Astronics Corp 2026 Q2 Earnings Call

Please go ahead. Thanks, Joe, and good afternoon, everyone.

We certainly appreciate your time today and your interest in Astronics. On the call with me here are Peter Gundermann, our Chairman, President, CEO, and Nancy Hedges, our Chief Financial Officer. You should have a copy of our second quarter 2026 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 likely 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, as well as at sec.gov. During today's call, we will have some non-GAAP measures that we will discuss which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for GAAP results. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release. With that, I will turn it over to Pete to begin.

Thanks, Debbie, and hello, everybody, and welcome to the call. We are here to talk about our second quarter results and our outlook for the remainder of 2026. Nancy and I will do our usual back and forth, and then open up the lines for questions. In summary, the second quarter was very strong for Astronics. We set records all over the place for revenue, for operating profit, for bookings, for backlog, and more. Our adjusted EBITDA was just shy of 20% of sales, which is a modern-day high. It was a very good quarter from every angle, and we feel good about it. It also puts us in a great position as we enter the second half of the year. We have strong momentum and are raising our revenue guidance to $1.02 billion-$1.04 billion.

We'll talk more about this at the end of our presentation, but we are excited to finally be crossing the billion-dollar threshold. Nancy will talk through Q2 numbers in due course, but first, I want to focus a little on margins. We've been working on our margin profile heavily, and we have made significant progress. Our adjusted EBITDA margin, for example, was in the low to mid-teens just one year ago in the first half of 2025 and practically all of 2024, for that matter, and now we are pushing 20%. There are a number of levers that we have used to accomplish this, and I'll discuss them one by one. The first lever, and arguably the most important, is the strong market demand that we see for our products, as evidenced by the bookings trends we have been experiencing.

A few years ago, at the height of the pandemic, we averaged bookings of $100 million to $150 million per quarter. Since then, our bookings level has risen steadily, culminating in our Q2 bookings of $306 million, which is an all-time high. Indeed, over the last four quarters, our sequential booking totals have been, in order, $210 million, $257 million, $290 million, and now $306 million. Bookings can be lumpy, of course, and we can't count on that type of progression indefinitely, but the overall trend is prominent and unmistakable. In our first quarter call, I discussed the range of factors driving our bookings. I'm not going to go into a lot of detail here to repeat all that, but to recap, they were, first, increasing aircraft production rates. Second, airline passengers' desire to be entertained and connected at all times.

Third, the growth of our flight-critical power franchise for smaller and emerging aircraft. Fourth, the trend towards high-end aircraft seating that uses our seat motion systems. And fifth, the expected growth in our test business based on the U.S. Army radio test program that we have been talking about for some time. Interested listeners who want to review that discussion should check out the transcript that's available on our website. Higher bookings, of course, leads to higher shipments, and higher shipments leads to better overhead absorption and increased profitability. I have said many times in recent years that we were not sized to be profitable at the reduced revenue levels we saw during the pandemic. Now we are growing into our cost structure, and our income statement is responding well. In the second quarter, there were a couple of bookings that deserve special mention.

The first was a $27 million booking for FLRAA MV-75 development work, which is a follow-on to a $57 million order we received back in 2025. We expect another relatively small order in early 2027, which should carry us to completion of the engineering development phase of the program. The MV-75 is the U.S. Army's planned replacement for the Black Hawk helicopter and promises to be the largest military program our company has ever seen. I don't intend to go into more details on it now, but I recommend that interested listeners who are unfamiliar do some research and look that one up. The MV-75 will be a big deal in our future. The other significant booking in the quarter was the long-awaited production go-ahead for our radio test program with the U.S. Army, called TS-4549/T. The order was for $45 million and will cover deliveries over the next 18 months.

We expect similar orders annually for the next four to five years under an IDIQ award we received back in 2024. The production award was not a significant factor to our Q2 results, but will begin to be so as production ramps up in the second half of this year. When it is in full swing, we expect margins in our test business to be comparable with what we get from our aerospace segment today. The second margin lever we have been using is pricing. About one-third of our volume involves deliveries that are tied to long-term contracts, typically with terms of three to five years. On these contracts, our pricing suffered when inflation picked up during the pandemic.

Inflation has since cooled down generally, and we have been able to reprice most of the affected long-term contracts, which has certainly benefited our overall profitability. We estimate that we are still waiting to reprice about one-quarter of our long-term contracts, which will come due over the next 12 to 18 months. The majority of our business is shorter term in nature, and we have learned to price to value more than to cost, which has also driven increased profitability. We believe that the cumulative effect of pricing actions has been, and will continue to be, an important aspect of our margin improvement journey. The third lever for discussion is organizational efficiency, and the point here is that we have suffered very high employee turnover during the pandemic, at times approaching 20% in a year.

High turnover meant that we had a workforce that was relatively inexperienced in their jobs, and that in turn hurt our efficiency and our quality. Today, our employee turnover rate has dropped to about half of what it was, and in many of our locations, it's well below 10%. As our workforce has become more stable, it has also become more effective and competent. I'm describing the well-known learning curve principle, and while it is hard to measure, we certainly see our workforce becoming more efficient and predictable, which helps deliver better margins. The final lever with respect to margins that I want to discuss is structural to our organization, which some might call simplification or portfolio shaping, which we have done a fair amount of in recent years.

As evidence, we have shut down and consolidated seven production sites in recent years and discontinued or limited a number of product lines and/or businesses. This activity helps us stay focused on the product lines and customers that matter to us the most. There's more to do on this front. As our business accelerates and we continue to evaluate our market goals and competitive positioning, we will work to make sure our organization is structured appropriately to align with those goals. So those are the four levers that are driving our improving margins, volume, pricing, efficiency, and simplification. What's exciting is that each of these levers has room to run. In other words, the actions we have taken continue to be active and we expect will lead to further margin improvement in the coming periods.

We are not at the end of our margin journey at all, but methodically moving along the process. Finally, before I turn it over to Nancy, there are a couple other topics from our second quarter worthy of discussion. The first is the B share distribution that we did during the quarter, announced on June 1st and executed on June 29th. It was a 20% distribution of B shares to all shareholders of record and was intended to reward shareholders and encourage long-term interest in the company. B shares have been an important part of our capital structure since the early 1980s, and because they do not trade but are convertible to common at any time, the share count drops over time as investors transition their holdings. The recent distribution was to replenish and rebalance the share count to historical norms.