Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- First-quarter sales increased by 5% year-over-year, reaching $46.3 million.
- Aerospace and defense sector showed a robust 23.7% expansion, with defense leading at 38.1%.
- Adjusted gross margin improved to 45.3% of sales, up nearly 2 percentage points from last year.
- Adjusted net income was $2.54 per share, and adjusted EBITDA was 33% of revenues.
- Net cash provided by operating activities increased by 57.9% year-over-year, allowing for significant debt reduction.
Negative Points
- Industrial business contracted by 3.5%, with weakened performance in oil and gas, semiconductor machinery, and general industrial markets.
- SG&A expenses are expected to increase in Q2 and Q3 before normalizing in Q4.
- Interest expense for the quarter was $17.2 million, reflecting ongoing term loan repayments.
- Industrial revenue came up short of guidance due to weaker-than-expected consumption rates.
- Visibility into the recovery of industrial markets remains uncertain, with expectations of flat performance through Q3 and potential improvement in Q4.
Q & A Highlights
Q: With industrial end market kind of starting to decline here, can you provide more content and detail about what you're seeing in the different end markets and exactly how far away we are from a trough and what we'd have to see to see improvement?
A: (Michael Hartnett, CEO) When we're looking at the industrial markets, there's a few areas where we've seen substantial softness, particularly in semiconductors and oil and gas. The oil and gas sector had a planning problem with a major customer, leading to an overstock situation that is now being liquidated. We expect improvement as the year progresses. Overall, there's a slight downward bias in the rest of the market.
Q: In terms of where we're seeing the weakness, are these mostly on new builds, or was the slowdown in buying also in the aftermarket?
A: (Michael Hartnett, CEO) By and large, it's a slowdown in the aftermarket in the various industrial sectors that support the aftermarket.
Q: Do you have visibility into when industrial revenue could potentially trough?
A: (Michael Hartnett, CEO) We rely on economic models that suggest flat performance through our third quarter and very strong performance in our last quarter. This is how we are currently planning.
Q: Was the industrial weakness the biggest driver of the revenue shortfall this quarter?
A: (Michael Hartnett, CEO) Yes, the industrial weakness was the biggest driver. It's all about consumption rates and the variance between our estimates and actual consumption during the quarter.
Q: Do you have visibility into the distributors to know if there's going to be a more pronounced destock in any of these industrial sectors?
A: (Michael Hartnett, CEO) We have similar information to what you have. We don't think there's much destocking going on. Last year, we benefited from a recovering supply chain and backlog reduction, which is not the case this year.
Q: Do you think industrial grows for fiscal '25, or will it face low single-digit pressure all year?
A: (Michael Hartnett, CEO) Our plan today is for growth. We expect some recovery in semiconductors and oil and gas, and the rest depends on industrial economic consumption rates.
Q: Can you provide more detail on the year-over-year growth rates by channel in aerospace, OEM, and aftermarket distribution?
A: (Robert Sullivan, CFO) They were very consistent, with OEM at 23.7% and distribution at 23.9%.
Q: What is driving the strong growth in defense, and can you comment on pricing?
A: (Michael Hartnett, CEO) Several major programs are driving the expansion, including submarines, missiles, joint strike fighters, and long-range bombers. We are not seeing much benefit from pricing yet, as many contracts were set in '19, '20, and '21.
Q: On M&A, are you seeing any changes in the size or scope of deals in the pipeline?
A: (Michael Hartnett, CEO) We are seeing A&D-like companies coming to market, and we are investigating them. If one of these companies comes to market, they will likely come with their own capacity, so they probably won't tax ours.
Q: Was the strong gross margin performance driven by mix in aerospace, or was there something unusual?
A: (Michael Hartnett, CEO) Aerospace contributed, but it was solid performance on the industrial side that carried the day. We saw synergies, favorable mix, and better plant efficiencies.
Q: Do you expect 20%-plus growth in aerospace again in Q2?
A: (Michael Hartnett, CEO) We are not planning for it, but it could happen. We expect industrial to recover in the back half, but it is more likely to be down sequentially from a revenue standpoint.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
