Greetings and welcome to the Astronics Corporation Third Quarter Fiscal Year 2024 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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.

You should have a copy of our third quarter 2024 financial results, which crossed the wires after the markets 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 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 these documents on our website or at sec.gov. During today's call, we will 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. With that, let me turn the call over to Pete to begin. Pete?

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. 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 his 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 line trends that are affecting our company. Nothing really new here, but we…

All right, thanks, Pete. As Pete mentioned, there's quite a bit of noise in the quarter, so 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 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 to 23%. Impacting reported results were the $3.5 million for warranty reserve for a product that's been in the field for several years and requires modification. We also recorded an inventory reserve of $900,000 in the quarter related to the Lilium 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 third 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 $0.34. Adjusted earnings per share was $0.35 for the third quarter this year and these compare with a GAAP loss per share in last year's third quarter of $0.51 and an adjusted loss per share in last year's quarter of $0.07. In the third quarter we generated $8 million in cash from operations. We expected 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 noncash 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.

Thanks Dave. As 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 some 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 Pete will discuss in more detail. Turning to the Test segment, the Test business was near breakeven in the quarter, primarily the result of lower legal fees compared with the prior period. We're seeing positive results from our rightsizing 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 this 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.

Thank you, Nancy. So, moving to this legal situation that we have in the UK, by way of background, we have been in a lengthy patent infringement suit brought by a European plaintiff relative to our in-seat 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 and 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…

Sure. Thank you. [Operator Instructions] our first question comes from Jon Tanwanteng with CJS Securities. Please proceed.

Hi, thank you for taking my questions and nice quarter. Congrats also Dave on the retirement and Nancy 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 kind of what run rate do you expect to see as we ramp through 2025 as that program restarts and kind of what kind of initial levels to start shipping and what you will be shipping to Boeing?

Yes, we really don't know the answer to that question at this point, Jon, but let me say a little bit about the situation. We because 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, we're guessing that they're going to start slow and they're going to accelerate as the year goes on. I think, 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 enough to keep us healthy and keep the supply chain going, but not so great that we get way ahead of them. And so, 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, the main plane that they build up in Seattle is the 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 $60,000, $70,000 an airplane has been ongoing through the shutdown and through to today. So our assumption is that that's going to continue, 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, maybe it's going to be somewhere in the 20 ship sets a month, but we don't know that for sure yet and it is an important part of our operating plan for 2025. So we need to get an answer to that.

Got it. And at the lower ship rate per month, does that impact your margins or can you get that back in pricing somehow?

I think it's still very profitable work. I mean, it's obviously higher volumes, higher profits, but I don't think it's going to materially affect our margins across the business.

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 extend that out shipping to Boeing again?

Yes, I do see continued strong cash flow going into the fourth quarter here. Like I said, a month into it, cash flow has been very positive, very good, and I think it'll continue for the rest of the quarter.

Okay, great, thank you. I'll jump back in queue.

Thank you. The next question comes from Michael Ciarmoli with Truist Securities. Please proceed.

Hey, good evening, guys. Thanks for taking the questions. Dave, congratulations, Nancy as well. I look forward to working with you. And Dave best in retirement there. 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 -- if you look at that revenue forecast in the fourth quarter, how much is new production versus retrofit or aftermarket?

We've been running around 50-50 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 million to $10 million if they don't turn us back on. So it will skew towards aftermarket. But 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.

Okay, okay, that's helpful. And then could you maybe talk just, I guess, specifically if there's an opportunity for IFE power, all of your related products at Southwest, given kind of the major changes in overhaul they're going through, it sounds like, 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 is it something you can, maybe give us a little bit more detail on if it is?

Sure, absolutely. 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 in seat 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 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 in seat power franchise, our IFE franchise. So, no, we certainly are involved with Southwest and, maybe the current, 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.

Okay, last one from me, I mean, I know, the legal battle has been going on for a long time here and I hate to get into the hypothetical, but $105 million in damages, given your balance sheet, significant percent of the market cap. I mean, 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 the dominant position in some of these product categories. I guess the damage is one potential question, but then does this also sort of make your products a little bit more vulnerable and do you see more competition coming in, in some of those NC [ph] Power and other related offerings?

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 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 I can see. So that's really a non-issue. And I would get into the realm of speculation about damages, but I guess I would say that we're coming out of a 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, it's been going on for 14 years, this whole battle. It will go on at least for a couple more. And this will be, one of those twists in the road, I guess, that we'll someday look back on and be glad it's over with.

[Operator Instructions] We have a follow up from Jon Tanwanteng with CJS Securities. Please proceed.

Thanks for the follow up. I was just wondering if you could talk about the strength in the test business in the quarter. What do you see in the run rate going forward? And I think you had another restructuring that you talked about in the press release. Do you expect that to be doing a positive operating profit going forward?

Well, I think we're going to get closer. 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 U.S. Army called 4549T 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 4549 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 want it 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.

Got it, thank you. And just wondering if you could just, is there any other bigger legal expense coming? What should we expect from just the litigation expense side, not the reserves, but just paying your lawyers?

Well, it's something we do pretty well. I think it should be pretty quiet, actually. 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, 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 things to be pretty quiet for a few months.

Got it. Thank you.

Thank you, John.

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.

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.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.