of been lifted here for three quarters in a row. I was wondering if you could give some color around how much of that increase is coming from not legacy platforms, obviously, but stuff that you've been working on versus new wins over the last couple quarters.

Well, I guess I'd say most all of the increase is driven by new wins. We have some situations where, like any company in aerospace, I suppose, developments that you think are going to cost X end up costing at least 1.2X or 1.3X. So some of the increase is due to that.

And some of the increase -- you know, we also end up in situations where customers tell us they want one thing and we run down that road. And we get just about to the end of the road and then the customers flip around and say -- well, actually, what we wanted was this other thing. And you have to take -- you have to backtrack a couple miles and start all over again, going in a slightly different direction.

So we have seen some of that. And then you end up in a discussion as to whether that's a billable type of change to the requirement. So we have some of those going too. But I'd say the majority of the cost increase is driven by market wins and new products that we're actively developing, actively working on.

Okay. Good. And then military and biz jet were both down sequentially in the quarter. I know biz jet had a pretty strong 2Q. Just wondering if you could give some color around kind of the quarter to quarter shift there.

Yes. Well, in the business jet world commute specifically?

Biz jet and military, if you don't mind.

Okay. Well, military is for us largely a spares exercise and tied to some big development programs. I mean, we're on every rotary wing. Those are continuing to have -- see pretty stable production. Joint Strike is getting to be more of an important program for us and will continue to do so, and V-22, also.

But a big part of it is spares. And those spares can be a little bit lumpy and a little bit difficult to predict. So we don't -- you know, it could be up one quarter and down another quarter. We tend not to get too excited about it. We have seen some program wrap-ups, at least temporarily, on some of our missile programs. Tactical Tomahawk is one that we put a lot of time into. So that could explain some of the decline.

In the business jet world, I think my read on it is that when the year began, most people in the industry thought that this was going to be a rebound year in terms of new airframe production. And our products are primarily used when airplanes are built. So we're tied to the build cycle there. And I think at this point, being the majority of the way through the year, it's pretty clear that the increase that was envisioned has not materialized, is not going to materialize.

So production rates are steady. I think they were -- the OEMs were buying at a quicker rate early in the year so we shipped them more in expectation of stronger production rates. And then as they whittle them back, obviously they have to bleed off inventory so they buy less from us. So I think that explains a little bit why we're down.

Going back to my NBAA experience, I think it's pretty clear that the boom -- or not the boom, but the increase that was expected this year now is perhaps pushed off a year or two. And I think the industry looks at it more as treading water in the business jet world for the next year or two. We should do better than that as we continue to put more content on new airplanes.

When we look at the business jet world, what we're primarily concerned about is getting our systems -- our higher value-added systems -- on new airplanes as they go into development. And one of our frustrations that I alluded to earlier is we can work on a program for a year, year and a half sometimes, and depending on the OEM, they just don't formally announce the program themselves. So they don't let us formally announce it.

And that's at least one of the situations that we're in right now in terms of our engineering and development expense. So that's a long answer to a short question. Did I get it for you?

Yes, you did. You nailed it. Just staying on that a little bit, what are your thoughts for -- or what are you guys facing in terms of Hawker for next year or the rest of this year?

Well, Hawker Beech has been -- I think they're formally now going by Beechcraft, by the way -- but they've been a little bit of a drama for the last year and a half. They've been a customer of ours for 25 years. We're on every plane they've built. Hawker Beech recently announced its intention as part of a bankruptcy resurrection to drop its jet production line.

So they've up till this year built four or five different jet models, including the Hawker aircraft and a couple developed by Beech. They're going to stop that production. They're basically going to be a propeller company. That means they're going to build something called the JPATS airplane, Joint Primary Aircraft Training System, which they've been marketing as the Pilatus derivative for a number of years.

Their big thing will be the King Airs. They've got three different versions at this point and they build 100 plus airplanes a year. And then they've got a couple of piston airplanes, the Baron and Bonanza. We're on all those airplanes. We think that those airplanes actually offer some good growth opportunity for us to the extent that they're stable and proven airframes and they have a mix of military and commercial customers.

And there's reason to believe that the basic systems on those airplanes, including their electrical systems, will need to be updated. And so we have ambition to work with Hawker Beech, or Beechcraft, in those areas.

We also are working on some lighting upgrades. If you follow the trade press, I don't think we released these press releases.

Yes, I saw that the other day. Yes.

Okay. So we've got some -- our Max-Viz organization has some work going on on the King Airs and announced some SPCs recently and we're doing some upgrades in terms of LED lighting on specifically, I think, the Baron and the -- which is a twin-engine piston -- and the King Airs have been announced.

But we have a lot of friends in Wichita at Hawker Beech and we're going to do what we can to help them through this muddle. And we think that they've got a pretty strong product franchise in propeller airplanes. So we understand that strategy.

Great. And then just one housekeeping and I'll jump off. If you guys could give what the Panasonic revenue was in the quarter.

Panasonic in the quarter was $27 million.

Okay. Great, thanks.

Thank you. Dick Ryan, Dougherty & Company, LLC. You may proceed with your question.

Say, Pete, when you look at the recent quarter and if you were able to strip out the warranty and the extra E&D, you're looking at maybe an operating margin in that 17%-ish range. You indicated E&D would be at the same level next year. But if you look out in a couple years down the road, could operating margins get to the 18% to 20% range? Or would this -- I mean, is this kind of giving us an indication of the kind of leverage that exists?

I look at the quarter as being very strong from a revenue and booking quarter. And I look at it as kind of a culmination of a bunch of timing issues that collectively hurt a little bit compared to where you might expect us to be.

So your question is a little bit beyond our detailed planning horizon, but I think there's certainly room for increased revenue and relative efficiency in terms of our cost going forward. But as always, that cost structure or the E&D expense is at least in part driven by our success in the market. And two years out, it's kind of difficult to predict where we're going to be.

Again, we think we have a chance to really establish ourselves in certain markets and as A-list customers bring up their airplane development programs, if we get invited to participate, we're going to go after that pretty aggressively.

So if three or four of those companies this time next year have announced plans that include us, that could really drive our E&D expense in 2014 and '15, for example. But if we get to this point next year and the business jet market's still depressed and -- it actually, it could go down. I wouldn't rule that out. So I don't mean to duck your question, Dick, it's just a hard one to answer that far out.

Yes, sure. The airframe programs, you mentioned the Lear and then the other two. Are they contributing in 2014?

To revenue?

Yes.

Not realistically. No.

Okay. And, Dave, maybe one. How should we look at the tax rate going forward?

Thirty-one percent, 32%, 33%. One thing to be aware of is that if our government decides that they want to reinstate the R&D tax credit after the election, we could have a positive adjustment to our rate to recognize R&D tax credit in the fourth quarter, or next year, if it happens next year.

What sort of impact could that have?

Oh, gosh. In the initial quarter, we'll have a big catch-up, presumably. So it'll have a significant impact on the rate in that quarter. Then on an ongoing basis, I would think it would have an impact of somewhere between two and five percentage points on the rate.

Okay. Great, thank you.

Michael Callahan, Topeka Capital Markets. You may proceed with your question.

I guess just first off, and I apologize if you already said this, but for the E&D expense for next year, is that going to be roughly equal across the quarter? Or is it going to be pretty lumpy or just how should we be thinking about that?

I would think of it as pretty equal. We end up in certain crunches where we're doing a lot of testing and things like that which requires outside services. But for the most part that level balances out.

Okay. So this isn't really related to one or even just a couple of programs. It's just kind of even across the board?

Yes, that's the way I'd model it.

Okay. Then I guess the other thing I wanted to touch on is we didn't talk about sequestration at all today. I know your actual military segment is not that large, but if you include FAA and Test Systems, it's 25%-ish. Have you guys done any work as to what your plans are there? Is there any specific area that you're more or less concerned about? Especially maybe as it relates to FAA, is there a chance that really gets kind of hit disproportionately from what we see in the rest of defense?

Well, the FAA budget is a valid thing to ask about. It's a little bit of a catfight every year. I guess we think that we've been operating at a fairly low level anyway, so we wouldn't expect too much harm there. As for our overall defense work, I guess we think most of it is reasonably locked in on pretty good programs.

So from a risk standpoint, unless -- like if Joint Strike were to be killed, that would certainly affect our outlook for years. But we don't expect that to be the case. And we haven't done a whole lot of testing or conditioning of our expectations accordingly.

I mean, we think we're on a pretty good distribution of programs and I'm sure hoping that our government finds its way to a more rational approach to managing its fiscal house. But we don't expect that we would come out with a sequestration adjustment to our short-term expectations.

Okay. And then maybe just lastly, on the sequential decline in the military segment this quarter. Was that more -- you had mentioned some programs kind of ended or at least temporarily ended. Were those all planned events or was there just some general slow-down in orders as well that maybe took you by surprise?

I'd say it was more just timing and circumstances. We don't view it as a trend at all.

Okay. All right, that's all for me. Thanks, guys.

Sure.

Thank you. (Operator Instructions) Mrs. Pawlowski, there are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Okay, very good. I'd like to thank everybody again for tuning in. We look forward to the fourth quarter and we'll end the call now and encourage everybody to go out and exercise their civil duty and vote. Thanks for your attention.

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