Astronics Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the Astronics Corporation's Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen only mode. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Deborah Pawlowski. Ma'am, please go ahead.

Speaker 1

Thanks, Jamie, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are Pete Gunderman, our Chairman, President and CEO and Dave Fearnney, our Chief Financial Officer. You should have a copy of our Q2 2024 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 atastronics.com.

Speaker 1

As you are aware, we may make some forward looking statements during the formal discussion and the Q and 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 Securities and Exchange Commission. You can find these documents on our Web site or atsec.gov. During today's call, we will also discuss some non GAAP measures.

Speaker 1

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 the call over to Pete to begin. Peter?

Speaker 2

Thank you, Debbie, and good afternoon, everybody. Thanks for tuning into our call. We're going to talk about 2nd quarter results, obviously, dig into some specifics of recent refinance expectations for the remainder of 2024. So long story short, we feel that the Q2 was a very good quarter for Astronics. Simply put, strong sales, improving margins and very strong bookings.

Speaker 2

Our Aerospace segment, which is just shy of 90% of our sales year to date had a very good quarter. Our Test segment, approximately 10% of our sales had what I would term as a reset quarter. We'll get into the segment results a little bit later. But as I already mentioned, we also after the quarter close accomplished a refinance in early July, which we feel is a very important step forward for the financial health of our company. So running through some overall consolidated numbers, again, sales of $198,000,000 exceeded our guidance for the quarter.

Speaker 2

That's happened a handful of times recently has become a little bit of a trend, up 14% year over year in the comparator quarter and up 7% sequentially from the Q1. The sales level marks a return frankly to pre pandemic levels. The sales level was enabled by positive trends that continue to propel us forward. And these are things that we talked about the last few calls, I'm not going to go into them a whole lot of detail, but we continue to see moderating inflation. We continue to see price increases that we have implemented taking hold and beginning to have an effect on our business.

Speaker 2

And most importantly, our supply chain, which is very much global in nature, continues to improve. Also, our workforce turnover has reduced from the very high levels of 20222023 and the efficiency of our workforce is improving and I expect will continue to improve. A tidbit of number which may surprise you, did me when we ran these numbers. Our workforce currently totals about 2,600 people and 43% of them at the end of the second quarter had been with us for less than 3 years. That's almost half and it's a much higher percentage than what we are typically accustomed to.

Speaker 2

I don't think it's unique. I think a lot of companies in our space are dealing with the same realities and it makes it challenging to step on the gas and immediately have a response in terms of organizational efficiency. But we're getting better and it's starting to show in our financials. The income statement is improving with the sales level. Dave will talk through a lot of the details in just a few minutes.

Speaker 2

The adjusted EBITDA for the quarter was 10.2%, up from 9.1% last year or 20 $200,000 compared to $15,900,000 That's an improvement, but we expect more of it as we go through the year as our sales continue to climb and as our supply chain continues to improve and as our workforce efficiency and quality improve and as price increases continue to take hold. Also, and it shouldn't be understated, demand continues to be very strong. Our 2nd quarter bookings were $219,000,000 That's a book to bill of 1.11 and it was strong demand really across our range of product lines. It's really nice when you have a high shipping quarter and an even higher booking quarter that makes you feel really confident about the near term future of the business. Our 12 month bookings at the end of the second quarter were 783,000,000 dollars That again is a number that's approaching pre pandemic levels.

Speaker 2

And we ended the quarter with a record backlog again of $633,000,000 with importantly $402,000,000 scheduled to ship in the second half of twenty twenty four. Looking at our segments, simply put again, Aerospace segment had a really nice quarter. It's 90% of our consolidated sales. And basically as Aerospace goes, Astronix goes. Solid growth of 11.7% year over year, dollars 177,000,000 in revenue with good margin improvement.

Speaker 2

Dave will talk through those details in a second. I want to spend a few minutes talking about test and what I described earlier as a reset quarter. We had a restructuring in April that I think we talked about on our Q1 call and it was designed to save about $4,000,000 annually beginning in the current quarter, Q3 of 20 24. So that restructuring was accomplished. And as part of that, we closed a facility in Texas, a smaller one about 30 people or so and consolidated those results in our Orlando headquarters.

Speaker 2

It's similar to a consolidation we implemented last year of an operation up in the Boston area and another one that we have announced but not yet accomplished for a smaller UK operation. All of these are designed to simplify the business, simplify the operations and lower cost and we're well underway with that effort. An unfortunate development in the second quarter was an estimate to complete adjustment of $3,500,000 for a couple of revenue over time or otherwise might people might know it as percentage of completion jobs in our transit test business. These resulted in sales and margin reductions of $3,500,000 in the quarter and it's basically a result of doing a ground up review of those programs and learning or deciding or discovering that we weren't as far along in terms of a development effort as we thought we were. We should get that revenue back over the next few quarters.

Speaker 2

The contribution on it is something we're going to have to wait and see what that's all about. But that was a negative development for our test business, but we feel sets us up pretty good for the second half of the year, getting it behind us. Most importantly, in the Q2, we were finally awarded that radio test contract by the U. S. Army that you've heard me talk about almost for 2 years now.

Speaker 2

It was an IDIQ or indefinite delivery, indefinite quantity contract or radio test equipment that is designed to allow the U. S. Army to test its full range of radios proactively and to diagnose failures in the field or in the lab or wherever. It is a big program. It's funded to be $215,000,000 We understand that there is clearly demand in the field at the Army to consume that amount of money and we expect that it will be consumed in the coming years.

Speaker 2

The initial contract came with an award for $15,500,000 and 7 point $2,000,000 of that was recognized as revenue in the second quarter, we expect the majority of the remainder, a total of about $10,000,000 to $12,000,000 will be recognized over the course of 2024. And that initial delivery order was for engineering qualification and low rate initial production tests. The question remains, when will full rate production begin? And we don't know the answer to yet. We have some tasks we need to get through as part of the initial LRIP award.

Speaker 2

We also are dependent on the Army getting through some of their tasks. Our best guess is that it's mid-twenty 25 or later, but probably will be commenced by the early part of 2026, more on that as it happens over the coming months. With that program, along with the cost reductions that we've implemented, we expect will put the test business on a much better footing compared to where it's been over the last few quarters. Finally, the refinance that we announced early in July, this is a big deal for our company. It is basically a larger improved ABL revolver facility combined with a reduced less expensive term loan and the combination of the 2 in some provides us a lower combined interest rate, much lower amortization compared to what we had before and improved level of available liquidity and friendlier covenants.

Speaker 2

In some, it's an important step towards the recovery of our company and gives us the flexibility financially to make the investments we need to make to realize the opportunities that are ahead of us in the near future. I'll turn it over to Dave at this point to talk through some of the details of the quarter and the refinance package. Dave?

Speaker 3

All right. Thanks, Pete. As Pete discussed, we continued our strong momentum into the 2nd quarter with consolidated sales growth of 14% with strength across most product lines and notable increases in demand from the commercial transport and defense markets. Consolidated revenue was $198,100,000 and this is the highest we've seen since the Q4 of 2019. It's difficult to make comparisons to 2023 as we're still fighting through the pandemic, part shortages and high inflation and hadn't yet re implemented bonus plans.

Speaker 3

So I think it's more relevant for the most part to compare our performance to the Q1 of this year sequentially. As we frequently point out, there is inherently strong operating leverage in our business. The double digit growth in sales compared with the Q2 last year translated into 21% gross margin, which was up 2 20 basis points compared with last year, while operating margin improved 240 basis to 3 point basis points to 303.8%. While these improvements are nice, our sales and profit were actually dampened by about $3,500,000 due to an increase of estimated cost to complete that Pete had mentioned on mass transit test contracts. And this had the effect of lowering sales and related margins by the same amount as the percentage of completion on those contracts was reduced.

Speaker 3

Also $1,300,000 of restructuring and severance costs primarily in the test segment were recorded in the quarter. Consolidated operating income was $7,600,000 and represents 45% operating leverage on the incremental sales over the Q1 of 2024. Adjusting for the estimated cost to complete revisions and the restructuring and severance costs, our consolidated operating profit would have been $12,400,000 or about 6%. Still not where we want to be, which is up in the double digits, but on the right track. As we've stated before, we feel we should be a company that should be able to achieve EBITDA margins in the high teens at least.

Speaker 3

And that translates to operating income in the 14% to 15% range for us. Sequentially, compared with the Q1 of this year, consolidated SG and A increased $1,300,000 primarily related to restructuring and severance costs of the Test segment, slightly higher legal costs and being partially offset by lower equity compensation. Sequentially again, corporate expenses declined by about $1,000,000 as the Q1 had roughly $1,000,000 of annual equity compensation granted and recognized in the quarter primarily to directors. We expect the $6,800,000 in corporate costs to be about the run rate for the rest of the year. Looking at the segments compared again to the Q1, Aerospace operating profit grew 59% on an 80% sales increase.

Speaker 3

The $19,300,000 in operating profit for the Aerospace segment was its highest since the Q1 of 2019. The sequential improvement was a result of strong contribution margin on the incremental sales and improved operating efficiency. Test sales were flat compared with the Q1, while the operating loss increased $2,300,000 to 5,300,000 dollars compared with the Q1. Test sales reflect $7,000,000 of revenue and related profit from the recently awarded 45 49T radio test contract. Included in the test segment loss was the $1,100,000 in severance and restructuring costs and the $3,500,000 reduction to sales related to the transit programs.

Speaker 3

Excluding these, the Test segment would have approached breakeven. As we continue to execute on new programs to grow revenue, we expect that the Test segment will approach breakeven by the end of the year. That's not to say we think this segment should operate at breakeven as we believe this business should also be able to achieve double digit operating profit. But for that to happen, the top line needs to improve and we need to get past the current program mix, which has weak profit profiles. 45, 49T will provide a significant step towards higher volumes with solid margin profile.

Speaker 3

We've taken steps to simplify the business, but as Pete mentioned by consolidating facilities and reducing the workforce during the last quarter and we should see the impact of that as we move forward into next year. Moving on to the balance sheet. As we announced on July 11, we amended and expanded our asset based revolving line of credit and refinanced the term loan. The refinancing included an expanded asset base line of credit and a smaller lower cost term loan. The revolving line of credit was expanded to a $200,000,000 maximum subject to the borrowing base with an interest rate of sulfur+2.5 percent to 3% varying based on our consolidated leverage ratio.

Speaker 3

We're currently at SOFR +3. At closing, we had $128,000,000 drawn on the facility and total availability of about $50,000,000 The new $55,000,000 term loan interest rate reduced the interest rate by approximately 200 to 3 25 basis points to SOFR plus 5.5 percent to SOFR plus 6.75 percent depending on our leverage ratio and importantly reduce the mandatory annual principal payments from $9,000,000 to $550,000 annually saving us $8,500,000 annually in principal payments. We're currently at SOFR plus 6.75 and provided and provided overall greater financial flexibility. The term note and the revolving credit facility both expire in July 2027. Jumping forward a bit, this refinancing As the refinancing was a 3rd quarter event, our Q3 will reflect some one time costs relating to the write off of some deferred financing costs from the old term loan and the revolving credit facility and the payment of the call premium on the old term note.

Speaker 3

These costs total approximately $7,500,000 About $7,000,000 of these costs will be reflected in the Q3 as a loss on extinguishment of debt in our income statement with the residual $500,000 recorded as interest expense in the 3rd quarter. Our blended cash interest rate today is roughly 9.5%, but could move if SOFR rates change or our leverage or drawn balance changes. Additionally, we'll have non cash amortization of the new up front fees classified as interest expense of approximately $500,000 per quarter. Although it might not appear this way, we have been focusing resources on managing our inventory. Inventory increased a modest 0.6% compared with the Q1 and reflects the continued delay in several new programs that have moved out 1 or 2 quarters.

Speaker 3

We continue to target mid three times turns per year for 2024 and a goal of over 4 turns per year in 2025, which gets us back to a more acceptable inventory turnover rate. CapEx were 1.8 was $1,800,000 in the quarter and 3 $400,000 year to date. And we are planning CapEx for the full year to be in the range of $17,000,000 to $22,000,000 so a pickup in the second half of the year. Much of that is related to machinery and equipment and test equipment that we need for the new programs that we're winning. We had no activity on our ATM program in the quarter and are not anticipating any further activity with that program.

Speaker 3

And this concludes my remarks. Pete, back to you.

Speaker 2

Okay. With respect to the remainder of 2024, in our Q1 call, we identified 3 watch items, which we felt would be important for how 2024 was going to shape up and work out. The first one was whether the demand ground swell that we had been seeing for many quarters up to that point would continue. The second one was whether we would get the 45, 49T contract award in a timely manner? And the third was, what would Boeing rates do with respect to their demand signals for us.

Speaker 2

The good news for today is that all three of those things seem to be in pretty good shape. We've talked about demand already, $219,000,000 of bookings in the second quarter, very well answered that question and we continue to be pretty optimistic about our prospects in the market. So demand continues to be very strong and is a helpful tailwind as we move into the second half of the year. The 40 five-forty 9 T radio test contract with the Army came a little later than we'd hoped, but it still got into the Q2, which is what the plan was. As we started the quarter, we are thinking again that that will provide $10,000,000 to $12,000,000 of revenue over the course of 2024 and it already did $7,200,000 of that in the second quarter.

Speaker 2

So it will be a reduced rate in the Q3 and Q4. But the important thing here is that the sooner we get through that engineering low rate production portion of the program, the sooner we will get into full rate production again, assuming that's consistent with the Army's expectations, we think it is. Finally, Boeing rates, I'm not going to tell this crowd on our call anything they don't already know. Boeing is committing to or has the goal to get up to 38 ships a month by the end of 2024. I talked in our last call that they had held us at 30 to 35 ships a month.

Speaker 2

They're still doing that. So we don't think they're building at that rate. They're building inventory apparently, but they don't want to turn their supply chain down and then try to turn it back up later in the year. So we're expecting, although we don't know that we will stay at this 30, 35 ships per month over the rest of the year and eventually they will accelerate beyond 38 a month. I'm sure they're planning that sometime in 2025.

Speaker 2

And when that happens, our rate probably will not increase accordingly while they burn off inventory. But that's where that arrangement stands for us at this point. So given all that, we are increasing our revenue guide for the year to the range of $780,000,000 to $800,000,000 that's up from the initial $760,000,000 to 7.95 That would be a 15% increase over 2023 at the midpoint of the range. I mentioned earlier that at the end of the second quarter, we had scheduled the backlog of $402,000,000 for the second half of the year. If you take our first half actual shipments and if we were to be successful shipping everything we've got scheduled in the second half, we would already be at the low end of that range without any additional book and ship orders over the course of the year.

Speaker 2

Now that was all as of the end of Q2, we typically do get a healthy amount of book and ship business. So assuming supply chain keeps up and assuming our capacity continues to develop, we should be in pretty comfortable shape with that stated range of 780 dollars to $800,000,000 We also announced in our press release that we are forecasting 3rd quarter revenue of 195 dollars to $205,000,000 midpoint obviously $200,000,000 which is a relatively small step up from our actual Q2 revenue that we're reporting today. But again, we put the range on there for a reason. We have been in recent quarters pretty consistently at or above the high end of our ranges and we haven't changed our forecasting techniques significantly from last quarter to this quarter. If we were, however, in the Q3 to be at the midpoint of that range, again, dollars 195,000,000 to $205,000,000 that would imply something in the Q4 like $207,000,000 to get to the midpoint of our new range of $700,000,000 to $8,000,000 So I just put a whole bunch of numbers out there.

Speaker 2

They're all in the press release to digest. But what it basically means is that we are anticipating a continued ramp in top line growth over the next couple of quarters. We believe that we have reset our test business so that it will not be anywhere near as big a drag on our financial results going forward. And if you look at the change from the Q1 to the Q2 and the marginal contribution in our Aerospace business in particular, we think we're set up for a pretty healthy close to the year, a pretty exciting close to the year in terms of recovery from the pandemic and rebuilding our income statement. And I think that concludes our prepared remarks.

Speaker 2

Jamie, we can open up the floor for questions at this point.

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. And our first question today comes from John Tanwanteng from CJS Securities. Please go ahead with your question.

Speaker 4

Hey, Pete. Hey, Dave. Thanks for taking my question and nice job on the bookings and the recovery here. I'm wondering if you were still comfortable with the mid teens EBITDA margin exiting the year. I think you've talked about that several times or maybe just below that.

Speaker 4

I know you're trying to get higher than that, but is that still in the picture with the way the backlog is and how your supply and prices are improving through the year?

Speaker 2

Yes, I think it's going to be close. I think we've got a very healthy backlog and we've demonstrated the incremental margins that should get us there if our top line does what we think it might do. The other obvious unknown at this point is how our test business is going to respond to the all the changes that happened in the Q2. We're hoping that it makes big incremental contribution simply by avoiding the big hits. So I would say it's going to be a push, but we think we have a good shot at being there.

Speaker 2

Dave, what would you say?

Speaker 3

Yes. I think I would echo that. You make an assumption that we don't have any of these odd things that we had in the Q2 here with adjustments significant adjustments to the estimated cost to complete that program and severance. I think getting up into the double digits and mid teen area is achievable level of adjusted EBITDA.

Speaker 4

Got it. And when do you think cash flow will start to catch up to the earnings? It looks like you've built some working capital here. I know you're working on inventory trends, obviously, but is there any thoughts on kind of when that actually converges and how much capital you might see here?

Speaker 3

Yes. I won't give you a quantitative answer here, but qualitatively definitely the second half of the year is going to be a significant improvement in cash flows.

Speaker 4

Okay. And then when do you expect test revenue to ramp as we go through as you start executing on this contract? Is that mid next year or do we have to wait till 26 before you get out of this program, this low rate initial production?

Speaker 2

Yes. I think we're going to have to wait and see on that one, John. As best we we just won the program a month ago, we had a kickoff meeting with the Army. So we learned a little bit about what their intentions are. And it seems like this original $15,000,000 delivery order will be followed by another similarly sized delivery order of further engineering development work for TPSs for test program sets that need to be done and some other ancillary engineering requirements.

Speaker 2

Your question at its core is when are we going to get into production? And I don't we are thinking that that will be at the earliest the middle of next year, but it could be slower than that. It really depends in how long it takes us to get our part done because we have a lot of things to do, But also the Army has to do their part. So we obviously don't control how they allocate resources internally to these kinds of tasks. But we'll know more about that and I expect that'll be a regular part of the conversation in these calls every quarter going forward.

Speaker 4

Okay. Last one, if I could sneak one in there. Just any thoughts on what happened to Delta that will flow through to you as one of your customers? Does there an impact on the operations have any effect on their spending?

Speaker 2

No, not significantly, No. Their longer term plans stay in place. We don't we can't really comment on what happened to them or why, but we don't see any ramifications directly for us as a result of that whole issue.

Speaker 4

Okay, great. Thank you.

Operator

And our next question comes from Michael Ciarmoli from Truist. Please go ahead with your question.

Speaker 5

Hey, good evening guys. Thanks for taking the questions. Nice quarter here. Pete, I guess just on the you've got the line of sight here, you've got the bookings, the backlog. Yes, it certainly sounds like Boeing wants to protect its suppliers.

Speaker 5

I Do you have the visibility of what you're shipping direct to Boeing, what you're shipping direct to Airbus? And I guess, simultaneously what's going to the 2 big seating suppliers and carriers? I mean, it just seems like there's so many different crosscurrents out there on these production rates. You did call out some inventory in the channel presumably, but do you have that line of sight from the bookings?

Speaker 2

I would say that the bookings are driven mostly by demand for updating a big portion of our bookings are driven by demand for updating in flight entertainment and connectivity equipment. So we ship to channels that aren't always correlated with production rates, right? So they generally are to airlines ultimately and they may go to line fit installation or they may go to retrofit installation. And I think the simplest thing I can say about our booking trends is that it's robust. I mean, there's a lot of demand for both retrofit and I think preparation for increased line fit rates.

Speaker 2

So we're not thinking that there's a whole lot of inventory being built up there. Obviously, if Boeing can't get their 87 rate up and can't get their 37 rate up, then sooner or later that becomes an issue and things change. But it seems to us that the world is expecting those rates to go up and they're planning accordingly. I think part of it, I think you and I had this discussion also separately that for better or for worse, the interior parts of the industry like seats and interiors and some of the other ancillary parts tend to be problematic for aircraft production in terms of the suppliers getting out and being on time and having all the quality that everybody wants. And so it tends to be one of the last places I think that the industry is going to want to slow down or cut back.

Speaker 2

I think they're looking at this opportunity as a way to maybe get ahead of the curve a little bit and deliver more product and get on time. So of all the things that we worry about or struggle with, I don't think building inventory in the channel is a major concern at this point.

Speaker 5

Got it. Got it. And then any you've seen anything any behavioral or demand changes? I know you talked about airline retrofit. It seems like some of the low cost carriers are having their struggles.

Speaker 5

And Southwest, maybe that could be a tailwind given they're going to finally move to the 21st century here. But any noticeable difference between the majors, the discount carriers?

Speaker 2

Not really. I mean Southwest has become a major customer for us this year. We're going to have revenue approaching the $20,000,000 range, something like that. They are kind of catching up. They're one of our biggest, certainly North American Airlines that hadn't invested heavily in our product.

Speaker 2

They are doing so now. There are some fleets on some airlines where decisions are getting pushed out because of the inability for the OEMs to deliver the airplanes that the airlines want. I mean, that's definitely happening and we are seeing that in certain situations. But I mean, you step back and you look at our overall booking trends, we put that chart on the back of our press release and I think it pretty effectively tells a story. For a couple of years now, the booking bars are significantly ahead of the shipping bars and that's ultimately not just building inventory, that's increasing strong demand kind of across the customer base and we're very much enjoying it and like to see it continue.

Speaker 5

Got it. And then just last one for me, shifting over to test. The EAC in the quarter on the transit program, I mean, is there any additional risk on that contract? Did this say EAC sort of write down the margin on a go forward basis? Or do you have some residual kind of tail risk on this program?

Speaker 5

Just trying to understand if this is the front end of EACs or you think this kind of cleans it all up?

Speaker 2

It's a very fair question based on our history here with this particular product line. But the way we've developed so far in terms of consolidating effort and shutting down ancillary operations And the fact that we're at the very tail end of the programs that are in question leads us to believe that we're in pretty good shape. I mean, certainly, we took the reserve that we took or the adjustment that we took with an idea that that's all there's going to be. And there might be more going forward at the smaller marginal end, but we don't see that at this point and we're hoping for something quite a bit different.

Speaker 5

Okay, got it. Perfect. Thanks guys.

Operator

Our next question comes from Scott Lewis from Lewis Capital. Please go ahead with your question.

Speaker 6

Thanks. Hey, Pete, Dave, Debbie. Thanks for taking the call and congrats on the nice quarter. I've got kind of a conceptual question about price increases. I know you guys are probably trying to capture the material cost increase you've seen, but I wonder if you're thinking about the increase in cost of capital with kind of much higher interest rate environment and maybe also your increased cost of protecting your IP.

Speaker 6

Do you think you have the ability to kind of capture those in your price increases going forward?

Speaker 2

Yes. I think the whole industry has exercised some muscles that had been kind of dormant for many, many years in terms of how to manage inflation. And certainly have learned or relearned things that we knew a long time ago in terms of protecting ourselves and contracts and also identifying in our business those areas where we can increase prices and spare on certain spares opportunities and one off buys or retrofit buys or things like that. I think the whole industry is kind of shaking off the cobwebs and has gotten pretty good at that. And I would say we have too.

Speaker 2

So I think we're doing a pretty good job of it. Our material cost is significantly higher than our direct labor cost. But we're protecting ourselves contractually on both sides with inflation indices and things like that, that I think will leave us in a much stronger position. I'll also say that, I think it's been such so severe, not so much today, but over the last 2 years, inflation pressures have been so significant and they're so pervasive and everybody feels it that so that it was not terribly difficult to raise prices. Our customers were surprisingly accommodating, because they were going through the same thing also from all suppliers.

Speaker 2

So there was kind of an accepted understanding that you could change price levels and nobody liked it. We didn't like doing it ourselves, but you kind of had to and everybody knew that. So, I do think that's kind of changing. I think it's going to be harder in the future to get those kind of price increases than it has been over the last year. So I think everything is going to quiet down.

Speaker 2

But those long term programs that are multi year, when those come up for renegotiation, there will be big increases. And I think everybody involved on both sides of those kind of programs are aware of that. So this dynamic will continue for 2 or 3 years, even if the kind of ambient inflation rate drops back to the Fed's goal of 2% to 3%.

Speaker 6

Okay, thanks. And then just my last question, have you seen anything with eVTOL programs either picking up or slowing down? What have you seen there?

Speaker 2

Well, we are actively involved with a number of those EV programs on a fee for service or kind of an off the shelf architecture that we've developed for certain critical technologies. I would say the general nature of the industry is that in service dates have slipped a little bit, maybe got a little bit more realistic compared to where they were initially. I think we're also entering a phase or have been in a phase for a while here where funding is going to be more challenging, especially for the startups. And I guess our feeling is that the airplanes are going to fly and the FAA and the the ASSA are going to figure out a certification path. The question is whether the business cases are going to develop in time to make a real industry out of it.

Speaker 2

And it'll be interesting to watch. We are involved, as I said, we're not betting the farm by any stretch. But for people who are interested in that part of the industry, if it develops anywhere near some of the more optimistic scenarios that are out there, we should benefit pretty substantially from it.

Speaker 6

Okay, great. Thank

Operator

Our next question is a follow-up from John Tanwanteng from CJS Securities. Please go with your follow-up.

Speaker 4

Hi. Yes, I was just wondering if you could give an update on litigation and expected expenses as you go through the year and beyond that?

Speaker 2

It's been pretty quiet actually. So we have a couple activity will pick up towards the end of the year, depending on a couple of decisions that we're expecting, particularly in France and in the U. S. On the Teradyne matter. We pretty strongly won in both those jurisdictions, but the other side appeals and the court has an obligation or a willingness to hear the appeal and then depending on how that appeal is handled will influence where we go from there.

Speaker 2

I think the exciting thing about it from my perspective is that it's the middle of 2024 already and we are thinking that there's a good chance that both of these things are wrapped up before we get to the end of 2025. And that sounds like a long ways off when you look at how long these things have been going on. We're pretty excited about that.

Speaker 4

Okay, great. And then just I may be getting ahead of myself here, but as your cash flow starts to improve and accumulate, what are your priorities for the cash flow? Obviously, do you have to catch up on some CapEx? Maybe you guys could get up to a level that's more normalized for you, but beyond that, what is the expectation for capital allocation?

Speaker 2

I would say the first thing that we would be wanting to do would be to pay down our debt a little bit. Debt loads a little bit higher than we would like it for kind of a normal run rate situation. I mean, in the past, we would lever up to these levels or even a little bit higher on the heels of an acquisition. But not having done an acquisition, this is a debt level that we would like to see reduced. And that's a function of what happens to our income statement and our cash flow over the foreseeable future.

Speaker 2

We do expect that the acquisition world is going to wake up a little bit. It's been pretty slow from our perspective. Certainly deals are getting done, but there isn't much of a flow that we would be interested in. And I guess I would say that we feel we have such an opportunity ahead of us just to execute on the backlog that we have in place and the opportunities that we've won, frankly, including during the pandemic that our best way to create value is to execute on what we have on our plate in front of us. So acquisitions will be a secondary pursuit when our balance sheet makes us more capable there.

Speaker 2

Our first priority is simply to execute and pay down debt. Dave, I don't know if you'd describe it any differently?

Speaker 3

No, I'd say that that's the priority is to execute. And as we move through the next 12 months, rebuild our dry powder and liquidity and kind of be ready for next year.

Speaker 4

Got it. Thank you, guys.

Operator

And ladies and gentlemen, with that and showing no additional questions, we'll be ending today's question and answer session as well as today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Astronics Q2 2024
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