Good afternoon, everyone, and welcome to the Astronics Corporation Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Deborah Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, Tammy, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are, Peter Gundermann, our Chairman, President and CEO; and Dave Burney, our Chief Financial Officer. You should have a copy of our third 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. Pete?

Thank you, Debbie, and good afternoon, everybody. Thanks for tuning into our call. Our feeling is that the third quarter was a reasonably good quarter for our company. Though there are many things to discuss, as usual, Dave and I will divide things up between us with respect to prepared comments, and then we'll take questions. Dave will focus on the nuts and bolts of the quarter, but I want to focus my time on what I consider to be the most important thing that is happening in our company these days and the most important thing for investors watching our company to understand. And that is the growth trajectory we have been on and that will continue to feature prominently in the coming quarters. It is important to understand that trajectory, both where we have been and where we are going in order to properly understand our company. I need to start with a bit of a history lesson that will be old news to those who know our company well, but setting the stage is important to understanding where we are and what is before us. I'll start by going way back to 2019, the good old days, pre-pandemic when we had sales for the year of $773 million. We were at that time and still today, heavily exposed to the commercial transport airplane market, both OEM and retrofit applications. They made up about 70% of our sales back in 2019. COVID arrived in early 2020 and hit the commercial transport industry hard and companies that were focused on it like Astronics. We bottomed out in 2021 with revenue of $455 million, so we went from $773 million down to $455 million. It was a fairly painful decline for our company. The only glimmer of hope back then…

Thanks, Pete. So consolidated sales were up $31.5 million or 24% from last year's third quarter. The increase was across the board in all of our markets, but primarily driven by the commercial transport businesses. Global airlines have increased their retrofit programs and OEM build rates have increased. Other than that, the sales increase was consistent throughout the entire aerospace business, but clearly dominated by the growth in the commercial transport business. I'll jump to some significant items that had impact on our margins this quarter. The largest item was the unexpected sudden bankruptcy a few days ago of a non-core customer. We did contract design and manufacturing work for that goes back to 2021 and 2022. We've been in weekly contact with the customer regarding their sales pipeline and prospective customers' order pipeline for their product, and we're surprised by the filing. We had very minimal sales activity with this customer this year and have not been including any sales relating to them in our forecasts. The impact of this bankruptcy will have no impact on our operations beyond the reserves that we recorded this quarter related to inventory, all of which was purchased prior to 2023 and receivables, most of which were prior to 2023. Looking at gross profit for the quarter. Gross profit was $20.6 million or 12.7% on sales. Lower-than-expected on $163 million of sales, primarily as a result of the reserve for inventory related specifically to that customer bankruptcy, which added $3.6 million or 200 basis points to cost of sales. Absent this inventory reserve, gross profit would have been $24.2 million or 15%, up from 10.9% last year, but down sequentially from the second quarter due to the lower sales volume. SG&A of $35 million or 21.5% of sales was higher-than-expected due to the…

I think that ends our prepared comments. So Jamie, if you want to open it up for questions, now is the time.

[Operator Instructions] Our first question today comes from Pete Osterland from Truist Securities. Please go ahead with your question.

Hey, good afternoon. I'm on for Mike Ciarmoli today. Thanks for taking our questions. So first, I just wanted to ask on the expectations for margins. If I look at your level of sales and EBITDA throughout the year, it would seem like in the fourth quarter, you should be able to put up at least low double-digit EBITDA margins based on that sales level and continuing that momentum into 2024. Is that reasonable? Or is there anything else you're currently seeing with costs or mix that would change how to think about the incrementals here?

Yes. This is Dave. Well, typically, we don't provide guidance on margins, but I'll steer you that the way we think of it is somewhere between around 40% to 45% of our incremental sales drops to operating income. So it's reasonable, I think that we can get back up to close to that double-digit of EBITDA number in the -- at that sales level for sure. But for your modeling purposes, I typically -- in my back of the napkin is generally to look at like a 40% is a quick number that will drop to the operating income line on the sales.

That’s very helpful. And then I just had a follow-up on the commercial aero build rates. Are you currently aligned with the stated OEM build rates that is publicly announced and have been talking about recently? Or are there any areas where you're currently lagging?

Well, sometimes we are aligned. I would say we are typically at this point on the narrow body MAX line, which is probably what you're asking about, we are running around mid to high-30s. And so we are reasonably close to stated production rates at this point.

Okay. So given that rates are picking up and expected to make meaningful progress soon, are there any areas you'd call out where you saw meaningful challenges during the quarter within your manufacturing processes, whether it's labor productivity or anything with key suppliers. Just anything you call out there that you're kind of still seeing in the current quarter, in the fourth quarter?

No. I think it's safe to say that we continue to face supply chain flare ups here and there across all of our operations, but there's nothing that really stopped us in our tracks with any of our major products in the third quarter. I think the bigger issue really was that we had a very large second quarter with huge shipments right at the end, if you go back and listen to that conversation that we had around that call, one of our concerns was that we are in this cycle where we are -- everything is back weighted or back ended and you end up with this huge push and then you end up with empty factories as you start out the next period. And that was definitely the case as we moved from the second quarter into the third quarter. And that combined with some shutdowns, a lot of our operations shut down for the week of July 4th really made for a pretty weak start to the third quarter and we just never really caught up. But I think that was the more major issue. I would say, generally kind of across the board, our supply chain continues to improve. And once we got kind of through July and into August and September, we accelerated and the operations are working more routinely at higher volumes. And certainly now as we are into the fourth quarter with the volume that we are expecting, things are accelerating. But I can't pin the weakness of the third quarter on any specific supply chain problems.

Got it. Thanks guys. I will leave it there.

Okay. Thank you.

[Operator Instructions] Our next question comes from Jon Tanwanteng from CJS Securities. Please go ahead with your question.

Hi. Thanks for taking my questions guys. I was just wondering today, how much excess is stranded inventory you're hanging on to and kind of what is the path or timing to work that down to more normalized levels?

I don't think we have a number for kind of the excess or stranded, it's definitely there and it's significant. And when we call it stranded, it just means that it's waiting for the rest of the parts to catch up with it so that the orders can be completed and shipped. So it's the contributor to our high inventory levels for sure. I don't have a number for you on that.

I would add some color, Jon that there's stranded inventory and then there's slower moving inventory. And one of the things that happened as we went into the pandemic is the wide body world really slowed down. And we got caught with some inventory that's specific to wide bodies that we expect will start to burn down as we move through 2024 in the wide body production rates and markets continue to pick up. So I think we are going to see a reduction in inventory, both in the stranded variety and kind of the wide body variety. How to quantify those is difficult with our systems. But we would like to think that we could burn down our inventory by the end of the year, at least $20 million or $30 million. I think that's what we're thinking.

No, it will be less than that.

Okay, great. Thanks. [Indiscernible].I was wondering just next year, you gave kind of a range for what you expected on revenue just measured against Q4. But I was wondering what you thought about order rates going forward and what the demand you think is going to look like from your customers, and that's excluding whatever military, large military orders you're waiting for?

Well, that's certainly a watch item. I would think that we are going to at least stabilize around that higher $750 million or $800 million level, but we are going to have to watch bookings over the next couple of quarters pretty closely to confirm that. One of the things that has not happened as we hoped for was on our test business, we are still waiting for some very significant programs, been waiting for one of them for over a year now, the U.S. Army radio test program. And that is an example where it will have a significant impact on our bookings when it happens and a significant impact on our 2024 plan. So we obviously publish bookings because we think it's a leading indicator of where we are going to be as a business, and we've got a record backlog. So we are -- we feel we are pretty safe with the preliminary initial look in the 2024 that I talked about earlier. But where bookings come out beyond that is something we are going to have to watch.

Okay, great. And then is there any update just on the litigation that expenses you're incurring? When do you expect that to either let up or some kind of resolution to occur?

We have two major actions involved, one of which has been going on for over a decade, and that one we would expect to continue to move pretty hot and heavy through 2024. Hopefully, with some kind of resolution as we get into 2025, that's our thinking there. The other one is relatively recent, and there is a chance we believe that, that could be wrapped up pretty quickly and have minimal expense into 2024. We will know more about that as we get into year end here.

Okay. Great. Thank you.

And ladies and gentlemen, at this time, I’m showing no additional questions. We'll conclude today's question-and-answer session as well as today's presentation. We thank everyone for joining. You may now disconnect your lines.