Astronics Corp (ATRO) 2013 Q4 法說會逐字稿

Greetings and welcome to the Astronics Corporation fourth quarter and year-end 2013 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 the conference is being recorded. It is my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Astronics corporation. Thank you. You may begin.

Thank you. Good morning, everyone. We appreciate your time and your interest in Astronics. On the call I have Peter Gunderman, Astronics President and CEO, Dave Burney, CFO, and Mark Peabody, EVP. Pete will first go through his planned remarks, and then we will open the call for questions and answers. If you don't have the news release, that was sent out this morning. Then we do have it available on our website at www.astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation or the question/answer portion of this conference. These statements apply to future events that 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 the earnings release as well as in documents filed by the Company with the SEC. They can be found at our website, or at www.sec.gov. With that, let me turn the call over to Pete. Peter?

Thanks, Debbie, good morning, everybody. We will talk through our fourth quarter and 2013 final results. We will give a preview to 2014, and obviously these are pretty exciting times for our Company. We are making big steps and we think beginning to experience some really good progress. We hope you share our enthusiasm as we go through these topics.

The fourth quarter of 2013 saw us complete couple of planned acquisitions which we'd had in the works for awhile . That of AeroSat Corporation on October 1st, and PGA in early December.

The contribution of these two companies in addition to PECO, which we acquired in July of 2013, made our fourth quarter look really good on the top end at least. Revenue was great. There are some things that are easy to see. Revenue is one of them.

We set a new record at $105.5 million. That's a 56% increase over the comparative period of Q4 2012. If you strip out the acquisitions and their contribution to revenue in the fourth quarter, organically our growth was about 21%, 21.2% over the comparative period of the final quarter of 2012. So pretty strong growth organically and through acquisitions.

Bookings also were very strong. We set a new record there of $109 million, just shy of $109 million. Our ending backlog as we entered 2014 was also at an all time record of $214 million.

The margin profile is a little bit more complicated to understand. Our reported numbers per GAAP accounting treatment, our fourth quarter gross profit was $25.2 million. That's a gross margin of 23.9% which is somewhat lower than what our two-year running average is.

If you were to go back over the last two years and take a mathematical average of our gross margin percent you would find it is 26.1%. So 23.9%in Q4 would appear on its surface to be lower than what our average has been of 26.1%.

Similarly at the bottom line , net income we reported $6.4 million dollars of profit which is a net margin of 6.1%. Again, if you were to go back over the last eight quarters and do a mathematical average you would find that we averaged 8.2%. So 6.1% reported in Q4 would appear to be lower than our 8.2% moving average.

But the big thing that you got to keep in mind in light of our acquisition efforts is the treatment that purchase accounting imposes on the fair market valuation and write up of inventory acquired. So, you buy a company , the inventory gets bumped up to a fair market value which means as you ship that inventory you as the acquirer make much less money than you would on a normal on going state.

We try to break this out for you so you can gauge our performance in light of this purchase accounting impact .

In Q4 the expense that we faced for the purchase accounting treatment was $3.5 million or about 3.3% of sales. It comes right off of gross margin as the acquired inventory is sold. These costs are temporary. We expect them to flush through by the end of the first quarter of 2014 for our 2013 acquisitions.

In any event taking this $3.5 million increased expense into account in the fourth quarter, if you were to back it out you would find gross margins would have been 27.2% which compares favorably to our two of year average of 26.1%, and you'd find our net income at our effective tax rate would have been $8.9 million or 8.4% of sales above our two-year average of 8.2% of sales.

Our GAAP margins, or profitability, has been affected by this purchase accounting treatment.

Our earnings per share without the $3.5 million inventory markup would have been been $0.48 per share instead of the reported $0.34 per share. The expensing of the inventory cost us $0.14 cents per diluted share.

Again, we expect going forward, we will talk about 2014 in a few minutes but we expect another $2.6 million of this type of expense to come in the first quarter, and we expect after that to be done with this flushing of inventory from our 2013 acquisitions.

There are a couple of other things worth mentioning going on in the fourth quarter. The first is that we had a series of little adjustments in terms of customer reschedules in and out and some mixed changes that were not ideal. Even compared to the third quarter, some of you will compare us to the third quarter which was a particularly strong quarter in terms of profitability and ask us why the dropoff. We will answer, just so you know in advance, that it is basically a mix change and little schedule changes and nothing for us to get too concerned about.

Also in the fourth quarter, we had some pretty substantial transaction related costs associated with the acquisitions. We estimate those to be about $500,000 for the quarter.

A couple other items to point out on our fourth quarter income statement, we do not publish an EBITDA analysis but we know that many people do. Central to those analysis, our interest expense, our interest expense in the fourth quarter was about $2 million which was up substantially from where we were in the comparative quarter at the end of 2012 when we were about $270,000. As long as we are carrying debt we are going to have that interest expense. When, or if, we retire that debt, the interest expense will come down. In the fourth quarter our depreciation and amortization expense was up substantially also $4.5 million, up from about $1.95 million in the fourth quarter of 2012.

There are different ways to do EBITDA analysis. We understand that. We believe that pretty much no matter how you do it the margin strength of the business as it unfolds becomes pretty evident.

Looking at 2013 in summary, our year, final revenue numbers were $340 million. That's up 27%, 28%, from where we were in 2012. Organically, excluding the acquisitions we grew at just under 19% for the year. Net income was $27.3 million, or 8% of sales. $1.49 per diluted share, and that compares favorably to 2012 income of $21.9 million, 8.2% of sales and $1.20 per diluted share.

Again the fair market value write up of inventory cost us in the year net income would have been about $31.1 million or $1.69 per share as opposed to $1.49 per share in the normal on going state. Our engineering and development expenses came in at $52.8 million, up from $45 million in 2012. Kind of interesting to note that our 2013 E&D expenses were about 15.5% of sales. That's down from 16.9% in 2012.

We will see in a minute, I think it is reasonable assumption that percentage will continue to drop even as the absolute number rises in 2014.

Year to date bookings in 2013 was $357 million. That's about 5.2% above sales, and our backlog as I said earlier was $214 million, a big step up from our Q3 backlog where we ended at about $168 million.

Our aerospace segment continues to dominate our business. Year to date $330 million in revenue. Up 30% from 2012 and 97% of our total.

Some numbers people are usually interested in, Panasonic, our largest customer was $30.1 million in revenue in Q4. Our other listed customers, Boeing, where revenues were $22.4 million in Q4. Our in seat power or cabin electronic sales which we no longer break out were $45.3 million in the fourth quarter, and that makes it about $164 million for the year, up about 15% over where we were in 2012.

Our test system segment year to date at the end of the year-ended at $9.4 million, 2.8% of our total sales and down from $11.5 million in 2012. It was again not profitable at that level with an operating loss of about $3.8 million year to date. Bookings were $12.9 million, and backlog at $7.1 million.

Our test system segment we expect will get a very lively injection with our planned acquisition of the EADS Test & Services business that we talked about in our last call. We, as a preview, are thinking that acquisition will close toward the very end of the month, maybe the beginning of March.

Our balance sheet we feel ended in a pretty healthy state. Cash was about $55 million. Total debt was $200 million for a net debt of $145, $146 million. We feel adequately capitalized for the task that's ahead of us.

Looking forward. As I mentioned we had strong bookings in the second half of 2013 and we ended the year with a pretty strong backlog of $214 million. We are initially establishing guidance revenue wise for 2014 in the range of $585 to $640 million.

Our base business as it exists today, we expect to produce somewhere in the neighborhood of $485 million to $520 million, and we are expecting our EADS acquisition, when that happens, to contribute somewhere in the neighborhood of $100 million to $120 million. So the mid-point of the combined range would be somewhere around $612 million. That would be an increase of 80% over 2013.

That's obviously a big bite to chew, but we are excited at the prospect, and we feel pretty well prepared for it. There are some moving parts that could heavily influence that total. One is the closing date of the EADS acquisition. We are currently working through some closing checklist items, for lack of a better term.

The one that is perhaps the least predictable is our department of justice antitrust investigation which is mandatory based on the size of this deal. We don't expect any problems there, but it is not a highly interactive process to say the least. We sit on our hands and wait. We are expecting to hear something by the end of the month. It could be any day. That's kind of the gating item. There are other things that we are more in control of and are a little more predictable. We are working to a time frame to have those wrapped up over the next week or two.

The other issue that could have a material impact on our 2014 performance would be a series of STC projects in place with our AeroSat operation. We expect that by the time we hold another conference call we will have a number of those through the process. There are six or seven of those or eight of those in work at the moment in various stages of complying with the FAA requirements.

We believe we are in a favorable position to start wrapping some of those up. If we don't, that will have a negative impact to our expectationsfor the year.

Some other numbers, we expect capital expenditures somewhere to be in the $33 million to $37 million range for 2014. That's higher than we usually have. Largely due to a new building we bought already this year in Portland, Oregon for our PECO operation. That is a facility that we will be moving into for the rest of this yearshould have that move largely done by the end of the year.

We are expecting our engineering and development expense up front to be in the $65 million to $69 million range and that excludes EADS. $65 million to $69 million will be around 10% or 11% of sales which is substantially lower than our 2013 total where we ended up at 15.5% of sales. We have been living for a number of years with pretty high engineering and development expenditures. I don't want to suggest that we are entering a new lower level of that type of activity. It may turn out to be that way, but it may not. We will keep you informed. For the time being we expect that percentage to drop in 2014.

For the first quarter, which we are halfway through at this point, we are expecting revenues of $130 million to $140 million. Again, that's assuming a closing date towards the end of this month for EADS and certain STC progress at AeroSat, and again in the first quarter we will have another $2.5 million expense of the inventory step up accounting process from our 2013 acquisitions. Once we get that done through the first quarter we won't face those charges anymore.

Some of you may ask what we expect the inventory step up charge to be with EADS going forward, and I think we will tell you that we don't know yet because we don't have the deal done. We haven't gone through the allocation of purchase price exercise that is necessary before you get to those kind of numbers.

So, I think that ends my prepared remarks. We can open it up for questions at this point.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Tyler Hojo, of Sidoti. Please proceed with your question. Your line is live.

Good morning, everyone. Firstly, I want talk about how your acquisitions are tracking, at least the ones that you've now closed on. If I am looking at it right, it looks like PECO probably came in toward the lower end of your previous guidance range. Curious how they are tracking from a top and earnings contribution standpoint.

I think, Dave, I will give you a shot at this in a minute. I would answer that question a couple different ways. From a strategic, or cultural, or operational perspective, we are pleased with all three. I think actually, probably, the fit and the integration opportunities that we are seeing and realizing are better than we imagined. On that level, after six months here we are excited. From a financial per perspective , I think it is safe to say if you net out the interest expense, and the amortization expense, and you markup the inventory like we talked about, allocate all of those to the operations, they didn't contribute anything significant from a profit standpoint in the second half of 2013. We obviously expect that to change going forward. I would say, Tyler, at this point, we are pretty pleased. Dave do you want to color that at all?

No, I think you hit the points. From a top line perspective, I think they were right in the ballpark of what we expected , and from a bottom line as well. Basically no contribution from the acquired businesses as a result of the $5.5 million fair value inventory right up through the flush through amortization. I would say they are tracking pretty well.

Okay, that sounds great. Moving to something else. In regards to AeroSat, Pete, in your prepared comments you talked about the pipeline of supplemental-type certificates that are out there. Could you maybe elaborate on what aircraft models you have in the queue, and I guess when you need to get those back in order to achieve your revenue target for AeroSat for 2014?

The current plan is based on getting some of those STCs granted as early as the end of March. And pretty steadily on a regular basis through the second quarter, and there are other projects that are scheduled even later than that. If we get to our next call and we can't talk about STCs being granted, then that would spell a little bit of trouble for our plan at least in terms of the waiting of the quarters throughout the year. An obvious reminder is we work pretty closely with Gogo in this exercise and the STCs in question are not our STCs, they are their STCs. We have to coordinate our communications with our customers, as we always do.

I don't know exactly how these things will be communicated, but the working plan at this point is that we expect to have the PMA, the manufacturing authority from those STCs toward the end of the first quarter here. And you asked about model. I guess the answer to that is pretty much everything. It's whatever airplane Gogo's customers need to fly, are the one's we're working on. So it is a pretty wide range. I am not sure individually it is all of that significant.

That sounds good. We have obviously heard some positive developments in regards to narrow body aircraft operators installing in seat power. Pete, I'm just curious what you are hearing from your customers? Is the pace of conversations picking up or just overall how do you view the momentum in that specific product line?

It continues to build and it continues to get strong. I think the same dynamics that have brought us to where we are continuing to carry us. People are bringing more and more personal electronic devices on board and they want to be able to use them on board with wi-fi and other amenities that are increasingly available. They, very importantly, want to get off the plane with a charged device. I don't think I'm unique, I carry three devices on board and when I get off I need a full charged phone because it's going to tell me where I need to go. I think demand is continuing to build.

I fly a fair amount. I know you do too. I'm sure many of the people on the phone do. This is one of those products you see when you look around. I think that momentum is continuing to develop and continuing to build and upcoming in April we have our biggest trade show of the year which is an interior specific trade show in Europe. And that is one of those big measuring points where we get a chance to really talk to customers on a broad basis over a pretty condensed period of time. We will probably talk about that in our next call too. I am expecting we will continue to see positive things in the market.

Wonderful. Thanks for all that color.

Our next question comes from Dick Ryan, with Dougherty. Your question is live.

Just to stay on the AeroSat, the 737 didn't need the bird strike certification. Are you flying any 747's at this point?

Yes. That one has been granted.

How many are you on and what has been the experience? Can you give us a sense?

It is not many, Dick. I would say it is a handful during the initial installations and trial tests. It could be as few as two or three or somewhere in that neighborhood. We do have orders and we are building parts for those aircraft.

Any operational issues with the antenna?

No. It works perfectly. Nothing major. It is a a pretty complex assembly when you go through an initial installation like that. But we are pretty encouraged with how it has been working.

Outside of Gogo, can you talk maybe about potential opportunities whether that's business jet, or maybe refresh my memory here. Can you work with anybody else on KU band or is it strictly with Gogo? And, as an extension, are you doing anything on the KA band side?

It is not an exclusive arrangement with Gogo. One of the pursuits we are excited about is moving more to the VVIP market. We put a press release out about the service we are offering with a partnering with Harris CapRock which a company that operates KU band satellites around the world. With the intent of being able to offer a subscription service to VVIP aircraft, VVIP is the ultra, ultra high end business jet type of market for heads of state or people who when a gulf stream is too small they want something bigger so they buy a 737 or a 757 or even an 8380. They make it their own corporate private aircraft. They want to be able to fly not on a prescribed route like a commercial airline, but they want to fly anywhere in the world. Harris CapRock is a good partner for us because they have a network that is in part designed to service the maritime industry.

Ships go everywhere so they need satellite coverage everywhere. We are their entry to aerospace. They allow us to plug airplanes into their network and with that combination of our hardware and the Harris CapRock system, people can fly their airplanes from one out of the way place to another out of the way placeand keep coverage for the most part all-around the world. We are actively pursuing that and interestingly, you didn't ask this, Dick, but I will use it to plug our newest acquisition here, PGA, is very active in cabin's in flight entertainment and cabin management for VVIP aircraft. So if someone is going to outfit a (inaudible) for corporate, private aircraft travel, they will go to a design office or modification company and they may end up with an Astronics PGA cabin management system and an Astronics AeroSat connectivity system as part of that installationWe are in the early stages of coordinating our market efforts between PGA and AeroSat. We are pretty excited about the potential there.

I notice the PGA backlog was higher than I was thinking. Is any of that business in there yet or are you still pursuing?

Well, anything in backlog the way we count it is a firm order. We haven't worn any programs based on the combination of marketing efforts there. That's only been two months so we are just getting going there.

Maybe a question for Dave. The top line guidance with the test business from EADS, can you give us a sense what E&D or SG&A might look like with EADS included in there, the test business?

I think it is a little preliminary for that. While we have some historical information for EADS, I don't have it at my finger tips here. I don't want to wing it on that one, Dick.

Okay, no problem. One last one for me then, Pete. An in seed power typically or historically Panasonic had a bigger quart in their fiscal year-end, so March. Do you anticipate that seasonality continuing this year?

I don't have a specific planned answer for you, Dick, but I suppose it is reasonable to assume that. You are right. Their year dose end in March. It seems that often we get a real strong first quarter from them. From our perspective, this year, there will be so much happening as we go throughout the year that the impact of that seasonality, so to speak, will not be as pronounced as it has been in certain years in the past.

Thank you.

I will get back in line.

Thank you. (Operator Instructions). Our next question comes from Kevin Ciabattoni, from KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning, guys.

Good morning.

Just a couple quick ones to start on the guidance for 2014. For the first quarter that $130 million to $140 million, did that include any of the (inaudible) revenues at the low end? Does the $130 million assume that the deal doesn't close before quarter end, or was there revenue in that system?

There is revenue baked into that. We would hope for March if we close at the end of February. So obviously that would be included.

And then to take a moment on the guidance. In terms of AeroSat, are you still expecting the $20 million to $40 million range, or have you been able to narrow that at all?

No, we haven't. That is one of the big wild cards as we look out over 2014. What is the timing going to be with these STCs?And my position on it at this point is that our year expectations probably won't change a whole lot even if the certification dates slide a little bit. I think we will build in advance and what we will do is end up with a disproportionate waiting toward the end of the year. Obviously if the STCs slide from March to November that is a different deal. If they slide from March to even June or July, I am not sure that will affect us for the year. We will report on that as we can.

Looking at the Aero Space margin in the quarter. You just got done with your prepared remarks and mentioned mixed in schedule impacts there. Are those going have a pull through impact on the first quarter? Should we expect to see a positive bump as you play catch up there?

I think the first quarter is going to be a strong quarter. We will have some purchasing wrinkles going through and cleaning up our inventory from 2013 acquisitions and the somewhat unknown impact of the EADS situation, but without those things, just looking at the strength of the business, I expect our first quarter to be pretty solid.

You mentioned 500,000 of acquisition-related expenses in the fourth quarter. I assume those are separate from the $3.5 million inventory step up. Are those related to 2013 acquisitions or were those tied to the EADS acquisition? Can you maybe give us an idea what to expect going forward from that line?

Dave, do you want to answer that one?

Sure. They are separate from the $3.5 million inventory valueexpense. They relate to things like consultants that we hired to do some due diligence, legal costs and other items of that nature.

For the test acquisition?

Largely for the PGA acquisition and also a little bit for the test acquisition, yes.

Should we expect more of that then type of test acquisition over the next quarter or two?

Yes, there certainly will be, as we did a fair amount of the legal work in January.

Okay, thanks. Pete, have you seen the change in your level of direct bookings from the airlines as they retro fir those narrow bodies? Or is it still primarily going through the IFE providers?

I think we are seeing a change. I think if you look at the total size of the business and the percentage going through the IFE guys. The wide body IFE oriented type of distribution system is still important to us, obviously. The customers that we have in that market, including specifically Panasonic, very important to us. The narrow body world we would expect, and we are seeing it is more of a direct sell to the airlines. So we are definitely seeing that.

And then last one from me, just wondering if you could give us maybe an update on how you are progressing with the leer 85 program and what your expectations are for what you baked in on for 2014 on that program?

Sure. Actually, I have Mark Peabody on the line who is kind enough to call in from a ski vacation in western Canada. Mark, do you want to answer that one?

Sure. Leer has been saying that they are planning on doing a first flight here any day now. So we expect to see that pretty soon. And then they will go on continued flight tests over the next year or so and then beginning production next year. We are of course going to ramp up to meet that.

Great, thanks, guys.

Our next question comes from Dick Ryan, from Dougherty. Please proceed with your question.

Pete, on the in seat power, do you have a sense, or can you give us a little color of how that is split now between wide and narrow body?

The wide and narrow body debate. We have taken some estimates to try to divide our sales there, Dick. I think I promised to do this a couple calls ago. We still don't have it done and part because we have been a little busy, but in part because it is a hard thing to do. Our product is pretty modular. If you are selling to a narrow body operator it is easy to know that these products are going on narrow body airplanes. Most airlines operate a mix. It is really hard to know. We can do an educated guess, but it is a hard thing to automate. We are a little reluctant to put out numbers there that we can't verify and look back with some trace-ability. It comes down to a judgment call on the people putting the analysis together. It is definitely increasing. Beyond that, I am not quite comfortable we have a number we can publish.

That's fine. Dave, on the gross margin line. Stripping out the E&D side, the direct overhead I think was a little over 59%. How should we look at that going forward? I think it was up in that range was back in 2010 and how should we look at that going forward over the next few quarters or maybe 2014 in general?

I think the fourth quarter was a solid quarter for us. We discussed the abnormal things we don't expect to continue once we get through these purchase accounting things. Some transaction-related costs to the acquisition. I think where we are running now is representative of where the business is right now.

And one last one from me. Pete, you talked about CapEx . I think that was low $30's or $33 million, $35 million without test. If you include that in there what could that CapEx number become?

We are not aware of any substantial CapEx related requirement from the EADS business. They have a reasonably good facility and they are completing a revamp of it which we think they have done a pretty good job on. It is not as though we have to move it or put it in a new building. There could be some program specific CapEx requirements, but I am not aware of anything major in the immediate future.

Great, thank you.

Sure.

Our next comes from Kevin Ciabattoni, with KeyBanc Capital Markets.

One quick follow-up for me. Aero Space looked strong in the quarter. Just wondering how much was acquired versus organic and maybe what the expectations are for a run rate as we look into 2014?

I didn't hear what the beginning of the question was.

Sorry. I'll repeat it for you. The military side of the Aero Space business looks strong in fourth quarter, and I was just wondering how much of that was organic versus acquired business? And then what kind of run rate we should look at for that in 2014?

On the military side the majority of that was organic, particularly related to a couple of programs. We started shipping power control units in the fourth quarter as compared to the year ago. And our revenue from the joint strike fighter program was up.

Is that the level we should look at into 20 014 or is that more one-time items in the fourth quarter?

No, I think Cat Tom will continue into 2014, and I know that we expect continued revenue for joint strikes fighter, for the lighting sweep there. I am not sure if it is rabidly throughout the year, or not.

Thanks. That's helpful. That's all I have.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Peter Gundermann for closing comments.

Very good. Thanks for attending our call today. We are pleased with how 2013 ramped up and we are excited about 2014. We look forward to talking to you again. Have a good day.

Thank you. Ladies and gentlemen, this conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.