Good afternoon, and welcome to the Astronics Corporation Second Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, Anthony, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call here with me are: Peter Gundermann, our Chairman, President and Chief Executive Officer; and Dave Burney, our Chief Financial Officer. You should have a copy of our second quarter 2023 financial results, which just crossed the wires after the market closed today. If you do not have the release, you can find it on our website at 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 earnings release as well as 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 measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin. Peter?

Thank you, Debbie, and good afternoon, everybody. Thank you for tuning in. We are here to talk about our second quarter and our prospects for the rest of the year. And in sum, we think our second quarter was a pretty strong step forward for our company, easily the best quarter we've had since COVID took over in early 2020. There are 3 prominent themes that are going to come up over and over again as we talk through our results. And you'll catch them, no doubt. I mean, one is that volume continues to ramp. We're recovering our production rates, and that has a lot to do with our supply chain, which is the second theme, our supply chain, while certainly not perfect, is getting quite a bit better as time goes on. And that's pretty evident in the volume that we've been able to produce. The third prominent theme is that demand for our products remains very strong. This gives us confidence of continued recovery as we move through the quarters -- the near-term quarters in the future. Digging into the specifics. Sales of $175 million were up 35% year-over-year and 11% sequentially. It continues a pretty strong pattern of recoveries set out over the last 4, 5, 6 quarters. The last 4 in succession saw revenues of $131 million; then $158 million; then $157 million; and now, $174 million -- $175 million. Our Aerospace segment was the key driver of our results with sales up 45% year-over-year to $158 million. Our Test segment by comparison had a pretty difficult quarter. Sales were down 19% year-over-year to $16.1 million. Jumping to the bottom line, we had a net loss of $12 million, but an adjusted EBITDA of $15.8 million, which was 9.1% of sales. Dave will talk through…

Thanks, Pete. Sales came in at the top end of our range, as we had some good supply chain cooperation in June that allowed for a really strong finish to the quarter. Our operating income for the quarter was $2.4 million, which was our first positive operating income since 2019 and a $4.8 million improvement compared with our first quarter of this year, $10.8 million improvement compared with last year's second quarter. The improvement was somewhat muted by high legal costs for the quarter, which were about $4.9 million, not including an adjustment that we had because of a lower interest rate that will be applied to the penalties that we've accrued for the German lawsuit. Driving the margin improvement was a 47% contribution margin on the incremental aerospace sales as compared with the sequential first quarter. It's highlighting that the top line growth is a key piece of our recovery. And we're seeing that the strong order levels over the past 3 quarters and the record backlog are translating into increased sales and improving margins. Test margins remain depressed as the segment continues to struggle with high cost relative to its revenue levels. To address this in the short term, on the first quarter earnings call, we announced a restructuring and headcount reduction that will begin to result in cost savings of about $1 million per quarter starting in Q3. Still, the cost structure is staffed in anticipation of a revenue growth that we expect will begin once the 4549/T Army radio test program contract is awarded. And the Marine Corps HHRTS radio test program, which we recently received the first task order for, that Pete mentioned, begins. SG&A continues to be high due to legal costs for the lawsuits we're involved with. Legal costs were $4.9 million in…

Okay. Looking forward, we are holding our 2023 revenue forecast, we're now at $640 million to $680 million, but we are very much focused on the high end of that range, the $680 million part. We had first half sales of $331 million, and we entered the second half with scheduled backlog of approximately $330 million, and these 2 together get us to $660 million, the midpoint of the range. Scheduled backlog for us means that we have a firm order, we have a firm delivery date and we have a high level of confidence in our supply chain in order to execute the program. If any of those things are untrue, we don't call it a scheduled backlog in the current period that would go out into some future category. So $331 million in the first half, $330 million scheduled for the second half -- and then on top of that, we expect in any period, but especially in any 6-month period, a certain amount of pull-in or pop-up or book-and-ship, there are different names for it, orders that will add to the total, especially in the fourth quarter as time goes on. But some of these changes, the pull-ins or the pop-ups can be difficult to predict, but a $20 million net number over a 6-month interval is pretty modest, and we would consider it very achievable. So we think that we are directionally going towards the high end of that range. Breaking the 2 quarters apart, we expect the third quarter to be relatively similar to the second quarter. It could be a little higher, it could be a little bit lower, but it's going to be in that neighborhood, we think. And the fourth quarter is the one that has the potential to be a step-up…

[Operator Instructions]. Our first question will come from Jon Tanwanteng with CJS Securities.

Peter or Dave, at the high-end of the range, that's $175 million in revenue, which is similar to what you did in Q2, that doesn't give you the benefit of volume leverage to drive margins. So I'm wondering what kind of improvements are available just in the less spot buys, the price increases that you're talking about? And is volume actually going down as prices are increasing?

Yes. There's a couple of things that will start rolling in. The spot buys are expected to come down. They were somewhere between $1 million and $2 million for the quarter. Historically, they've been running about $3 million ultimately, they'll continue to fade away. There'll be new contracts, new purchase orders that will have higher margins on them as we've priced in the inflation over the last year as we've entered into new agreements on that. And, so there is some leverage. And I think, that the -- we'll see some continued improvement. The legal costs will come and go depending on what's going on in the various port situations. So I think that's likely to drop a little bit over the next couple of quarters, depending on what's going on there. And I think, we're -- at the top end, I think we're being conservative here. We have some programs that are in the pipeline that we're hoping will increase -- that get us up to that top end. And I think we're just -- we're hesitant with the supply chain the way it is right now to extend out over our on that. So I think that's my that's my take on it.

Fair enough. And then just on the bookings, how should we think of the pipeline of design activity and ongoing book and ship activity that you're seeing today, is that kind of $200-plus million order run rate sustainable as you look at the ongoing air recovery? Or are there going to be fits and starts and a little bit of lumpiness as you go forward?

It's a very good question, and it's something that we all need to keep our eye on. If you look at that table on the last page of our press release, not only just the 4 quarters, but the trend that has existed really since the pandemic took hold as evident by the bar chart on the bottom of the page. I mean, it's been a pretty -- I mean, it jumps around a little bit, but it's -- you can't miss the general direction of it. And -- we have won a number of pretty significant programs, and I just talked through a handful of them, and none of those are really seriously reflected in our backlog, at this point. So -- and there are others like that out there. So our ambition is to exceed where we were pre-pandemic. But in order to get there, we have to get to the pre-pandemic level. And this quarter, I think, from a bookings standpoint, felt really good because we did $773 million in 2019. And obviously, $200 million, if we could annualize that puts us above that rate. And if we do that, then shipments will follow. So we talk about bookings, I think, more than most companies do. For us, we think bookings are a real good leading indicator for where the business is going, and that's why we draw so much attention to it, both internally and when we're talking to the market.

Got it. And then last one for me. Just where do you think cash flow can be in the coming quarters? It seems like it's been tighter than expected over the last 2 -- I mean, is there any indication that it will get better than that from what you're seeing today?

Yes, that's what the plan is. It's been tight for the past 2 quarters. We saw a pretty big buildup in our working capital in the second quarter between inventory and receivables. So we'll -- those receivables are converted to cash pretty quick. The one that we're having the hardest time getting our hands around is the inventory at this point. But we are internally forecasting to be cash flow positive for the balance of the year.

Our next question will come from Sam Struhsaker with Truist Securities.

I'm on for Mike Ciarmoli tonight. I was curious, as you guys are kind of returning on the Aerospace segment to pre-pandemic levels in prior peak. How should we think about margins going forward? It kind of the same as you're getting in the past at this level, stronger, weaker?

They're going to start out being probably -- I mean it depends on what period you're looking at [Technical Difficulty].

I'm thinking on like a go-forward basis, once you kind of -- once you get back to those revenue levels, like what can we expect in terms of margins in pre-pandemic?

Yes, I think we should be able to -- I don't see any reason why we can't get back up to our pre-pandemic margins. We need the new program, the new programs that we are winning to, and pricing at higher margins to kick in here, which will happen as we through next year and in the second half of this year. But yes, the mix isn't a whole lot different. And there's no significant fundamental change there. We're lagging in terms of getting our -- the increased costs from the past year on wages and materials through into our new contracts, but that's going to -- that will catch up as we move through next year.

Great. And then kind of going along the line of the inventory and supply chain, where exactly are you guys seeing the bigger issues on the supply chain in terms of getting parts in? Is it extended lead times? And is there any particular area that's worse than others that might be impacting guidance for the year?

Well, a lot of what we do is electronics-related. So I think our answer to that question would definitely include the general electronics difficulties that the world has seen over the last couple of years. We have, in some cases, some extended supply chains that move into Asia, and all parts of Asia. And so, we've dealt with a little bit of that also. And it's not uncommon for some of our more complex products to have a couple of hundred components in them. So all you need is one to be late. And the other 199 sit there on the shelf until you have everything you need. So, it's getting better in that the general level of responsiveness and lead time has come down. The surprises we see today are decidedly positive compared to where they were certainly 1 year ago or 1.5 years, 2 years ago where they were decidedly negative, all surprises seem to be negative. So I think we're making progress on that, but it still is clumsy and it still is a situation where our customers want to be able to place orders and get parts in 20 weeks in many cases. But the components that go into those parts for us have 40 or 50 week lead times. So trying to balance the lead times that we face from our suppliers with the lead times that our customers are demanding, puts some risk in the system, and that's part of what we're dealing with also. Again, we think it's all getting better. And we think -- I think in terms of inventory management, most parts of our business are doing a better job, but we got to get more consistent across the entire company. So that is a major focus, all hands on deck, and we got to do a better job there.

Great. And if I could just sneak in one more. What's the update on the FLRAA program? Anything there?

There is activity. I'm not at liberty to discuss it in this context right now, but we are engaged and looking to make some public news about that shortly.

[Operator Instructions]. Our next question will be a follow-up from Jon Tanwanteng with CJS Securities.

I was wondering if you could go into a little bit more detail on the legal expenses in the quarter, what were they for? Kind of, what's the run rate that you expect going forward and if there's going to be an in any time soon?

Well, we have a couple of long-running situations that we've been dealing with. The longest one is -- has to do with our in-seat power product and electrical outlets, specifically against the German competitor, and that's been playing out in 4 countries over the last decade, really. I mean the U.S., France, U.K. and Germany. The U.S. is done, and we won that case basically a long time ago. France, we think, is almost done. It could be done depending on whether an appeals court wants to hear the other side's appeal. But either way, we think that one is pretty much done, and it's very much going in our direction. The U.K. and Germany are a little bit more complicated. The U.K. we lost. So there will be a penalty phase. We've accrued for what we think that's going to be -- that's probably going to play out in 2024-2025. And Germany has been going on forever, and that's also one that's probably going to play out in really late 2024 or 2025. So it has been active for the last few months, and that's why the bills are so high. We also have one going on in our Test segment -- that is basically -- it started off as a patent dispute. We got the patent dismissed. It was brought against us, and then it's evolved into a copyright dispute. So from our way of thinking that the stakes are significantly reduced, but we had no choice but to pursue legal remedies to get there. So -- and we're not done yet. That will be something that actually it could shut down depending on court decisions by the end of this year. If not, it will probably wrap up by the end of next year, I would say.

Our next question will be a follow-up from Sam Struhsaker with Truist Securities.

Just, I have two quick clarifying questions. In your prepared remarks, you mentioned the systems for the eVTOLs. Was that $10 million total or per potential customer?

No, it's $20 million total for the 10 customers.

Yes. Got it. Okay. And then within the -- I think it was the USB, USB-C product that you guys have across narrow-bodies. Do you have any rough dollar content per aircraft on that?

It's pretty highly variable, but I think the general rule of thumb that we might -- I mean it depends on the configuration, and some aircraft want to go just for certain classes of seats. But I would say it's pretty widely variable. A real inexpensive installation might be $70,000 a ship in expenses, where a more normally priced one could be up around $130,000 or $140,000; highly variable depending on how the airline wants to configure their cabin.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Gundermann for any closing remarks.

No closing remarks. Thank you for your attention. Again, we think the second quarter was a very significant step forward. We think, we're set up for a good second half and close to the year, and we look forward to talking to you next time. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.