Greetings and welcome to the Astronics Corporation First Quarter Fiscal Year 2022 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. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to our host, Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks Diego and good morning, everyone. We appreciate you joining us here today. On the call with me are Pete Gundermann, our Chairman, President, and Chief Executive Officer; and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2022 financial results, which we released earlier this morning. If not, you can find the release 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 call here. Our agenda is as follows; I'm going to start by talking about a couple of prominent forces which have been affecting our company for some time, but have really come to a head here in the first quarter. And then I'm going to turn it over to Dave to talk through financials including some pretty strong cash results over the course of the quarter. I'll take it back and we will talk about a forward look for the remainder of 2022 and revisit our guidance and some of the issues affecting that and then go to Q&A at the end. So, the two prominent forces affecting our company; one negative one positive, if you read our press release, you've seen them both pretty prominently displayed. The negative one is supply chain struggles. We're not unique here and I don't intend to present a thesis, but I do want to describe how the supply chain is affecting our performance, it was pretty significant in the first quarter and it's something that's been growing. The positive force is continued strong demand from the market for our products and for our services. Bookings were really strong, backlog set another record and it's setting up for what will undoubtedly be a pretty exciting second half of 2022. So, the supply chain, this was something that's become more and more of an issue over the last six to nine months, basically as demand started picking up for us, that's when supply chain struggles became more and more apparent. In the first quarter, it was as bad as ever. We went into the quarter thinking that we would have revenues somewhere north of $130 million, we ended up at $116…

Thanks Pete. Consolidated revenue was $116 million in the quarter up almost 10% from last year's first quarter, flat sequentially from the fourth quarter of 2021. It's still not where we need to be to get to breakeven which is around $160 million per quarter in revenue to hit GAAP breakeven. We don't expect to get to breakeven until the second half of the year. As Pete mentioned, we're expecting some significant growth on the topline in the third and fourth quarter this year, as well as improved topline growth in the second quarter. Although we're expected to get to the point where we'll be GAAP breakeven in the second quarter. Aerospace revenue was $101 million and test revenue was $15 million for the quarter and consolidated gross margin was $19.9 million or 17.2%, with a loss from operations of $4.2 million and a slight adjusted EBITDA loss of $353,000 after removing the impacts of the AMJP grant, and the gain from the earnout for the sale the semiconductor business. Margins continue to be compressed as a result of the low revenue in the quarter and increased cost of raw materials. roughly $3 million of raw material costs in the quarter relates to what we call spot buys as we source materials outside of our typical supply contracts to meet customer demand. Outside of the spot buys, we've experienced general information relating to our materials and labor of between 5% and 10%. As Pete mentioned, supply chain continues to be our biggest challenge as lead-times are continually moving around making planning a challenge and limiting our ability to book and ship orders quickly, but we're managing through it. We've had about $140 million of backlog scheduled for delivery in the second quarter, but we anticipate some of that may push…

Okay, looking ahead, we are maintaining our revenue guidance for the rest of 2022, which calls for revenues of between $550 million and $600 million. We have an internal forecast that actually exceeds that range slightly. So, you can see what kind of margin we're building in for potential supply chain disruption. And supply chain, as I said earlier, is likely to remain a factor as we move through the remainder of 2022. The midpoint of that range $550 million to $600 million would represent about 30% growth over 2021 with sales of about $450 million. The high end would represent growth of about 35%. Are those numbers realistic? That's a big step forward. We think so of course. A reminder I talked to earlier that the trailing 12 months of bookings were $632 million, so a forecast of $550 million to $600 seems to jive with that number pretty well. Also, our first quarter backlog was a record $475 million with $364 million scheduled to ship in the remainder of 2022. That would suggest we need another -- approximately $100 million of kind of book and ship business which in the normal course should be pretty achievable for our business. We expect the second quarter to be somewhere in the neighborhood of $125 million to $135 million. If you run the numbers and add it to the midpoint for the first quarter that would show 40%-plus -- 42% of 2022 volume in the first half and much more maybe 58%, 60% in the second half. So, we're obviously at expecting a ramp. And again, if you use midpoints and make some assumptions, this implies quarterly revenue of about $165 million on average in the third quarter and the fourth quarter, although we expect the third quarter to be a…

Thank you. And at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Pete Osterland from Truist. Please state your question.

Hey, good morning. This is Pete on so for Mike Ciarmoli this morning. Thanks for taking our questions. First just wanted to ask on the 737 Max, what monthly rate are you currently producing to? Are you aligned with the underlying production rates at Boeing? Are there any differences in your rates, whether driven by inventories or availability of materials?

We assumed it will bounce around a little bit. But we are as best we can tell pretty well aligned with what Boeing is doing. We think the -- we had an inventory buildup that happened when the thing shut down. But they've pretty much shoot through that. So they've got us at the same rate that they're producing at this point, which was you know, high 20s trending to 30.

Okay. Great. And then just a follow up on aero, you mentioned in your release that you're seeing signs of a pickup on the wide-body market as well. Just because you get a little color on the main improvements you're seeing there. And you know, maybe whether you're seeing any incremental headwinds from the delays on the 787. And now, if you could just as a reminder, what about is your revenue mix currently, in terms of why body versus narrow body?

A lot of questions there. I'd say the 787 slowdown has kind of flown through the system already. We're not hurting any more there. It's all upside from here I would say. As far as products, I can tell you that there are certain types of in-flight entertainment systems which are standard in wide-body and not so present in narrow-body. And we make components that go into those systems. And we've noticed an increase in order for some of those products. They only go in wide-bodies, so wide-body demand must be improving, maybe not on the production line, because as you point out, 787 for example is not increasing at this point. But maybe more on an aftermarket, maybe pulling airplanes out of storage and getting them ready to fly. Our business mix in our commercial transport business before the pandemic was pretty evenly divided. We were for practical purposes, 50-50 wide-body narrow-body and 50-50 line fit and aftermarket. That has skewed heavily, especially when the MAX was shut down, towards narrow-body aftermarket. Wide-body was kind of down on both sides, aftermarket and line fit, and narrow-body line fit was way down with the MAX being down. The MAX coming back has really helped us a lot, and is a big part of why we think we're going to -- 2022 will be a significant year of improvement for us. We're not counting on wide-body production rates coming back in the near-term future. I mean Boeing can't comment on that very accurately. We're not going to comment on it. But we have noticed these increases in sales. Another product, to give you an idea, we make motion systems for high-end aircraft seating typically found in long-haul, wide-body first and business class sections. And we've noticed an uptick in orders for those kinds of programs, too. Again, that's, for the most part, those products don't find a place on narrow-body airplanes. It's early and it's not real significant, but there's a lot of industry prediction that wide-body recovery will happen over the course of 2023 and 2024. And just like we're seeing strong demand and growing demand over the last 12 months, it's primarily been narrow-body driven as narrow-body airplanes have resumed flying. And it's interesting to me to watch the beginnings of wide-body ordering also. So hopefully, that's a sign for that the wide-bodies are going to be -- if production rates don't increase, the ones that are in storage are going to be brought out and maybe airlines are starting to think about what they want to do with them in terms of fleet upgrades or refurbishment or recovery in advance of increased flying as early maybe as this summer. Does that answer your question?

Yes, it does. Thanks a lot for the color. I'll jump back in the queue.

Thanks.

Thank you. [Operator Instructions] Our next question comes from Jonathan Tanwanteng with CJ Securities. Please state your question.

Hey, good morning. Thank you for taking my questions. My first one is -- if you're not seeing so much improvement in the supply chain, what's really giving you the confidence that you can actually increase sales, to the guy levels through the second quarter and the second half? Are those -- are your suppliers telling you they can meet those volumes? And, what the track record of them being able to do that at this point?

Well, it's a very fair question. It is a little bit tricky to explain what we went through in the first quarter, and then talk about that kind of ramp in the second half. But the reality is that, we have that work scheduled, and we've gone out and sourced those components. And we have them on order. So, if things -- if the supply chain performs, we should see a ramp. The question is, will we continue to see surprises and slips and we think we will. But we don't know exactly which parts are going to flip. And we don't know cumulatively what the effect is going to be. But the overall velocity is going to increase no matter what, unless the world falls apart. Because we have these orders, and we've gone out and, and put the orders on our supply chain. So we can accommodate a reasonable amount of slippage, so to speak, and still have significant ramps in the second half. And that's how we've constructed that revenue guidance that revenue forecast. Does that make sense? We can withstand quite a bit of slippage and still be in that range.

Yes, it does. Thanks for clarifying that. And then second, just in terms of your own internal capacity, have you made progress at all in closing the labor gap that you've been talking about in prior quarters? And can you meet that production level internally?

It's another good question. The reality is that if our supply chain snapped to right now, I'd probably be telling you about a labor shortage. Because I think I talked on the last call that we were a couple of hundred people below where we wanted to be. We were at 2,200 I think at that time, and we wanted to be at 2,400. We're making pretty good progress though on the labor side. I mean it's not -- the pressures aren't gone for sure, but we are seeing a little bit of improvement in various markets that we operate in. Not all markets and not all positions. But the production ramp that we're talking about is really production floor kind of labor where we need it. And we are seeing a general loosening there. We're seeing more applicant flow, for example for new positions. So it's possible that that becomes more and more of a pressure point as we start to ramp up volume in the second half. But at this point, we're more concerned about supply chain than about labor.

Okay. Great. That makes sense. And if I could slip in one more, just you talked about these touch projects that could be awarded midyear. What's the relative scale of those? And what would that mean for year-over-year growth and into 2023 if you landed those?

I've got to -- let me do -- it's significant, Jon. The programs are over the life of the programs, very easily over $500 million. I mean, I'm just running numbers in my head, I'm looking at data, but there are probably six, seven, eight of them in both segments, and of course, FLRAA if we were to be successful, that's going to run for 20 years, who knows. And be a couple 1,000 airplanes. I mean, you could easily stretch those numbers to include that one especially well over a $1 billion, frankly.

Got it. Now that seems like a big opportunity. Good luck there.

Thank you. Good luck to both.

Thank you. [Operator Instructions] Our next question comes from Pete Osterland with Truist. Please go ahead.

Hey, guys, Thanks for taking the follow-up. I just had one quick one. On cash flow generation, just -- with the guidance for sales to improve sequentially through year end, do you think it's feasible that you'd be able to get to breakeven on a free cash flow basis over the course of the year? Or are there any other working capital or other considerations that might keep your free cash flow negative even as the top line improves?

Yes. I don't think we'll create significant free cash flow as we ramp through the second half of the year. The inventory component of working capital stuff is kind of -- is where we're most inefficient right now. And on one hand, we have more inventory than we would typically have, if you go back to the pre-pandemic days, maybe as much as $40 million more inventory than we have with the sales level we're at right now. But you can't turn around inventory either. You don't want to slow that down. And so I expect what kind of tread water as we move through the year in terms of free cash flow there. I think our as our margin picks up, I think, what we'll see is, increased working capital components there. But then at some point, it'll flip around to be a tailwind as we move through a normal supply chain environment in the next year. As I said, our inventory is turning much, much slower than it used to turn prior to the pandemic. And it's because of these supply chain challenges where you can have 99 out of 100 parts that you need to ship something and you're missing a washer, and you can't ship it. It affects everything. But I think cash flow wise, I think, we should be able to, depending on where the working capital and the inventory goes, be able to kind of tread water on that.

Great. Thanks a lot.

Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi. Yes. Thanks for the follow-up. Just one on pricing. I was wondering, because we've seen a lot of companies do this in the quarter, if you've been able to pass on some of the more extraordinary inflationary costs that you've been seeing, that 3 million excess spot costs that you talked about in the first quarter, if your customers have been amenable to that, I think, being transparent with that, as has helped a lot of other companies that we've covered, I'm wondering if you've seen any receptivity at all.

We have seen that and, yes, we've been passing on price increases where we can, when we can, and frankly, for the most part, we're pretty surprised with how cooperative everybody is about it. And everybody's experiencing the same thing. So it never comes as a surprise. That doesn't mean that customers are happy to pay more. But for the most part, we have seen and taking advantage of that ability to the extent that we can. And at the same time, we do have long-term contracts on certain things where that's not as easy to do. But even in those cases, we are initiating conversations occasionally and trying to keep the situation from spiraling out of control. But at this point, we don't view that as our biggest headache, our bigger headache is just getting parts in here in the first place and executing the demands, the customers are placing on us.

Got it. One more follow-up. Just you mentioned the big projects that were in the pipeline, but I was wondering if there's actually any general thoughts on military spending, just given the highest security concerns that we're seeing to the world, not on new programs, but existing programs and kind of how that makes -- to you guys?

I'm not sure the -- well, I think the Army’s future lift initiatives probably become more of a priority, right? That's one thing I would say. Not too long ago, people were saying there was never going to be another ground war. So why do we need a ground force? I think the recent events have probably changed the thinking on that significantly. So I expect spending there to be up. I'm not sure that translates much to an increase in Joint Strike Fighter fighting, for example, or most other aerospace applications. But I think the helicopter programs probably become more important, not less important with the Army's version of the future battlefield.

Understood. Thank you.

Thank you. There are no further questions at this time. I'll hand the floor back to management for closing remarks.

Well, thank you for your attention and time today. Obviously, interesting times for our company and we look forward to reporting second quarter results probably early August. Thanks for your time. Have a good day. Bye.

Thank you. That concludes today's conference. All parties may disconnect. Have a good day.