Astronics Corporation (NASDAQ:ATRO) Q4 2023 Earnings Call Transcript
Astronics Corporation (NASDAQ:ATRO) Q4 2023 Earnings Call Transcript February 28, 2024
Astronics Corporation beats earnings expectations. Reported EPS is $0.2, expectations were $0.12. Astronics Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Astronics Corporation Fourth Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Craig Mychajluk with Investor Relations. Please go ahead, sir.
Craig Mychajluk: Yes. Thank you, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call with me here today are Pete Gundermann, our Chairman, President and CEO; and Dave Burney, our Chief Financial Officer. You should have a copy of our fourth quarter and full year 2023 financial results, which 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 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'll also discuss some non-GAAP 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. So with that, let me turn it over to Pete to begin. Pete?
Peter Gundermann: Thanks, Craig, and good afternoon, everybody. Thanks for tuning into our call. We ended 2023 on a pretty strong note and consider it in retrospect now a solid year of progress. Our fourth quarter results were enabled by a series of trends that have been affecting our business for some time. Those trends are continuing to shape our environment as we enter 2024, which we expect will be another year of progress. I will dedicate my few minutes of comments this afternoon to describing these trends and the impact they are having on our business. Then Dave will talk you through some of the specifics of our financial statements. But first, some headlines from the fourth quarter. Fourth quarter revenue of $195 million was at the high end of our forecasted range and up 23.5% over the comparator quarter of 2022.
2023 cumulative revenue of $689 million was up almost 29% over 2022. The higher volume drove improvements in financial profit measures. Our fourth quarter adjusted EBITDA, for example, was just shy of $25 million or 12.7% of sales. Year-to-date, 2023 adjusted EBITDA was $55.6 million or 8.1% of sales. In 2024, as previously announced, we expect revenue to be in the range of $760 million to $795 million. That's up at the midpoint, another 13% over where we closed in 2023. So about those trends. Our fourth quarter results are really kind of the expected results of several trends affecting our business. None of these are new. We've talked about them to varying degrees over recent quarterly calls. In other words, there was nothing really special that went into our fourth quarter to drive these results.
It's more just the expected result of things that have been happening kind of under the surface for some time now. And I'll talk through them that in any particular order, certainly not in a priority order. They're all important. First of all, demand has been and continues to be just really strong. And for us, airline demand or travel has been strong everywhere. You see this in pretty much any metric, if you follow the aerospace industry, the one exception being China, international travel in and out of China remains pretty weak. But in most other major parts of the world, travel is near or at or even above where it was in 2019 before the pandemic hit. With that, production rates of major platforms have increased over time in our major markets.
Despite some of the travails going on in Boeing 737, there's upward pressure; 787, there's upward pressure; Airbus A350, A320, all trending up. And for a company like us, when more airplanes are being built and when more people are flying, that translates into improved or increased demand for us. And that's what we've been seeing, not just in the fourth quarter, not just in 2023, but really for years now. Our book-to-bill in 2021 was a 1.3. In 2022, it was pretty much at same level, 1.29. The final number for 2023 looks a lot lower, 1.06, but that's dragged down a little bit by poor bookings in our Test business, where the book-to-bill came in at 0.76. Our Aerospace segment, which is the vast majority of our business came in with a book-to-bill for the year of 1.1, so 10% of our shipments.
With that demand, our backlog has consistently set new highs quarter after quarter after quarter, the only exception being the fourth quarter where it came down ever so slightly. The second trend, which is worthy of mentioning is in addition to demand is the continuing improvement in our supply chain. Constraints in 2021 and '22 -- 2022 left us handicapped and gave us a hard time trying to respond to the increases in demand I was just talking about. But those really started to dissipate and straighten out as we worked our way through 2023, and that continued through the fourth quarter. It's not perfect. There are still challenges, but the headaches are much fewer and farther between than they were earlier on in the pandemic. And that supply chain performance is a major reason of why we are able to execute on our backlog as 2023 due to a close and why we are confident being able to predict another year of pretty solid growth for 2024.
Another trend that needs mention is the -- really the improvement in personnel labor availability and consistency that we have seen recently, especially as 2023 war on again. Like a lot of companies, the Great Resignation, while we were used to turnover in the low single digits on a percentage basis in most of our operations during the peak of the pandemic, we saw turnovers approaching 20%, which is fundamentally a different situation. That has settled down. As a result, our workforce in generally -- general is much less tenured than it was before the pandemic, and it's taken some time to get the culture going again, get the learning curves going again and getting people working together as a team. But we're seeing that improve, and we're seeing turnover drop back to those kinds of rates that we were used to seeing years ago.
There's still more turnover. It's not like it was before, but it's dropped dramatically from where it was at the peak of the pandemic. And finally, inflationary pressures over the last 24 months or so have also dissipated pretty dramatically. Obviously, the Fed is not back where they want to be. We all know that. But in terms of the pressures we see from suppliers in particular and other costs of the inputs for our business, the pressures have dissipated and have become more reasonable. So you add all that together, and one of the things that I wanted to point out also is I look back at what's going on in our business is everything is getting quite a bit more predictable than it used to be. To be honest, in the peak of the pandemic with supply chain headaches and turnover and inflation, it was a challenge to accurately predict where the business is going to be and how it's going to perform.
That's coming much more into focus as we worked our way through 2023 and now as we enter 2024. Some evidence for you to consider back in the fall of 2022, when we were putting our 2023 plan together, we issued initial revenue guidance of $640 million to $680 million. We came in at $688 million. That's actually pretty accurate compared to what happened in the year or two before that. And not only that, but our internal forecast was within 1% of where we actually ended up for the cumulative year in 2023. And similarly, with the fourth quarter, we issued revenue guidance of $185 million to $195 million. We came in right at the high end of that range. Again, another example of improved predictability, which is really critical for optimizing the business and executing a plan as we go forward.
And as we go forward with respect to 2024, the trends I just discussed and the strong finish we had to 2023 together give us confidence it will be another year of solid recovery. Our initial outlook in terms of the sales forecast is $760 million to $795 million at the midpoint. That's a year of 13% growth over 2023. That's a low percentage growth compared to what we saw in 2023 and in 2022, but it's one that's welcome for a couple of reasons. First of all, it will get us back to the revenue range of where we were pre-pandemic. Finally, it's been a long journey, but in 2019, we had sales of $772 million and the midpoint of this range would be $778 million. We have the business and the backlog to do more than that, but our expectation, our goal is to be at the high end of that range, $760 million to $795 million.
And even at 13% growth, it would cap another year of pretty strong performance. If you look at topline, 2022, 2023 and 2024 at the midpoint, we would see $535 million turning into $689 million, turning into $778 million. As we work through 2024, we're also going to have an increased emphasis on margins. That's something that you always worked on and worry about when you run a business. But frankly, we knew as we are operating through the pandemic that we would not be profitable at those lower sales levels. There's no way a company like ours, the way we're structured right now, it's going to make money at $535 million. But as we move into the high 700s and with the performance that we saw in the fourth quarter, we think there will be room to optimize and improve our profitability as we work through the year.
We expect 2024 to start somewhat slowly. We expect first quarter sales to be $170 million to $175 million. That's a little bit of a step back from where we were with the fourth quarter, and it's a pattern that we've been in for various reasons over the last 6 quarters or so, where we're up a little bit, down a little bit, up a little bit, down a little bit. But the trend overall continues to be positive if you can look past one quarter at a time. There are a few things we can point to that are going to be affecting us in the first quarter. The first is we're intentionally walking away and winding down some kind of noncore non-aerospace business that we pursued and picked up early on in the pandemic to help keep our factories full. Those pieces of business are generally not as profitable.
So we are prioritizing profitable aerospace work as we wind them down, though, there's a little bit of a hole in our income statement that will last for a quarter or so. There also is a little bit of a reschedule going on with Boeing on the 737. That's been in the news and people have heard it and seen it. Boeing is and has been our biggest customer. 737 is one of our biggest programs, it's not our biggest program. And we put product on that airplane from a number of different facilities through a number of different routes. And the messages we get are not entirely consistent from operating unit to operating unit, but there is it seems an overall general rescheduling going on, which will probably deflate first quarter sales a little bit, resulting in the range that we're giving.
And then finally, just kind of a mix of customer schedule issues that you got to sell product and deliver products when the customers on it. So we're expecting first quarter to be $170 to $175 million. That's no indication whatsoever of wavering demand. We expect to climb pretty dramatically from there in the second quarter, and we expect the second half to be quite strong relative to anything we've seen since well before the pandemic took hold. One other comment on 2024. We have been talking for some time about an Army radio test program, we call it 45 40 90. It's something that we were announced a winner 1.5 years ago now, and we have been waiting for a directed procurement, sole source contract negotiation to take place. It is underway currently.
We have not previously been able to talk about having positive momentum in this area, but we certainly have quite a bit of it now and so much slower that we're expecting to see awards there most likely, but not absolutely for sure, in the second quarter. So more on that as it happens. A little bit of a review is that this is for a platform of test equipment that the U.S. Army could use or will use to test the full range of their family of radios. And they have quite a few radios in use. It will be an IDIQ program, but we expect it to be $200 million to $300 million over four to five years. And if you look at our Test business, which is operating at about an $80 million level, you can imagine the impact of dropping in $30 million to $40 million of sales a year once this thing gets underway.
So more on that as it happens, but that's one of the items, which certainly will have an influence in our 2024 plan. And we'll talk about it more as we know more, most likely in our Q1 call. That's the end of my prepared remarks. Dave, you want to take it away and talk about financials?
David Burney: Sure. Thanks, Pete. As Pete mentioned, we had a very strong fourth quarter customer demand, supply chain and our operations executed at a high level during the quarter. The top line was driven by strong sales to all of our aerospace markets that combined were up $30.4 million or 22% compared to the fourth quarter of last year. Commercial transport, our largest end market, was particularly strong with sales up $21 million from last year's fourth quarter. Test segment sales also increased compared to last year from $19.8 million to $26.5 million. In terms of margins, we had a pretty clean quarter with no significant unusual costs or income. One item to be called out, though, is in the fourth quarter includes a full year of bonuses that were not determined until year-end, and therefore, not accrued each quarter as we went through the year.
So Q4 reflects bonuses of $4.2 million. That's the full year amount. These bonuses will be paid in stock to preserve cash, and they are the first bonuses that we've paid since 2019. The top line growth drove our margin expansion, demonstrating the leverage we can get on incremental sales. Consolidated operating income increased by $10.9 million to $7.8 million or 4.5% -- or 4% driven by the sales growth. Looking at segment performance. The Aerospace segment, which represented 86% of our consolidated sales had operating income of 8.5%. Adjusting for the full year of bonuses that were recognized in the quarter, Aerospace operating margins would have been closer to 10%, which is back in the neighborhood of prepandemic levels. This margin expansion demonstrates the leverage we can achieve from incremental sales.
As we said before, depending on mix, we tend to think of our contribution margin in Aerospace being around 40%. The Test segment continues to be challenged by underutilization, program mix and high legal costs. Sales were up $6.7 million over the comparative quarter last year and operating loss improved from a loss of $4 million to a loss of $200,000 in this year's fourth quarter. Interest rates remain a headwind with our current debt structure and high sulfur rates. Our cash interest expense for the quarter was about $5.1 million, which equates to about an effective rate of about 12%. At the end of the quarter, we had outstanding debt of $172.5 million. Now that we're recovering from a tough period over the last few years, we will have more alternatives available to us in terms of debt structure, and we'll be reviewing options going forward.
Cash used in operations in the quarter was $1.7 million. The net loss adjusted for noncash expenses provided $26.2 million, but was offset by an increase in net operating assets, which used $27.8 million. Looking at the components of the operating assets where we consume much of the cash generated from operations. We continue to make progress in managing our inventory, which was a struggle earlier in 2023. In the fourth quarter, we were able to reduce inventory levels by $10.7 million exclusive of reserves. The improvement was welcome, but we're still not where we need to be, which is a goal of getting our inventory turnover back close to pre-pandemic levels. We're forecasting improvement as we move through 2024 but still face some headwinds as the supply chain while improved compared to a year ago is still not a well-oiled machine and lead times remain longer than they were pre-pandemic.
The $19 million increase of accounts receivable in the fourth quarter was due to the high level -- high sales level and timing being weighted in the second half of the year or the second half of the quarter, I should say. Liquidity continues to be tight. We were active using our at-the-market program to sell 500,000 shares at an average price of $15.65, raising $7.6 million to fund working capital needed until we realize the cash flow from the growing sales. The ATM program for the full year sold 1.3 million shares and net proceeds were $21.3 million, all in the third and fourth quarters. This equates to about 4% dilution. We're compliant with our debt covenants and are forecasting continued compliance. And in summary, as we move into 2024, our focus is on operational execution, optimizing our debt structure and improving our inventory turnover.
Free cash flow will be used to reduce outstanding debt as we move through 2024, and we're expecting free cash flow to grow as we move through the year. That concludes my remarks. Pete, back to you.
Peter Gundermann: And Rocco, over to you if you want to open it up for questions.
See also Real Estate Investing For Beginners: 11 Best Stocks To Buy and 15 Countries With Economic Growth or Debt Problems in 2024.
To continue reading the Q&A session, please click here.
