Peter Gundermann; Chairman of the Board, President, Chief Executive Officer; Astronics Corp
David Burney; Chief Financial Officer, Executive Vice President - Finance, Treasurer; Astronics Corp
Greetings and welcome to the Astronics Corporation Third Quarter, Fiscal Year 2024 Financial Results.
(Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations. Thank you, sir. You may begin.
Yes. Thank you. 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; David Burney, our Chief Financial Officer and Nancy Hedges, our corporate controller.
Should have a copy of our third quarter 2024 financial results which crossed the wires after the markets closed today. 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 in the Q&A session of this conference call, the 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 uncertainties and other factors are providing their needs release as well as with other documents filed with the Securities and Exchange Commission.
You can find these 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. 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. With that, let me turn the call over to Pete to begin.
Thank you, Craig and good afternoon, everybody. I would like to begin this call by saying a few words about a couple of people here in the room with me, Dave Burney will be retiring as our CFO early in 2025, after a tenure of 29 years with the company. 22 years ago, he and I took over the C suite at about the same time, revenues for our company at that time were about $33 million and this year, we expect to again be in the $800 million range.
So it has been quite a ride over these 29 years with Dave, but he's been a tireless leader within our company and a trusted friend and partner for me and he will be missed. Although I do have a cell phone number and I know where he lives. So if needed, we'll pull him back in.
Also with me is Nancy Hedges. She is a new name probably for most of the people on this call, but she will be succeeding Dave as our CFO in January. Nancy has been around for a while. She joined in 2014 as Controller and Principal Accounting Officer of our company. And over the time since has established herself internally as a leader and top tier performer on our team.
She's very familiar with our personnel, our operations and the improvement initiatives we seek and I am confident the investor community will get to know her and appreciate her talents as time goes on. I'm very confident she will do a very good job as CFO going forward. We'll hear from both Dave and Nancy in just a few minutes.
I want to move to a couple of comments on the top, you know, line trends that are affecting our company. Nothing really new here, but we felt operationally that the third quarter was a very good quarter for Astronics.
Sales were strong up 25% year over year and in the high end of our forecasted range, once again, adjusted net income was 12.2 million or 35¢. A share adjusted EBITDA was 27 million. 13% of sales are trailing 12 months a justed EBITDA that is 91 million at this point.
Our Aerospace segment gets a lot of the credit for the improvement sales for our aerospace segment. Again, we're up 25% for the quarter and 19% for the year and adjusted operating margin was 14.2% in the quarter up from 3.5% in the comparative period a year ago.
So we continue to recover with our volume and our margin improvement initiatives. They're starting to show up strongly on the bottom line. We have a ways to go still, but we're making progress for sure.
There are some kind of macro tailwinds which have been helping us over recent quarters and continue to help us. I'm not going to go into any of these in too much detail, but it's worth reminding ourselves kind of where we've been and where we're going. And the first and probably the most important thing is that our supply chain continues to improve and perform.
We do regular reviews of our business units and not too long ago, every problem was attributed one way or another to the supply chain today. Those comments are fewer and farther between. There are still issues there always will be. But in general, the supply chain continues to improve and enables our improved performance.
Similarly, input cost pressures continue to subside the inflation that we experienced over the last year and a half has gotten much quieter.
Our workforce continues to improve and get more efficient. Some of you might remember on the last call, I mentioned that we, we had something like 45% of our 3,000 employees have been with us for three years or less. That kind of turnover, which again was attributable to the, to the pandemic is really hard to operate in, but as time goes on and people get more and more familiar with what they're doing and how to work with each other.
Our efficiency improves similarly, pricing adjustments which we negotiated through that period of inflation are now coming more and more into effect. Some of our major programs are beginning to take on new pricing structures which will be a contributor as we move forward through 2025.
And finally, demand continues to be pretty strong. We are entering the fourth quarter with a backlog of 612 million, if you look back to like 2018, 2019 when we were last at an $800 million run rate, our backlog was much lower like in the 404 $120 million range. So we're entering the fourth quarter at 612 that sets us up, we think for continued results and continued improvement op line as we move forward.
The press release talks a lot about adjusted measures. I thought it would be worth spending just a minute talking about some of the major adjustments in our third quarter, there were a few of them.
We did a refinance in July and as part of that refinance, we had to expense about $7 million of assets related to the old credit facility that are no longer applicable on our financial statements. We also had legal expenses during the quarter of 5.6 million that was ramping up to a hearing that happened in the UK that I will talk about again later in the call.
And finally, one of our eVTOL customers, Lillian filed for bankruptcy just a couple of weeks ago, and we took a total of about 2.2 million in charges related to that. I wanted to comment that we are involved with a number of EV to customers, but we were more heavily involved with Lillian than we are with the others. So for people who are concerned about whether this is the first shoe of many shoes to drop in this segment, I would tell you, I don't think that's the case.
What we have done with most customers is developed a a kind of a standard architecture off the shelf products that can be relatively easily integrated into their, into their aircraft without a high degree of customization. So I don't feel we have the same level of exposure that we are working with a pretty wide range of eVTOL aircraft that are being developed currently.
Finally, we had a rare warranty reserve of 3.5 million, this is related to a an electrical power system for a business jet aircraft that was experiencing less than desirable reliability over time. It's something that we introduced a few years ago and it's supposed to perform better and longer than it has been. So we need to take some actions to fix that. It's part of being a supplier with integrity and living up to our promises to our customers.
So it's kind of a long list and it's high dollars and we broke out a lot of our tables in our press release, more than we usually do to help everybody understand where the expenses were fitting in and what the adjustments were and what the company was performing like underneath.
With that all said, I'm going to turn it over to Dave was going to talk about our consolidated results and then we'll go to Nancy to talk more a little bit about segment results.
David Burney
All right. Thanks Pete, as Pete mentioned, there's quite a bit of noise in the quarter. So we, we presented some tables to help show where on the income statement, the impacts of these items are reflected and to highlight the performance of the, the underlying business.
So I'll review the operational results on a consolidated basis and I'll pass it over to Nancy to review the segment results with higher sales volume. Our operating leverage was demonstrated with stronger gross profit and margins.
The GAAP gross margins improved to 21% up 8.3 points over the prior year on an adjusted basis. Gross margin improved 23 to 23%.
Impacting reported results with a $3.5 million for warranty reserve for a product that's been in the field for several years that requires modification. We also recorded an inventory reserve of $900,000 in the quarter related to the William bankruptcy filing.
I should point out that last year's third quarter also had an inventory reserve of 3.6 million.
Also relating to the bankruptcy of a contract manufacturing customer. We adjusted both periods accordingly in the non-GAAP comparison.
SG&A expense was also impacted by the bankruptcy in the amount of $1.3 million with $800,000 in outstanding receivables being reserved for and $500,000 in fixed asset impairment for equipment relating specifically to lilium.
Adjusting for the impacts of the warranty reserve, the bankruptcy and the other unusual items that are highlighted in the tables provided in the release, adjusted operating margin for the 2024 3rd quarter was about 9.6% compared with an adjusted operating margin in the prior year third quarter of zero. Below the operating line was the $7 million in costs relating to the extinguishment of our previous term loan that we had discussed last quarter.
Our GAAP loss per share for the quarter was 34¢, adjusted earnings per share was 35¢ for the third quarter this year. And compares with these, compare with a GAAP loss per share in last year's third quarter of 51¢ and an adjusted loss per share in last year's quarter of 7¢.
In the third quarter, we generated $8 million in cash from operations. We expect it better, but between the Boeing strike and two IFE related programs that were moved to the right by a few quarters, our inventory remains above where we would like it to be.
The improved cash flow was driven primarily by improvement of our net loss, which was $11.7 million adjusted for 23.8 million of non cash expenses and lower increase in our net operating assets. And you can see this on the cash flow statement.
Our net debt at the end of the quarter was about $174 million about even with our second quarter. Thus far in the fourth quarter, we've had strong cash flow with our net debt today down to about $168 million and roughly $60 million available to draw on our revolver.
With that, I'll turn it to Nancy to review the segments.
Nancy Hedges
Thanks, Dave. If you have the results available in the press release, I'll just help pull out the major drivers of profitability for each of the segments.
Starting with Aerospace, which represented about 88% of the business. The nearly $22 million improvement in operating income was driven primarily by higher sales volume and improved productivity. The comparator period was more heavily impacted by a customer bankruptcy making the year over year comparisons challenging on a GAAP basis.
That's why we decided to include adjusted operating profit by segment to clearly delineate the noise of the two quarters, adjusted operating profit was 25.3 million in the quarter compared with 5 million in the prior year period.
Adjusted operating margin improved 10.7 points on the same impacts of higher volume and improved productivity, as well as the benefit of higher pricing that's rolling through now. Litigation expenses were more elevated in both the quarter and year-to-date periods as we've been in court more this year, especially as it relates to the UK which people discuss in more detail.
Turning to the Test segment, but the test business was near break even in the quarter, primarily the result of lower legal fees compared with the prior period. We're seeing positive results from our right sizing efforts but we were affected by less favorable sales mix in the quarter as well as under absorption of fixed costs at our current volumes.
We also presented non-GAAP adjustments for the segment that show the significant decline in litigation related expenses that were associated with the Teradyne lawsuit, as there were no major developments in the quarter associated with that matter.
With that, let me turn it back to Pete.
Peter Gundermann
Thank you, Nancy. So moving to this legal situation that we have in the UK by way of background, we've been in lengthy patent infringe. We've been, we have been in a lengthy patent infringement suit brought by a European Plaintiff, relative to our NC Power product line.
Hearings have been going on since 2010 and they have moved around in the USA, France, Germany and the UK. In the USA and France. The subject patent was found to be invalid though the French decision is being appealed. Germany dismissed some of the claims of the patent but upheld others and found that Astronics had been infringing.
The company paid 3.5 million in penalties and interest in 2020 has taken a reserve of 17.3 million to cover remaining estimated damages and associated interest.
We expect proceedings may commence in the German matter in 2026.
The UK court however, maintained the entire patent and found Astronics to be infringing, a damages hearing was held last month in October and a ruling is expected in December or January.
We have reserved 7.4 million to cover anticipated damages but the Plaintiff is seeking damages of up to approximately 105 million excluding interest. Based on UK legal practices, the company expects that some amount of damages may be due in early 2025.
The company is engaged with its lenders to arrange financing to cover the range of possible outcomes and satisfy any potential damages award as required.
The company believes that an appeal to a higher court is likely in the matter brought by one or both of the parties that appeal would start in late 2025 or 2026.
And most importantly, perhaps rest assured that all of the subject patents expired years ago and do not restrict the business of Astronics today in any way.
Apart from that. And looking ahead, we are expecting our fourth quarter sales to be in the range of 190 million to 210 million. That's a little bit wider than usual due in part to the Boeing strike situation.
The Boeing strike hurt our third quarter revenues a little bit but not badly by about $3 million. As we got shut down direct sales to Seattle in mid September or late September, the fourth quarter will get hurt more and the turn on schedule is a little bit uncertain. So we have a wider range than we normally would at this point in a quarter.
But assuming we hit the midpoint or actually, that range of 190 to 210 million brings our 2024 year end sales forecast to the range of 777 million to 797 million. At the midpoint that would show a 14.2% increase for the yea, another year of strong growth.
Looking a little further, we are working on our 2025 plan, which looks like another year of solid growth though, maybe not as high as what we're experiencing in 2024 and continued margin improvement.
We expect to release a sales forecast to our shareholders in December or January.
I think that ends our prepared remarks, Latonya. Maybe we can open it up for questions at this point.
Operator
Sure. Thank you. We will now conduct a question and answer session. (Operator Instructions)
Jon Tanwanteng, CJS Securities.
Jonathan Tanwanteng
Hi. Thank you for taking my questions and next quarter. Congrats also Dave on the Retirement and Nancy on the on the appointment. I'm looking forward to working with you.
Pete, I was going to ask you if you could quantify the impact from Boeing on a monthly basis and and kind of, what run rate do you expect to see as we ramp through 25? You know, as that program starts and kind of what, what kind of initial levels to start shipping out, what you will be shipping to Boeing?
Peter Gundermann
Yeah, we really don't know the answer to that question at this point, John. But let me say a little bit about the situation. We because of they shut us down, we accumulated some inventory during the quarter. So that's going to be one factor in our rates going forward and they also accumulated some inventory as part of the strike process. So there's a little bit of an inventory burn down, that's got to happen.
We think they're going to, you know, we're guessing that they're going to start slow and they're going to accelerate as the year goes on. I think. You know, they have internal ambitions of catching up pretty quickly to the rate that they were at before the strike. We'll have to see how realistic those plans are.
What we expect to happen is that they will hold us at some rate and that rate will be, you know, enough to keep us healthy and keep the supply chain going, but not so great that we get way ahead of them. And so, you know, we'll find out shortly here. I think what that plan is. We really don't know what it is at this point.
But I would also further add that, you know, the main plane that they build up in Seattle is 737. And the situation I just talked through really involved, the product that Boeing buys from us directly that we ship to Boeing for 737 installation line fit installation, we call it.
There's also a range of products that are primarily IFE in flight entertainment related that get installed in 737s on the production line, but are not bought by Boeing and not shipped by us to Seattle. They're in, rather shipped to airlines or shipped to seat companies. And that content, is maybe averaging 60 $70,000 an airplane has been ongoing through the shutdown and through to today.
So our assumption is that that's going to continue, you know, those shipments are going to continue and that Boeing will turn us back on for the direct shipments at some lower rate. We were operating at about 32, 33 ships a month. You know, maybe it's going to be somewhere in the 20 ships sets a month, but we don't know that for sure yet. And, you know, it's, it is an important part of our operating plan for 2025. So we need to get an answer to that.
Jonathan Tanwanteng
Got it. And at, at the lower ship rate per month, does that impact your margins? Or can you get that back in pricing somehow.
Peter Gundermann
I think it's still a very profitable work. I mean, it's obviously higher volumes, higher profits but, I don't think it's going to materially affect our, our margins across the business.
Jonathan Tanwanteng
Okay, great. And then, just with the inventory situation, I guess, do you see the cash flow or at least the net debt improving in Q4? Does that do you have to extend that out until you start shipping and billing again?
David Burney
Yeah. I do see a continued strong cash flow going into the fourth quarter here. When you said the, you know, a month into it, cash flow has been been very positive, very good and I think it'll continue for the rest of the quarter.
Jonathan Tanwanteng
Okay, great. Thank you. I'll jump back. Thank you.
Operator
Michael Ciarmoli, Truist securities.
Michael Ciarmoli
Hey, good evening guys. Thanks for taking the questions, Dave. Congratulations Nancy as well. Look forward to working with you and Dave best in best in retirement there.
Hey, Pete, just maybe asking this another way. Just obviously impossible to predict how fast Boeing ramps up Airbus having their own challenges. How much of your, you know, if you look at that, that revenue forecast in the fourth quarter, how much is new production versus retrofit or aftermarket?
Peter Gundermann
We've been running around 5,050 line fit and aftermarket the 737 coming down will probably hurt that to the tune of, got to do some thinking here, probably to the tune of 8 to $10 million if they don't turn us back on, so it will skew towards the aftermarket.
But, you know, the overall trends continue to be pretty positive. And what's interesting to me is that our airline customers, for the most part have been consistent with their demand schedules. They haven't been pushing a lot of stuff out.
So you get a little bit of that every once in a while here and there, but that hasn't been a major driver. So Boeing's, strike, it seems like a lot of our customers have been kind of looking through that and, not getting too worked up about it.
Michael Ciarmoli
Okay. That's helpful. And then could you maybe talk, just, I guess specifically if there's an opportunity, for IE power, all of your related products, at Southwest. Given kind of the major changes in overhaul they're going through. It sounds like, you know, the majority of their cabins are going to be retrofitted here. I know they've got a pretty aggressive schedule. Is that on your radar? And if it's something you can, you know, maybe give us a little bit more detail on if it is?
Peter Gundermann
Sure. Absolutely. That. Southwest is a pretty major customer of ours already and we're doing a lot of work in their cabin refreshes.
Going back actually a little while now, we developed a new architecture of C power specifically based on USB type C power. Not for Southwest alone, but largely with and in partnership with Southwest because we've been chasing them around for many, many years and we finally kind of got through and it's pretty prominently featured in, in their new cabins. If you look at some of the pictures, you can see it.
And not only that but that new architecture again, USB type C oriented is lighter weight and a little bit lighter cost. And we've been very successful selling it around the world. It's becoming an increasing part of our NC Power franchise or IFE franchise.
So, no, we certainly are involved with Southwest and, you know, maybe the current, you know, things that they're going through in terms of further cabin modifications, improve that opportunity and we might increase our content. But there's not much I can say about that at this point.
Michael Ciarmoli
Okay. Last one for me, I mean, I know, you know, the legal battle has been going on for a long time here and I hate to get into the hypothetical but, you know, 100 and $5 million and damages, you know, given your balance sheet, you know, significant percent of the market cap. I mean, how, how are you guys kind of thinking about this?
And I mean, is there a, I know, I typically think of you guys as having, you know, the dominant position in some of these product categories, you know, I guess the damage is one potential question. But then does this also sort of, make your products a little bit more vulnerable and you see more competition coming in, you know, in some of those MC Power and other related offerings.
Peter Gundermann
Well, the second part of your question is the easiest to answer. No, the patents in question are all expired have been expired for years. So this is in a sense fighting about, you know, history.
So, it doesn't restrict our business in any way today and it's really not a material issue at all competitively as far as, as far as I can see. So that's really a non issue. And, you know, II I would get into the realm of speculation about damages, but I guess I would say that, you know, we're coming out of the hole and we're financially gaining a lot of strength pretty quickly. And in that sense, have financial options that we wouldn't have had maybe a year and a half, two years ago. So I don't view it as a major crisis.
Also given the reality that it appears the court is going to allow appeals or even anticipates appeals. So, you know, it's been going on for 14 years this whole battle. It will go on at least for a couple more. And, and this will be, you know, one of those twists in the road, I guess that we'll someday look back on and be glad it's over with.
Operator
Jon Tanwanteng, CJS Securities.
Jonathan Tanwanteng
Thanks for the follow up. I was just wondering if you could talk about the strength in the test business in the quarter. You know, what do you see in the run rate going forward? And I think you had another restructuring that you talked about the press release. Do, do you expect that to be doing a positive operating profit going forward?
Peter Gundermann
Well, I think we're going to get closer. The 25 it jumped up to 25 million from a typical run rate of 20 million. I don't think it's going to stay up at that level. I think it might retrench the situation, it kind of remains the same. Our anticipated radio test program for the US army called 4,549 is what we're waiting for.
And the current look is that that should kick off in the series production at the very end of 2025. We got to get through the first three quarters of 2025, and this restructuring is designed to make that a less than painful experience.
I don't expect the company to be super profitable, but we are making progress doing what we need to do to get the 4,549 program going including shipping the low rate initial production units so that the army can do what they need to do to make sure it does what they wanted to do and then turn on series production.
So, the restructuring is intended to kind of get us through the next nine months, acceptably in anticipation of that high volume job kicking in late in 2025.
Jonathan Tanwanteng
Got it. Thank you. And just wondering if you could, just is there any other bigger legal expense coming? What we expect from just the litigation expense side, not the reserves, but, you know, just paying your lawyers.
Peter Gundermann
It's something we do pretty well, I think it should be pretty quiet actually. Well, I don't, I don't know the parameters or the timing of an appeal in the UK situation if we get there, that's probably a late 2025 event.
Our experience in Germany has been pretty quiet. We think that's more of a 2026 event.
And in France, you know, we have a victory where the other side is trying to appeal that victory. We don't know where that's going to go or when it's going to go. But there is an avenue here actually for, you know, things to be pretty quiet for a few months.
Jonathan Tanwanteng
Got it. Thank you.
Operator
Thank you. At this time. There are no further questions in queue. I would like to turn the call back to management for closing comments.
Peter Gundermann
No closing comments. Thank you for your attention. Again, we thought it was a pretty good quarter, a lot of subsequent events and an exciting future going forward. So thank you for your attention.
Operator
Thank you. This does, concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation and have a great day.