Greetings. Welcome to the Astronics Corporation Fourth Quarter Fiscal Year 2022 Financial Results. 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 this conference is being recorded. I will now turn the conference over to your host, Craig Mychajluk, Investor Relations. You may begin.

Yes, thank you and good afternoon everyone. We certainly appreciate your time today and your interest in Astronics. On the call here 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 fourth quarter and full year 2022 financial results, which we released just after the market closed today. If you do not have the release, you can find it on our website, astronics.com. As you are aware, we may make some forward-looking statements during the formal discussion and the Q&A session of this conference call. 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 and with other documents filed with the Securities and Exchange Commission. You can find those 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 tables that accompany today's release. With that, let me turn it over to Pete to begin. Pete?

Thanks, Craig, and good afternoon everybody. Thanks for tuning in for our fourth quarter conference call. As usual, or as is often the case, I've tried to simplify the headlines for the quarter and the things that I would broadly categorize as good news, things that I think will be well received by our investor base and some other things that are less good, maybe bad challenges that we want to also give equal time to. And we will kind of close with a turning our attention away from 2022 and turning towards 2023 and talking about what we expect to happen in the current year and how we think it's going to play out, recognizing that it's pretty early and a lot can happen. So the good news headlines strong demand continues as evidenced by our bookings, $182 million in bookings is a very solid performance, our second highest since COVID came in, and a very good close for the year. We'll talk in detail about bookings and how that's translated into a record backlog and how that sets us up for a solid opening frame for 2023. We'll also talk about some reasons why we think that strong bookings level is very likely to continue based on how our market is evolving and how some of our programs are playing out. Second positive good news headline is that the revenue ramp that we've been looking for we believe has begun. We have since COVID struck – been stuck in a quarterly revenue band of about $105 million to $130 million and just seemed to have a really hard time getting beyond that level until the fourth quarter, $159 million, frankly, was higher than we thought we would be. As we started the quarter, we think it's a positive…

Okay. Thanks, Pete. Following on to some of the points Pete made with regard to our sales and bookings, they continued to improve through the fourth quarter. The primary driver for both bookings and sales increase was the commercial transport market. Sales to this market were up 76% to about $103 million, which was an increase of a little over $44 million from last year’s fourth quarter, and up just over $24 million sequentially from the third quarter. Globally, air travel continues to improve driving demand for the aircraft retrofit spend and increasing OEM build rates. Now, there are a lot of puts and takes to compare last year’s P&L to this year’s, but the main driver was the increased margin on the sales ramp, partially offset by higher input costs and additionally, the 2021 fourth quarter had the benefit of $7.5 million from the AMGP grant program and the $5 million gain from the building that we sold in that quarter. This was partially offset in that quarter by a full year’s accrual for our 401k cost. As we reinstated the company contribution in the fourth quarter of last year and higher legal fees. The 2022 fourth quarter, on the other hand, had the benefit of a $1.5 million gain relating to the litigation settlement. Contribution margin on incremental sales is running at about 40% right now. This is somewhat lower than our pre-pandemic contribution margins, which were typically closer to 45% to 50%. These are being impacted by input costs on labor and materials. The margins continue to face headwinds primarily from supply chain predictability, which impacts shop floor efficiency, as well as increased input costs that eventually will gradually be mitigated as we pass on these costs through new contracts. It does appear that the trajectory of…

Okay. Turning to 2023. We are maintaining our initial 2023 revenue guide of $640 million to $680 million. That may seem like a pretty big jump from 2022, $535 million, but there are a couple things to think about at the midpoint of that 2023 range. We would be seeing something like 23% growth over 2022. That’s actually just slightly more than what we did in 2022 over 2021. We saw 20% growth in 2022. That initial range anticipates 23% growth in 2023. So it’s certainly a step, but it’s a step we’ve already done once and we have the backlog to do it. Another piece of data supportive of that range, again, $640 million to $680 million, is that our last four quarters bookings were $690 million and four of our last five quarters were right up around $180 million. So if you annualize that, you get $720 million. So the orders are coming in. We’ve demonstrated 20% to 23% growth. And big assumptions beyond that are that COVID continues to moderate around the world. That seems to be happening, that people are traveling, travel restrictions are coming down. We’ve talked about China. Certainly, I assume a majority of people on the call have been on commercial airplanes over the last couple months. They are packed and loaded and doesn’t seem to matter where you are or where you’re going. So people want to travel and as long as COVID [indiscernible], and with China opening up, we expect solid growth in our markets or solid demand in our markets. The other big assumption, of course, is the supply chain. We need to continue to see – and we expect to see cautious but steady improvement. Again, problems still exist, but we’re better at recognizing them and resolving them when…

Sure. [Operator Instructions] And our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi. Good afternoon, guys. Thank you for taking my questions. Obviously nice to see the supply improve. Just to double check that the timing is what’s going on in Q1, if not the you supply constricting again, or that maybe you had something that pushed out from Q3 and Q4 and you just caught up to that. Just help me understand the supply chain improved into Q1 from Q4. It is a question really.

Yes, it’s a good question and it is not an easy answer. I think, the way to answer it is that the top line is going to move a little bit by program slides. We did pull a couple things that we were able to pull into the fourth quarter out of the first quarter, which left the first quarter a little bit light. And I think the way to think about supply chain is that, a year ago we would place an order for a part and where we might normally expect it to come in 10 weeks or 15 weeks, all of a sudden we were getting quotes for 52 weeks. And the difference now is that in many cases, 52 weeks is coming down, but it’s still not 10 weeks to 15 weeks. And it’s – but the suppliers are more capable of hitting their – hitting whatever they commit to which is an improvement. But it’s not an improvement to the point where we can accelerate things very easily. Given our backlog, given the orders that we have in queue, if we had a supply chain that was cooperative or functioning like it used to first, we’d have no trouble filling this hole in the first quarter. But given the way the supply chain is performing while it’s getting better, it’s not getting better to the point where we can push and yank and pull all the levers that we are used to operating with. So it’s kind of a combination of all that. It’s just a little bit of a clumsier process. Lead times are still a little bit longer and we do have the occasional hiccup. But I hear about them fairly regularly. And so it just limits our ability we think to respond in the short term during the first quarter of the way it’s looking. Dave, I don’t know if you’d add anything to that.

No, I think that covers it. It’s – a lot of it is, as you said, we – pre-COVID, we were able to respond really quickly to customer requests if they wanted something in six weeks or eight weeks. And it puts a damper on your ability to do that. But I think generally speaking, what we’re seeing is a little bit, a lot more consistency than what we saw in supply chain six months ago, or eight months ago, nine months ago. We’re also seeing a flattening out of kind of the inflation that we saw as we went through last year. Prices aren’t going down or costs aren’t going down, but the trajectory certainly has flattened out on a lot of the materials that we’re buying.

Got it. No. That’s all very helpful and good to hear. Dave, just a question for you. You mentioned the contribution margin is close to 40, obviously you're still doing the spot buys, you mentioned the improving mix in Q1. How should we think of that contribution margin going through the year? Should it be improving towards that 45 or even 50 as the spot buys goes down? Just help us to understand when you hit that 150 or 180, what does that incremental margin actually look like?

Yes, the way we're forecasting in particular with regard to the spot buys, which, as I pointed out, are not insignificant on a quarterly basis is to – they will gradually phase – we're expecting them to phase out as there is more normalization in the supply chain. We don't expect this to happen until we move into the second half of the year. So that by the fourth quarter we're expecting it – the spot buy cost to decrease. The other thing that we're expecting to see as we mentioned earlier as we roll into new contracts where our quotes have reflected higher costs and a higher selling price, those will start to become more meaningful as we move through the year and into next year as well. The 40% contribution margin I think the way we're forecasting is expecting that to gradually improve as we move through the year as well.

Great. And then last one from me, did you say that your cash tax burden would be $67 million this year, or was that a non-cash number?

I – what I intended to say was $6 million to $7 million.

Well, $6 million to $7 million. Okay. Understood that caught me off guard. I apologize.

Oh, did you hear 60?

I heard 67 and maybe that was just my fault.

No, no, no, $6 million to $7 million. Yes.

Understood. Thank you. Okay, I'll jump back in queue. Thanks a lot, guys.

And our next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with question.

Hi, good evening guys. Thanks for taking the questions.

Hello.

Maybe – how are you? Peter or Dave, just to stay on that margin, kind of the contribution margin and just thinking about aerospace margins, I mean, given the volumes you put up, I think it was what, three eight in the quarter. Should we expect a kind of steady increase in those aerospace margins as we move through the year and presumably, knock on wood, nothing kind of gets derailed here with supply chain, but we continue to see the demand flow through. Is that a reasonable expectation that the margins build off this level?

Yes, I think – when I speak to that 40%, I'm speaking to the incremental contribution margin. But what will happen also as the top line grows is better absorption of the fixed costs. So yes, we would expect as aerospace continues to have top line growth that we will see those margins continue to improve.

Okay. And then, I mean, Pete, you talked a little bit about pricing. I mean, would you be able to kind of elaborate or kind of give us more detail in terms what you think or what you are trying to push through for price increases and what that's kind of adding to the equation this year?

It's a little hard to quantify. I guess I would say that for the most part, I think, we're in pretty good shape, in part because we've had a lot of heavy demand, heavy bookings recently and quite a bit of our revenue base turns over on a pretty frequent basis. We certainly have long-term contracts on major programs and in some of those cases, we're able to increase prices. In some cases we got to wait for the contract to renew. But I guess I feel that assuming that inflation doesn't pop along at ridiculously high rates for another two or three years, I think, we're going to ride it out and I think it will adjust in due course. I'm not considering at this point a major issue, and that's not to say we don't have our stress points. We've got some parts of our business that are adjusting quite a bit better than other parts of our business, and we've got to fix that on an operational basis. But for the most part, I don't think we're going to long-term be sitting here complaining about inflation as a reason why we can't achieve good margins.

Okay, okay. It sounds like, are you getting real pricing? I mean, are you pricing above inflation or just trying to keep pace with it or…

For the most part, we're adjusting where we think it's going based on when we think we're going to have to execute certain programs. We're also making some use of surcharges and we're going to our customers and saying, this thing that you want to buy is costing us a lot more than we expected. And in many cases, customers are agreeing to pay that surcharge.

Got it.

In some cases, that's being reworked into the base price. In some cases it's a temporary arrangement that will go away later. We'll have to deal with it then. But for the most part, I feel like we're staying on top of it and the relatively recent ramp in bookings works to our favor.

Got it. Got it. And then just one more, I mean, you talked about wide-bodies. Can you kind of just remind us what your ship set content there is? And then it seems like you called out some older platforms, so it seems like some of these older ones are seeing retrofit opportunities. I mean we know where, where the A350 and the 787 are going right now. So I guess I'm asking is it seemingly maybe more sort of retrofit demand right now and then just maybe if you can give some color on the content.

Sure. We do a number of things in wide-body airplanes. The most prominent though are IFE related. Right? So most every wide-body airplane that comes off a production line gets a seat back display in every seat, nose to tail. And for quite a few years now, we have been the prominent provider of power, for example, to those systems, the major system manufacturers. So when somebody buys an 87 or A350, they check the boxes, they want provider A, B, or C, and whichever one they pick, they get Astronics as the power system. Additionally depending on whether they pick A, B or C, we might do other parts of the system, theoretically, file servers, wireless access points, data loaders, things like that. And then we also do wide fit work. So it's not uncommon for a widebody airplane on the production line, to be somewhere in the neighborhood of $250,000 in revenue. I mean, in theory it could be $0.5 million or more, but the aftermarkets important too. The aftermarkets important because this IFE product line, when you think about it, it’s kind of where consumer electronics meets the aerospace industry. The aerospace industry has very long life cycles for most of the airplane. Consumer electronics does not, right? It turns over in two years or three years. What you do today is obsolete two or three years from now. Powers – even power somethings basic as that or what people think of is basic is undergoing a lot of changes. I mean, the world spent a lot of money and time equipping their hotel rooms and restaurants and seating areas and airplanes with USB power type A, now type C is prominent, and they’re not compatible. They’re completely different. So one of the things that’s great for just having airplanes flying is that life cycle effect takes place and the systems need to be upgraded. If they’re sitting in the desert, they don’t need to be upgraded to be blunt. So that’s all helpful. We like airplanes flying. It doesn’t really matter if they’re new or old, that we just let them fly.

Yes, yes. Got it. Makes sense. Perfect. All right. Let me I’ll jump back in the queue here. Thanks guys.

Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, thanks for taking the follow-up. I just wanted to follow-up actually on the widebody topic. How much widebody revenue do you have in the forecast this year? Or how much was in the revenue last year and kind of what was the prior peak, I guess, and do you think you get back there if ever or is it 50% or 75% of where it used to be? And does it take two years or three years to get there maybe?

It’s a very good question. Those are numbers that are really hard to – we have some products and product lines, which are used exclusively on widebody. And we have some that are used exclusively on narrowbody. We have some that are used on both. So it’s really hard to kind of figure out definitively where they’re going. But I can tell you that I would say, just from what I understand to the business that widebody revenue last year was probably running in the neighborhood of 10% or 15% of where it used to be. And we’re probably going to move closer to 30% or 40% this year. From what I can tell, we’re just get – we’re taking a lot of orders in that are widebody specific. And I think what’s interesting to me is you follow the experts in the industry and whereas six months or a year ago, they were all predicting widebody return and global airline traffic getting back to 2019 levels sometime in the 2024, 2025 timeframe. More and more voices are now expecting or predicting that’s going to happen in mid-2023 or late 2023. Again, a lot of that depends on what happens in China I suppose. But we would expect demand for our widebody products roughly to track with what demand is like for air travel in those kinds of airplanes. So if we see a recovery, mid-year I think that’s probably a little optimistic, but mid-year or second half of 2023, I guess I’d expect our ordering patterns to be pretty much back to normal by then also. And by the way, we’re not that far off. I mean, we did $780 million, $770 million in 2019. We just booked $690 million in 2022. So it’s not that far from here to there before we’re kind of back at pre-COVID levels of ordering anyway, and then it’s up to the supply chain to allow us to execute on it.

Got it. That’s very helpful. Could you just give us a little more color on the expectations for FLRAA and the Army radio test program? When they do actually start up and get going, what are the run rates you expect out of there? Is it consistent or is it lumpy? Just help us understand what the contributions are going to look like.

Sure. Recognize that we know not much at this point. The 4549, the radio test program, we expect the initial award to be in the next – I would say between the $150 million to $200 million. We think it’s going to be towards the high end of that. The timing on it is a little bit of a wild card at this point. There’s going to be a low rate initial production. There’s going to be some qual testing involved and then eventually there’s going to be a production turn on. And if all that happens sequentially, then the major impact in our production, theoretically, depending on lead times may not happen till late 2024. If we can stack those things or do them concurrently then I think it becomes probably not a late 2023 thing, but probably an early 2024 thing. So – and we think that that initial order is just the beginning. This is going to be a standard for the U.S. Army. They have a lot of radios and a lot of units and families that we will – that our product will be testing. We think that could be a decade. So more on that as it develops FLRAA, I’ve used this analogy to describe the importance of this program for us. . : And again, we have a little bit of a gag order, but I’ve used this analogy I said, imagine a wide body airplane where we put absolutely everything that we might possibly put on that airplane. That’s in our toolkit. And this is a little different than Mike – how I answered Michael’s question earlier, because this is a theoretical airplane that’s never really existed, but if it comes down to production line and we put power on it, we put a full suite of IFE equipment on it, we put an antenna on the roof, we put a radio and then we put a full cockpit lighting suite, a full exterior lighting suite, a full interior lighting suite in terms of passenger service units, et cetera, et cetera. You – and you add all that up, you probably get to somewhere in the neighborhood of a $700,000, $750,000 airplane. And while we aren’t under contract and there’s movement in the ship set and things that are going to change, we expect that our FLRAA content will be well north of that. So – and then you ask, well, how many aircraft are they going to build? And that’s a whole another kind of guessing game at this point. It’s a replacement for the Blackhawk. There are 4,000 Blackhawks out there. Nobody expects a one for one replacement, but what do you expect? A little bit of a guessing game, but even if you guess conservatively for a company like us, it’s a real significant over time game changer of a program.

Got it. No, that helps put it in perspective. Thank you, Pete. I assume that doesn’t go into production until much later, though, in this decade, right? So the initial development revenue is what we’re thinking about, which would be…

I think I’m older than you are, Jon, but we buy both route be retired before we know how far this program’s going to go and hit real volumes. But if it’s anything like – well, the Blackhawk’s been in production now for 50 years?

Right. No, that – it could be check. Yes. Okay, great. Last question for me just on the labor issue, let’s assume your supply chain cooperates and you get all these wide body orders that you have to facilitate. Can you reach that 180 run rate with the workforce that you have now? Or is it going to take more work just to get those people in the door and supplying that?

Yes, for the most part, I would – I guess, my feeling is that labor is certainly not our biggest problem. Supply chain has been our biggest problem. Your question is insightful, if all of a sudden the supply chain snapped to attention and the trucks pulled up full of parts. Then yes, we would be short labor to turn those that quickly. But for the most part, in most places of our business, the labor side of it is a little bit better than what it was say 1.5 years ago at the height of COVID. Nobody wanted to come out of their houses to work. That’s changing a little bit. We certainly have parts of our business that are struggling for labor, but for the most part, kind of across the board. I think that we have a general feeling that we’re okay and that we can adjust our headcount and our capacity to the scheduling of the major programs as they happen. Dave, I don’t know if you’d answer that in any different way.

No.

Okay, great. Thanks guys. And obviously, congrats on getting all the stuff done and over the finish line over the last couple of months.

Thank you, Jon.

And our next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.

Hey, thanks guys. Jon, picked up my labor question there, but just on FLRAA too, Pete, is there anything assumed in the current year outlook for FLRAA revenue contribution from the development program?

We do have some – yes, we have some NRE built in. As you might imagine, it’s probably a couple year engineering effort. It’s a little unclear how that’s going to play out at this point. We originally thought that it would be somewhere north of $30 million, south of $50 million over 2.5 years. It’s delayed. So it’s nothing in the first quarter that hurts us a little bit. If it gets delayed for, let’s say, something crazy happens and the whole thing gets thrown up in the air with the – by the GAO and they recompete it or whatever, and the whole year is lost, then that would be a significant downgrade to our internal forecast. But at this point, we feel that we’ve got enough demand and enough excess demand that over the course of the year, while it’s going to change the shape of our first quarter a little bit, it’s not at this point material to the whole year. Again, we’re expecting the protest to be resolved early April. That’s what we’re hoping and we expect to be kind of hit the starting blocks right then or pretty close to right then.

Does that, I mean, I think, Lockheed filed the second complaint, which is that there’s a deadline on that for May 17. So I know the first decision is – I mean, does that have any implications given their additional complaint that they filed?

Not that I know of, but again, I don’t know any inside knowledge about what the deliberations are on the protest.

Okay.

I can just say that the longer it goes, the more – it becomes a material detractor to our plans.

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

All right, thank you.

Yes, it looks like we have reached the end of our question-and-answer session. I’ll now turn the call back over to management for closing remarks.

Okay. No closing remarks. Thank you again for your attention. We feel like the fourth quarter was a step up to close 2022, and we’re optimistic for 2023. We look forward to talking to you again next time. Have a good night.

And this concludes today’s conference, and you may disconnect your line at this time. Thank you for your participation.