Greetings and welcome to the Astronics Corporation Fourth Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now like to turn the call over to Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks, Darryl. And good morning, everyone. We appreciate your time today and your interest in Astronics. Joining me on the call are Peter Gundermann, Chairman, President, and CEO; and David Burney, our Chief Financial Officer. You should have a copy of our fourth quarter 2021 financial results, which we released earlier this morning. And if not, you can find it on our website at astronics.com. As you are likely aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties, and other factors are provided in the release as well as with other documents filed with Securities and Exchange Commission. You can find the documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non - GAAP measures with comparable GAAP measures in the table that accompanies today's release. So with that, let me turn it over to Pete to begin. Peter.

Thank you Debbie and good morning, everybody and thanks for tuning in for our year end 2021 conference call. Our topic today, include a range of fourth-quarter headlines. Sales were in the expected range of a $116 million, but the income statement was clouded by a pretty long list of unusual items. Dave will walk us through those in a few minutes. The highlight of the quarter which I'll spend some time covering, were bookings. Way up, again, a book-to-bill of 1.53 for the quarter, set us up with a record backlog at year-end. We also have reworked our financing arrangement with the banks getting a small three-month extension. Dave will talk through that. And then we will spend some time looking at 2022, and to cut to the chase, we expect it to be a year of strong growth or a lot of caveats here, as you might expect. But we are establishing an initial range for revenue for 2022 or 550 to 600 million. The midpoint there would represent something like 30% growth over where we ended up for 2021. And then we'll end up with questions and answers. So fourth quarter summary sales, as I said, $116 million, last time we talked, we predicted a range of 115 to 118, so we were safely in there. This was despite ongoing supply chain and labour challenges which will be a theme throughout this conversation and is not inconsistent with what's going on out there in the world in general. We ended the year with what we feel was about 15 to 17 million of scheduled product that could not ship for one reason or another, typically, having to do with supply chain challenges. As for labour, we're operating at about 2,200 people right now. Before the pandemic, we…

Okay. Thanks, Peter. I'll skip going through the sales, the top-line again. Pete, covered that pretty thoroughly there and just Jump right down to margins and some of the items that impacted the margins for the fourth quarter. Steve mentioned it was a pretty noisy quarter. I think the easiest way to walk through it is to point into our adjusted EBITDA reconciliation. It's on Page 9 in the press release and talk to the items on there as most of those items are going to be the noise that flowed through our income statement in the quarter. So we had GAAP net income of $1.6 million and adjusted EBITDA loss of $800,000 in the fourth quarter. There's a number of puts and takes, we hear positive and negative items that had impact. First, we received an unfavourable ruling from the Appeals Court in the United Kingdom regarding the ongoing patent infringement litigation. A lower court ruled that the patent was valid and that Astronics have been infringing and lifetimes of technique patent and our appeal was dismissed. Based on the information available to us, we recorded an estimated damages loss, including interest, in the amount of $8.4 million. This is included in our SG&A cost in the fourth quarter. Next item, as we committed in the fourth quarter to reinstate a company contribution to our 401K plans and other retirement plans, the company contribution was suspended when we entered the pandemic in early 2020. A non-cash company contribution to our 401K plans for 2021 will be funded with the shares of Astronics common stock that we'll issue out of treasury to shares with a value of $4.2 million. At the current stock price, this equates to roughly 300,000 shares, which is less than 1% of the shares outstanding. Of…

We'll switch topics now and look ahead to 2022. I mentioned earlier that we are establishing initial revenue guidance of $550 million to $600 million. The midpoint of that $575 million would represent 30% growth over where we ended up for 2021 and the high end would be 35% growth; those are obviously very big numbers. And a reasonable person might ask how we're going to do that, and part of the answer basically comes back to bookings and backlog. I mentioned earlier that our 2021 bookings were $577 million, that's right in the middle. So if you assume things that were booked in 2021 need to ship in 2022, we've got to ramp up our internal production capacity to that level over the course of the year to execute on those orders. Our internal forecast is actually above the high end of that range. In other words, orders we expect to get combined with backlog that's already scheduled gets us above $600 million, but we're discounting our totals somewhat for the challenging operating environment that we are working with. I mentioned earlier that 2021, we ended the year with $15 million to $17 million of scheduled backlog that we could not deliver because of supply chain problems. Our opening backlog for 2022 again was $416 million, $340 million of that is scheduled for 2022. So the math suggests to get to the midpoint, we need to book and ship $235 million. Additionally, that's a very achievable number by historical standards, historical norms for our business. Our current look at the year has first-half sales amounting to about 40% of the total and second-half sales about 60% of the total. We expect to start slow and accelerate and ramp as the year progresses. Our first quarter sales will be marginally…

Thank you. We will now be conducting a question-and-answer session. One moment, please, while we poll for your questions. Our first question come from the line of Michael Ciarmoli with Truist. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions. I guess, could you give me a little bit more detail on why you would be selling excess raw materials? Was that for an out-of-production or it just seems like given the current environment, you'd want to have some buffer stock there. Was it Aerospace? Was is test or what was the rationale there?

Yeah, it was aerospace and it was older generation raw materials to service older generation equipment that we -- somebody came to us and asked about it and we would have ultimately used it over time but it's not something that we identified as needing to have for the current stuff we're selling.

Got it. Okay. That makes sense. And then any longer-term implications here with the patent infringement and the ruling there? Does that impact future profitability, future sales, or are there any -- as part of the settlement, are there any additional payments, royalties you guys might have to pay? Any more detail there?

Let me -- this has been going on for more than a decade, so I don't know how much time you have, but it's another step in the process. I would describe it as losing a battle, but we're still, in my view, winning a war. And just to give you the big picture here, the litigation's been going on in the U.S. France, the UK and Germany. I would argue that the most important countries by far are the U.S and France. Because those are the countries we're wide-body airplanes have been made, over the last 20 years for the most part, and that's where most of this subject product has gone. So those are the most important countries. A few years ago, we concluded and won, the U.S case and the relevant patent was annulled. At this point, the patent in France is also being struck down. But Lufthansa Technic has the ability to appeal that decision, and we expect that hearing to happen at -- in December of this year. But if that -- unless that appeal is successful, the indications are that we're going to win in France too, and those are the two important countries. So the two lessor countries are Germany and the UK. The UK case is basically over except for a damages hearing, which we will -- which we believe will be in 2023. Nothing yet this year. And the number that we accrued, I think was $8.4 million in the fourth quarter, is our best guess that -- where that's going to come down.

Okay.

You can expect that the opposite side will have a different number in mind, but we'll have to settle that when the time comes. And then in Germany, let me dig up a note here, we accrued, way back in late 2020, $17.3 million for what we believe damages will be in there, but we are appealing that number. So that appeal is also not going to happen till 2023. So basically, very little is going to happen in 2022. We'll have a case right in December on the appeal in France. We expect damages hearings in Germany and the UK in 2023, and we're appealing Germany and I think is also appealing in Germany. So this is going to go on for a while, but we think the accruals that were likely to paid, that we know about, are in the books at this point.

Okay. And then, funding this ongoing war, what should we expect for legal fees throughout then '22?

I think it's the same run rate as we've been going here. It doesn't run consistent. It depends on what is actually happening in a given quarter, and how much lawyer time is being spent during that quarter. Expected a ramp up towards the end of the year here.

Got it.

It's just one closing comments. It's been a real learning experience for us and one we hope in every repeat, but it's we have same patent in France, and the UK, and Germany, same exact patent. It's dismissed in France so far. It's completely upheld in the UK and it's partially dismissed and partially upheld in Germany. So go figure.

Got it. Got it. Last question. Pete, you gave some colour on '22 and you talked about 1Q being slightly above and I guess at your midpoint, 575 with 40%, that kind of puts you right at that 150. I mean, is that implying then you're not going to be profitable on first half?

I think we've been running the business not necessarily to be profitable at the levels that we're experiencing in terms of demand. Our assumption has been that demand will return and volume will increase and we felt it was important to continue to keep the capacity to execute on the programs like customers have trusted us with. And for the most part, those programs did not go away with the pandemic for better or for worse. So we're under obligation to continue to execute and perform and we have them. So what we need to do is have demand come back and have revenue come back to the point where we can cover those costs, then we would expect that to happen about mid-year. Dave, you'd answered any differently?

Yeah, just I want to add. In the first quarter, remember Mike will have $6 million of AMJP grant trending come offsetting COGS for the first quarter. But absent to that, yeah, we would not be running at a profit at that level of sales.

And we are.

Got it. Okay.

And the earn-out too.

And the earn out, yeah. I'll jump back in the queue. Thanks, guys.

Thanks.

Our next question is coming from the line of John Tanwanteng with CJS Securities, please proceed with your questions.

Hi. Good morning. Thanks for taking my question. Pete, just one quick one for you. How board has tracked in Q1 so far, are you seeing a continuation of the increasing trend or is it more steady-state as you compared to Q4?

It's a good question were we got a little ways to go here. I wouldn't -- I do not expect we are going to repeat fourth quarter in this quarter. I think it might be a little bit of a step back but that by itself doesn't bother me, as you know, bookings can jump around all over the place but overall, if you pull the mood of our salespeople, I think they're all quite excited at this point in terms of just how much opportunity there is out there. It continues to be a good picture even if we don't continue the ramp in the first quarter.

Okay, great. And then you mentioned you're not seeing much improvement in supply chain. Just to clarify, do you expect any release through the year or are you assuming the current status quo as we go through from the first-half to the second-half?

Yeah. That revenue guidance number does not assume much improvement, frankly. We got caught and learned some lessons in 2021 about lead times and things like that. So we're assuming that those lead times kind of stay in effect. So we're ordering an advance as much as possible in order to be prepared for that ramp when the time comes. I -- It has been an incredibly challenging environment. I'm sure you've heard tales from other companies, but the gymnastics that we have to do to figure out how to execute when a supplier for a program called up because you know, those parts that you ordered that I said I would ship next week. Well I'm not going to ship them for 20 weeks. It's just incredible. So that kind of background -- with that kind of background, it's hard to say things are improving, we can't say that. But I'm hoping they don't get a whole lot worse. I mean, I don't think most -- I think we're kind of in the worst of it right now, at least from what I can tell, surveying industry out there. And we'd love to see a little bit of a rebound, but we're kind of assuming that things stay the same through this year.

Okay. That's really helpful and, yeah, I don't envy that job at all. Last one, you mentioned your engineering operations in the Ukraine. How many people do you have there? What's the size of that business? Number one, and then number two, do you have actually direct exposure to Ukraine and Russia, either their airlines or something else that we're not thinking of, maybe in the supply chain?

A bunch of questions there. So the Ukraine operation that we have in Lviv is about 42 people right now. So not that big but it's all engineering. So it has a significant impact in parts of our business and Lviv is a pretty quiet and rest of the area at this point compared to what's going on in the eastern and central parts of Ukraine. If you look at a map and you think about it, it's likely to continue to be pretty quiet in part because it's like 45 miles or 50 miles or something from the Polish border. Poland is NATO. I don't think, who knows, but I would think hostilities would be very low key that close to a NATO border. So that's that part of your question. Russia is not so much a source of raw materials but we do some business in Russia. I mean, Russian airlines fly Russian people for the most part and they like to be connected when they're flying and powered with their personal devices also. And so our revenue level there isn't all that great but it's probably safe to say it's $5 million to $10 million on an average year. Sometimes if we're doing an outfit of a new airline, it can be higher and sometimes it can be lower. You read about private jets quite a bit recently. We actually did some work for the private jet industry in Russia primarily out of our French operation. There will be a slight impact if the current international business sentiment gets established and we get limited. That hasn't happened yet, I don't think, that I'm aware of but we're obviously watching the headlines every day and waiting for news from the government. So the bigger -- the Lviv engineering operation, in my opinion, is a more significant item for us than incremental sales into Russia that we might be foregoing at least for a while.

Okay, great. Thank you. And good luck to you all.

Thanks.

Our next question has come from the line of Dick Ryan with Colliers. Please proceed with your question.

Thank you. Pete, one last one on the legal side. This is the kind of settling old score. The patents you're talking about aren't on the current technology going forward; is that correct?

They're pretty much expired at this point anyway, so it doesn't really matter. The patents in question, I don't actually have this in front of me, but I want to say they're from 1998 or something like that, but they pre -- a lot of water went under the bridge before this thing even erupted, which is another source of complaint of mine. But the rules are different in different parts of the world. So I guess that's okay.

Okay. In Q3, you said you had a portion of $8 million to $10 million in revenue. Now, it's $15 million to $17 million. Is that the $8 million to $10 million just turned to $15 million to $17 million or is that on top of what was already there in Q3?

It's hard to -- you got a lot of moving parts. It's hard to figure out what's what, in terms of what slips in any particular quarter. Because you're right, some things slipped from the third quarter into the fourth quarter, and some things slipped from the fourth quarter into the first quarter. And what we decided to do was just kind of described it at the end of a period, how much work is there that should have gone and would have gone under normal circumstances. But it did pick up in the fourth quarter from what we were experiencing up to that point. So it's getting a little bit worse over the course of 2021. And again, we're kind of forecasting the situation to remain at its current level, it's current status through 2022.

Okay. Where does the strength and test orders come from? Was that from municipalities kicking back in or something different?

Good question. That was -- it was kind of across-the-board, a number of different programs that we were pursuing, and frankly, nothing that's all that major. You may remember me commenting at the end of the second quarter and the third quarter that bookings were low, obviously, but we weren't losing. Seeing anything, it was just that stuff was sliding and we blamed COVID largely because these are orders that tend to come from defence basis around the world or from municipalities when it has to do with land mobile radio type stuff, or transit train test. And everybody is working from home. And the thing just kind of ground to a halt. What happened in the fourth quarter really was people started coming back in the office at least until, Omicron struck, and started releasing those orders. So that's more of what happened. Now, I will say though as we look forward, I mentioned this generically, we have -- it's a pretty target rich environment out there in terms of significant programs. And on our test side, I would say there are two or three programs that are critical for us in 2022. And depending on when they hit, they may not help 2022 very much, but they sure will help 2023. I look forward to talking to those when I can. At this point we are expecting, let's see, one of them to fall pretty much in the second quarter, one of them, Dick, and two of them to fall in the third quarter. So it's going to be a little while until I can talk about and probably, but they are significant targets that we're setting our sights on.

Okay. Can you talk about what your anticipation might be on the aero side? You talked about, you haven't seen this sort of level of opportunity. I mean, is this the commercial side, there is a potential military down select? How does the business jet world look to you?

It's -- the opportunities are pretty broad-based. I talked about -- well, airlines are waking up around the world and some are deciding to go forward with major installations and major changes from what they've done in the past. The technology doesn't lie still even if the airplanes are. So we're seeing a surge in demand there including some new customers which are impressive to me. I talked about eVTOL, electric vertical take-off and landing opportunities and how that seems to be a good fit for the capabilities we've developed for flight critical electrical power for small aircraft and we don't have news today but we are furthering our investigations there and extending our reach and I expect program award announcements there in the near future. A third one which is more public matter or public record is we're teamed with Bell very closely on the FLRAA, future lift opportunity. And that is a down select there, I think it's expected in the third quarter this year, mid-year stretching into the third quarter and it's a team led by Bell against the team led by Sikorsky. We're firmly entrenched on the Bell side. If they win, that would be a very good program for us. If Sikorsky wins, we're not necessarily out of it, but we would expect our hope reasonably to have a much smaller role on their team. So that's an example of some of the things we're looking at. And again, nothing to announce today necessarily, but we would expect to see awards towards the middle of the year.

Great. Thank you.

Thank you.

Thank you. . Our next question is coming from the line of Michael Ciarmoli with Truist Securities. Please proceed with your questions.

Hey, guys. Thanks for taking the follow-up. Maybe I'm pitched to dovetail in what you're expecting on test and some of these programs, but more broadly, I guess, pricing. Can you give any colour as to how protected you are? You can be on price, whether it's your supplier furnished contracts with Boeing and Airbus versus buyer-furnished equipment with the airlines and any escalators. I guess, the short question is: Can you drive through significant price increases to bolt your average space and test customers?

I guess, I would answer in the short-term about half of our business realistically, it's pretty lock down. We have multi-year agreements on major programs that there will be an opportunity. But while you're in the term of the agreement, there are escalator clauses that give you some relief, but not 100% of what you're experiencing over the term of the contracts. So -- and I think that's probably fairly typical for most of the Aerospace companies. The other half I'd say, we have more flexibility, they're shorter term programs and they tend to be PO based. And in those cases, we're finding that customers expected and do not actually resist too badly. So that probably doesn't spell good things for inflation and getting out control or staying out of control across our economy if everybody acts that away, but we are seeing some opportunity there. And of course, you do what you can to lock down costs as much as possible in these kinds of environments. But we've been doing that for a couple of years. So there's probably not a whole lot more room to go over there. Dave, I don't know if you colour it?

Yes, the newer programs or contracts that we're quoting on, we certainly consider the increased cost structure when we price those. But as Pete said, a fair amount of what we have are up to the 3 or 4 year programs, particularly with the larger OEMs.

Okay. Even on like -- I know it might be a little bit hard for you guys, but an aftermarket brake fix, I mean, we're here in broad-based suppliers getting anywhere from mid-to-high single-digit up to low 20% price increases. I mean, you're having more success. You guys do have what 80%, 90% share out there with certain product lines; are you getting pricing on the aftermarket side?

On the newer orders, we can, but a lot of aftermarket like pick a major airline. We tend to have established pricing with them for a period of time and they can order from a price sheet, and you can't necessarily change the price sheet in the middle of that order. But when it comes time to renegotiate a new vehicle, then you can't.

Okay, got it. All right. Perfect. Thanks, guys.

Sure.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Peter Gundermann for any closing comments.

No closing comments. Thank you for your interest. We're glad 2021 is over and we're glad to be in 2022, and it's going to be much more of a year of rebound. So we look forward to reporting on it as it progresses. Have a good day. Talk to you next time.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.