Greetings and welcome to Astronics Second Quarter 2022 Financial Results Call. At this time, all participants are on the listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn a conference over to your host, Craig Mychajluk with Investor Relations. Thank you. You may begin.

Yes. Thank you. Good morning, everyone. We appreciate you joining us here today. On the call with me are Peter Gundermann, our Chairman, President and CEO; Dave Burney, our Chief Financial Officer. Should you have a copy of our second quarter 2022 financial results, which we released earlier this morning. If not, you can find a 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 and A session. These statements apply at a future events that are subject to risk and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risk and uncertainties and other factors are provided in the release as well as with other documents filed with the Securities and Exchange Commission. You can find the documents on our website or at sec.gov. During today’s call, we’ll also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance, should not consider the presentation of this additional information in isolation, or is the substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release. With that, let me turn it over to Pete to begin. Pete?

Thanks, Craig. And good morning everybody. As in most quarters, there are some good things to think about or good things that happened in the second quarter, and there are some things that are a little bit more concerning or maybe watch items going forward. I’ve organized my comments today to talk about the good things first and the watch items or bad things second. And then we’ll go today for some specifics on a few topics, and then we’ll do questions and answers afterwards. So the positive things, when I look at the second quarter, there are a couple things that really stand out to me. One is that demand continues to be pretty strong for our business and for our products. Second quarter bookings were $148 million. That’s slightly off the pace of recent quarters, but was still a book to bill of 1.15, leaving us with another record backlog of $494 million, an all-time high. This continues the trend over the last year. Over the last four quarters, we had bookings of $655 million against sales of 473. That’s a book to bill of 1.38, very strong in our experience. The important thing to recognize about the bookings that we’ve experienced to date is that for the most part, it’s really a groundswell of business, kind of across the business as the aviation industry, particularly the commercial transport industry comes back to life. There are no big blockbuster bookings that inflated those numbers. It’s really much more of a groundswell of business across the company. Again, a book to bill of 1.38 over the last year. That being the case, in the second quarter, we did announce some major program wins, which we think are going be real important for driving our volume in the near future,…

Sure. Well, thanks. As Pete said, so while sales continue to improve, we’ve experienced headwinds are putting downward pressure on our margins. The consolidated revenue of 129 million in the quarter was up 16% from last year’s first quarter and up 11% sequentially from the first quarter, driven by continued strength in the commercial transport market. Despite an $18 million increase in our top line compared to the year ago quarter, we experienced the operating margin decline. So why is that? So the margin headwinds for the quarter were on sales increase of $18 million compared to the previous year’s quarter. Historically, we’d expect about 45% of that sales increase were about 7 million to 8 million to drop to the operating profit. But we didn’t see that. We saw our loss from operations actually increase from a loss of 5.9 million to a loss of 8.4 million. And Pete mentioned some of the headwinds that we saw for the quarter in comparing this quarter to a year ago. First, effecting comparability in the 2021 second quarter, we eliminated a liability relating to the contingent consideration on an acquisition from a prior year. Eliminating this liability had the impact of reducing our SG&A cost last year in the second quarter by $2.2 million. Second wage and benefit inflation amounted to somewhere around $3 million to $4 million on top of the wage base from a year ago. That’s close to a 10% or more increase there. It’s not different than what other companies are seeing as well. Third, the cost of raw materials and sub assemblies is up somewhere in the range of 5% to 10% typically. In addition to that, we have the cost of the spot buys that we’ve been making when we can find components outside of…

Okay. I think we’ll open it up for questions now.

Thank you. At this time, we’ll be conducting a question and answer session. [Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hey, good morning guys. Thank you for taking my questions. First one is, Pete, did you have a specific component or pieces of supply chain that’s been giving you the difficulty that’s reducing the top end? Could you call out what that is?

I don’t know if I have specific components that have caused us. It’s more a general trend and you try to ratio it. We certainly have the work to do the- even go beyond our original range, but we’re observing that you just have these consistent and regular supply chain snap foods that bring you down at a certain rate. And so we’re thinking about that. Revised range is more realistic given that we’re halfway through the year now. But pretty much everything we make involves electronic components and quite a bit of it. We have some products that don’t use so much, primarily on the lighting side of our business, but it’s the electronic components that are causing us the most trouble, but it’s not limited to that. I mean, raw plastics paints, basic hardware, it’s really- like I just said, it’s a whackamole effort. I think we’re getting pretty good at dealing with it, but that doesn’t mean that we’re overcoming it. We’re just surviving with it. So like I said, some of our operations report that things might be getting a little bit of better, others don’t feel that way, but nobody’s saying it’s getting a whole lot worse. So that’s actually good news compared to where we’ve been in previous quarters.

Got it. And then, can you just talk a little bit more about these three projects or these contracts that you signed? The Southwest one especially sounds pretty interesting. Can you talk about the revenues that might be associated with each one of these and the scale in the coming year or two?

Sure. Timing’s a little bit of a question mark, actually on all three of them. As opening statement though, let me say this. The pandemic’s been horrific. Obviously, being focused and concentrated on commercial transport, aircraft, like we were, is a bad place to be when a pandemic grounds the airlines around the world. So that’s obvious. We just don’t have the military diversification or defense diversification that a lot of other companies did. We were much more concentrated. So that being said, two years later as I look at the way the industry’s coming back and I look at the way we’re positioned, we’re not implementing any major changes to our product line strategy or to our approach to the market. We were pretty happy with how we were situated up until the moment the pandemic struck. And now that it’s coming back, we continued to feel pretty good about the product lines that we have, the customer relationships we have. And there’s a lot of enthusiasm kind of in our corner of the world across the industry. And these three programs, I think demonstrate that to a large extent. The Southwest one, this was specifically for the Max fleet, obviously a narrow body airplane. Narrow body in-seat power is typically somewhere in the range of a $100,000 per ship, something like that. And we’ve come out with a new architecture. We’ve been talking to Southwest for years. We came out with a new architecture and they’re kind of a launch customers. It’s USB only type C and type A, but it’s a very lightweight system that really got them interested and excited. And we think it’s going to play out positively in other narrow body operators around the world. Before the pandemic, our feeling was that in-seat power…

[Operator Instructions] Our next question comes from Michael Ciarmoli with Truist Securities. Please proceed with your question.

Hey, good morning guys. Thanks for taking the questions. Pete, maybe just to stay on Lilium, you’re probably not going to like this question, but maybe some of us remember Eclipse. I mean, it’s certainly a very crowded space right now. It sounds like you’re doing some fun to development, but you can port this system to other potential operators out there. I guess when should we expect to see a ramp-up in revenue specifically tied to Lilium or any of the other ?

I think again, nobody knows how this whole thing’s going to shake out. There are a lot of different contenders like you’ve said, and there are some real differences in architecture in terms of the kind of aircraft that these companies are trying to develop. And I think it’s safe to say it’s unclear if everybody’s going to win and if not, who’s going to be the winners, who’s going to be the losers. It’s just too early to tell. But what we do think is that now is the time to be involved, if you want to be involved. It’s going to be hard to jump in later once these development efforts are well underway and certification is proceeding. At that point, it’s going to be too late to get in. So what we are endeavoring to do is to play a role in the electrical systems and some of the other product lines that we have may also come into play like lighting and again, be reasonable with our funded development or our internally funded development so that we stay in control of our technology. But we don’t want to get too far over our skis in terms of investing in specific program requirements that various aircraft may require or customers may desire. So we’re going to balance that going forward, where they pay for the customization and we pay for the basic system architecture and development. We think that’s a reasonable, balanced position to take, as most of these companies are seeking certifications sometime in the 2024, 2025 timeframe. That means the systems are going to have to be nailed down and largely developed over the next year and a half, two years at most. And that’s what we are preparing for and gearing ourselves for.

Okay. And then just back to the second half, I guess, looking at the guidance, looking at the step-up sequentially, I mean, do you guys think you can- with the higher costs right now, do you think you can be operating income positive? And do you think you can generate cash flow in second half?

Sorry, Mike. Yeah, for sure. Our GAAP breakeven point is right around 160 million to 165 million per quarter in sales. So if you look at our adjusted EBITDA calculation in, in the press release, at 129 million in sales, we’re right at about an adjusted EBITDA breakeven point here. Our CapEx requirements, while we are estimating them at 9 million or 10 million, I think they may come in a bit lower than that for the quarter, but that’s where we’re estimating now. So I think when we get up to north of 160 million, 165 million per quarter in sales, we start to generate positive cash flow, assuming we can keep our working capital in check. And as I mentioned earlier, the supply chain is the challenge there. Our receivables are in good shape. But you buy all the stuff you need to deliver on an order and you’re missing a $20 component and you have a million dollars worth of stuff sitting on the shelf that you don’t ship until you get that last piece in. So that’s part of the challenge there in terms of managing inventory, but we’re getting better at doing it, but again, part of that ramp-up in working capital and inventory relates to the sales growth we’re expecting. We’re not expecting to continue growing our inventory at the level you saw in the second quarter.

Okay. And then last one, just, can you maybe elaborate on the new credit facilities, the term and the asset based facility? I mean, the market clearly moving against and depending on when you close this, the spread might get even higher. What should we be thinking for the increase in annual interest expense? I mean, I guess could probably figure it out on the term, but what else are you going to be paying for the asset based credit facility? I mean, I think you’re running kind of maybe 6.5 million in annual interest right now.

Yeah. So we don’t have the details finalized to that point yet, but both pieces are going to be SOFR based. We’re expecting SOFR to get up to between three and three and a half, maybe over the next six months. And then on top of that, there’ll be the spread. So the spread’s going to be determined based on- the ABL, it’ll be based on some type of measurement of leverage. Still working through the details of that. And then on the term note, it’ll most likely be a SOFR spread on that and details to be determined there. I can’t give you how much because we’re not there yet, but it will be an increase over what our interest experience has been [indiscernible] this year.

Okay. And then just the last one. As you guys are defining leverage with your lenders, what’s the trailing 12-month number you guys are using now? Because, I mean, if we just look at the kind of reported adjusted EBITDA, only about 3 million on a trailing 12 months. So what kind of leverage ratio are you guys currently sitting at today for your sort of facility-

Yes. Based on the calculation and the revolving credit agreement, we’re a little over four at the end of the second quarter. We’re projecting that to drop.

Okay. Perfect. All right. Thanks guys.

Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

All right. Thanks for the follow-up. Pete, what’s the update on the FLRAA and FARA programs?

On the FARA program? Is that what you are asking?

Yes.

Okay. Well, the FLRAA program has been , delayed a little bit. I think award is now expected in the mid-October, late-October timeframe, which is a slide of about two months from what the army was saying before. As a reminder, we are very heavily on the Textron team, the Bell team, and that award, if it goes to Bell, will be a very significant game changer for us. We are much less involved on the Sikorsky or Lockheed team. So if it goes that direction, that would be a negative thing for us, although we have some opportunities there that would play out subsequent to award. The FARA program has been pushed off more substantially, and I don’t have a date for you exactly. I think that’s been pushed off like another year or year and a half. So it’s probably in the 2024-2025 timeframe for down select. So FLRAA is the big deal, and probably, hopefully before we talk again, that’ll be decided. We’re firmly in the Bell camp at this point. So that would be good for our company.

Got it. Thanks Pete. What’s going on in the test business? What’s your outlook there and kind of are the programs that you expected [indiscernible]?

That’s been a bit of a sore spot. The order rate for our test business has been slow, kind of keeping up with shipments, but we’re not seeing the growth that we thought. There are a couple of substantial radio test programs, one that we thought was going to be awarded in June, one that we thought was going to be awarded in October or so. And both of those have slid. We think the one from June will be awarded yet this month. That’s the latest we’ve been told. And the one that we thought was going to happen kind of at the end of the government operating year is going to slide into the beginning of the next calendar year. That’s what we understand. So we haven’t lost those programs, but the award date keeps sliding. It seems like that’s the theme these days. And the other major pursuits generally are along the lines of our transit business, our train test and subway test business. And those also have moved a little bit. I think it’s somewhat situational, but in general COVID and work from home and budget pressures have slowed down that process. We still have a very long target list. In fact, nothing’s come off the target list. It’s just that things that we thought were going to get awarded midyear now are a little bit less definite. So we’re continuing to push it. We obviously need to get bookings there to see some growth in that business in 2023. So we’re doing what we can to push bookings in the second half of this year, and hopefully they come in. If not, we’ll have to adjust as always, but we’re still pretty optimistic long term, just seeing short term delays.

Got it. Thanks, Pete.

Our next question is from Michael Ciarmoli with Truist Securities. Please proceed with your question.

Hey guys. Thanks for taking the follow-up. Just on the ramp into the second half, obviously supply chain issues. I guess your, your supply chain challenges getting components, was that sort of the biggest driver, or are you looking at kind of a slower rate here with the Max, with the A320, the 787 restart? Have those kind of factored into taking the top end of the guidance down? Just trying to understand kind of more of the moving pieces around what’s really impacting the ramp and how sensitive you are to some of these production rates and deliveries?

No, it’s really just supply chain, Michael. Book to bill is great and our backlog is great. Yeah, there’s some puts and takes with rate on some major programs, but the real big deal is customers want products. And the question is when can we get material to support those orders? And that big ramp is something that we have anticipated for many, many months. When lead times for a lot of commodities went way out, when we started getting strong orders over the last year, we had to schedule accordingly and the way the calendar fell, it disproportionately fell on the second half of 2022. So we went into the year with an internal plan that was well above the range that we guided to 550 to 600. As we’ve moved through the year and as we’ve experienced supply chains struggles, it really comes down to a probability weighted expectation going forward about how those troubles are going to continue. It’s not any kind lessening of demand from customers. It’s not a reduction in rates on major programs. Those are all kind of going in the right direction. It’s really an issue of how is our supply chain going to respond? We’re kind of in a unique position of a major ramp in a really tough macroeconomic environments. So there are things that could go wrong, and I think I mentioned that we went into the second quarter thinking that internally we should be somewhere in $135 million range. That was our perspective going into the quarter. We ended up at 129. If you run those numbers over six months, you responsibly come down from 600 to 580 on the high end. So that’s what our thinking was. Certainly, it’s not a reduction in demand from customers.

Got it. Okay. Thanks guys.

We have reached the end of the question-and-answer session. I’d now like to turn a call back over to management for closing comments.

Thank you for your time today. We’re looking forward to an interesting and exciting second half of 2022, which we hope will set us up well for 2023. Thanks for your interest in Astronics and have a good day.

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.