Greetings, and welcome to the Astronics Corporation Second Quarter Fiscal Year 2025 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Debbie Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, and good afternoon. We appreciate your time today and your interest in Astronics. Joining me here are Pete Gundermann, our Chairman, President and CEO; and Nancy Hedges, our Chief Financial Officer. Our second quarter results crossed the wires after the market closed today, and you can find that release 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 and 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 or at sec.gov. During today's call, we'll also discuss some non-GAAP measures, 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 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, I will turn it over to Pete to begin. Peter?

Hello, everybody, and welcome to the call. I'll open the call with my comments on the second quarter, which had a number of puts and takes, but also showed consistent progress towards improved performance for the business, which has been our goal as we work our way through 2025. I'll then turn it to Nancy to cover the details. And later, I'll talk about our strengthened outlook for the remainder of the year. Sales for the quarter were just under $205 million, similar to the first quarter and up 3.3% from the second quarter of 2024. This was driven by record sales for our Aerospace segment, which compensated for lower Test segment sales. Test sales were low due to a $6.4 million adjustment driven by our ongoing program review process, which has caused us to reevaluate our financial position on a few programs. Year-to-date sales are $411 million, up 7.2% from $383 million last year. So our sales momentum remains solid. Our margins continue to make progress also driven by the success of our Aerospace segment. We had adjusted EBITDA of $25.4 million or 12.4% of sales in the quarter. On a rolling 12-month basis, adjusted EBITDA as we calculate it, has been $114.7 million. This is up from $71 million for the previous 12-month period. So we have continued to make pretty good progress. Second quarter bookings were on the light side at $177 million for a book-to-bill of 0.86, primarily as a result of timing following a record level of bookings in the first quarter. Market demand for our products remains strong. Our book-to-bill for the first half of 2025 is positive at 1.11 and for the last 12 months, also it's positive at 1.02. So while our revenues have been ramping over recent periods, our bookings have…

Thanks, Pete. I'll review the key drivers and other impacts to our consolidated Q2 performance and then touch on segment level results. As Pete noted, revenue in the second quarter grew 3% over the prior year period and was in line with the trailing first quarter. This was despite the $6.4 million impact to revenue of the adjustment to the estimated cost of completion of certain Test systems projects. Growth was driven by record quarterly aerospace sales. Operating profit and margins reflected the $6.9 million total P&L impact associated with the EAC adjustments and $6.2 million in costs for footprint rationalization and the portfolio reshaping that Pete discussed. Additionally, as part of a further follow-up hearing in the latter part of May with respect to the U.K. patent dispute, we were ordered to make a partial reimbursement of the plaintiff's legal fees associated with the damages phase amounting to $3.5 million. This was partially offset by a $1.7 million reduction in legal fees and a reduction of R&D expense in the amount of $2.6 million due to project timing. On an adjusted basis, gross margin expanded 120 basis points over the prior year to 29.2% and operating margin expanded 250 basis points to 8.9%. Adjusted EBITDA was $25.4 million or 12.4% of sales, up from 10.2% last year, primarily reflecting improved profitability from higher volume and increasing productivity in the Aerospace segment. As a reminder, we did not add back the EAC impact in our adjustments, and it had a 2.9 point negative impact to our adjusted EBITDA margin. Interest expense declined 47% year-over-year to $3.1 million in the quarter, reflecting our successful refinancing last November of the prior term loan and the ABL. The lower interest rate on our convertible debt provides meaningful savings in both interest and reduced…

As Nancy said, we are expecting a strong second half to 2025. Our Aerospace business will continue to enjoy the strong tailwinds prevalent in the industry, including increasing passenger traffic, aircraft utilization, aircraft build rates and the increasing adoption of modern passenger entertainment and connectivity systems. We also expect solid improvement in our Test business based on strong recent bookings and the EAC adjustments we have just taken. We expect sales in the second half to possibly double the total from the first half, even with the possibility that the production start of our U.S. Army radio test program known as 4549/T may slide into 2026. Given all this, we are increasing our 2025 revenue guide to $840 million to $860 million, up from $820 million to $860 million, an increase of $10 million at the midpoint. The midpoint, $850 million would represent an increase of 6.9% sales year-over-year. We expect the third quarter to be up marginally from the pace of the first half with the fourth quarter up more substantially. We expect it will be a positive and exciting second half, setting up another positive year in 2026. And with that, Kate, we'll open it up for questions.

[Operator Instructions] Our first question comes from the line of Jon Tanwanteng with CJ -- I'm sorry, CJS Securities.

Pete, if you could first talk about the magnitude and, I guess, the drivers overall of the aerospace momentum that you're seeing that's allowing you to raise your revenue guidance. Maybe the Test business as well, where is that coming from? With the backdrop that you're exiting some businesses, you've got the [ EAC ] impact as well as the push out of the radio business, help me frame the size of all those things that you have together.

Sure. It's a pretty comprehensive list of things actually. On the aerospace side, production rates, first of all, are a pretty big driver. We've got 737 rates going up, A320, there's upward pressure, all those supply chain problems. 787, A350, those are the 4 main ones that are -- have increased or are expected to increase in the near future. 737, to give you an idea, we've been shipping somewhere in the neighborhood of low 20, mid-20 shipsets per month and most recently stepping up to the low 30s, and we are on a glide path to step up again to like high 30s and even up to the low 40s potentially by the end of the year if Boeing gets permission to go there. So that's a big driver as we look forward. Beyond that, we have a program that we've announced with the Airbus A220 up in Montreal that should be a pretty big driver as we move through 2026. So that's a positive picture in general. On the military aircraft side, you noticed some pretty big growth there. One of the drivers is our engineering and development work year-over-year with FLRAA, which shows signs of accelerating. It's a little early to talk about that, but there's demand from the U.S. Army customer to move that in sooner rather than later. And on our Test side, the big drivers are the programs we've talked about quite a bit here, including primarily the 4549/T program for the U.S. Army. We're making a lot of progress on that program. We think it's a very healthy program going forward. The unfortunate situation there is that the -- our customer at the U.S. Army has been delayed by a DoD requirement for a certain health and safety analysis that needs to be…

Got it. No, that's very helpful. Can you talk maybe about just what you expect on the margin for the year? You got the EAC. I don't know if you can make that up in the back half. You've got tariffs -- additional tariffs coming in. Just help us think of the margin expectation you have exiting the year.

The margin -- the tariff situation, I feel is still a little bit hard to predict. We've kind of got through the August deadlines of the Trump administration threw out there for everybody, but they're relatively new, and there's a lot of expectation that the rates may adjust a little bit. To give you some color on our tariff situation, almost half of the tariff burden comes from a single country, Malaysia. Malaysia got a 19% tariff, which is consistent with what a lot of other countries in the region got. But what we source from Malaysia is relatively resourceable, I guess, I don't know if that's a word, but you can source it from other places. It's nothing all that critical that were locked into Malaysia. Another 1/4 of our total tariff load basically comes from China. That's harder to move. And there are -- China negotiations are ongoing. We don't really know where those are going to end up yet. So Nancy talked a little bit about some of the efforts or actions we could take. And while we may see a tariff hit in the short term on the Malaysia front anyway, I think we'll be able to bring those down if necessary by moving production or moving suppliers or resourcing pretty easily. The China part is too early to tell. And then, of course, there are pricing opportunities and passing it on to customers. That's what everybody wants to do. The reality is nobody wants to pay tariffs. So how it all settles out, it's a little bit too early to tell. But looking back at the second quarter, I'm pretty happy with our continued improvement to our Aerospace margins. Our adjusted operating margin, excluding those 2 portfolio shaping actions that we took, we were up around 16% which we think shows pretty good progress. And if we -- Nancy mentioned a 49% marginal contribution or contribution on marginal sales, I guess, I should say. And so if we can achieve a continued ramp on the aerospace side, I think we're going to be in pretty good shape by the end of the year on our margins on that side of the business. The Test business is harder to predict. We certainly hope that the EAC adjustment we took here is enough to carry us and get us through the programs that we're working on for some period of time. I don't think our Test business is going to impress the world with margins in the second half of the year. But I'm hoping for an adjusted EBITDA level somewhere around breakeven, maybe small single-digit positive. And we're, at this point, 85%, 90% aerospace. So the aerospace business will drive the day when it comes to margins, at least for the foreseeable future until we get the radio test program going, which, again, will most likely happen in 2026.

Perfect. And just a quick clarification. Is that -- is the tariff impact that you guys outlined, is that for the remainder of the year? Or is that annualized.

That's annualized based on historical purchasing patterns with little or no mitigation in place.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Just to put a finer point on the margin topic there. Within Aerospace, do you think you could hold this kind of 16% plus adjusted level? I mean I know you just -- the tariff impact was annualized that didn't include any mitigation efforts. But do you have pretty good line of sight into Aero margins, especially if you get some further volume in the fourth quarter?

Yes. I think we're pretty comfortable with it. Again, tariffs are a little bit of an unknown at this point. So I'm kind of ignoring that for the moment. But with marginal or marginal further sales growth -- the other thing I didn't mention earlier is pricing increases that we've negotiated into certain of our contracts are also helping us quite a bit on the margin front. They're coming through as we work our way through 2025. And I think we'll see more of that as we go through the third quarter and the fourth quarter. So I don't view that adjusted level of 16% as a blip at all, except for the possible impact of tariffs as we move forward.

Okay. On that pricing, I wanted to ask on that, are you having success on both the supplier furnished and buyer furnished? I mean, I guess, are you having success pushing price to Boeing and Airbus as well as the airline customers?

We have been successful there. I think the whole world has realized that inflation has changed people's price -- cost structures and reality needs to set in. And so we have been successful. We continue to be successful. And I think more and more, we're pretty happy with our price levels compared to where we were, say, a year ago or 1.5 years ago.

Okay. Okay. And I know you gave some color on the new build side of commercial aerospace. Any color you could provide on what's happening maybe with the aftermarket or kind of planned retrofits from some of the bigger carriers?

It continues to be a very good market for us. I mean the production rate side of it is pretty easy to see. There are a lot of sources of information out there, and we would concur that especially in the Boeing side of things, that improvement seems to be pretty evident and pretty persuasive. The retrofit side continues to be a very positive place for us also. I know you and I have discussed this before, but we sit in a nice spot where consumer electronic life cycles move on, whether there's a pandemic or not. And in order to keep up with those shortened consumer electronic life cycles, certain updates are necessary and certain modification efforts are necessary. And when airlines do that, they generally do it across their fleet, both with new build aircraft and with their existing fleet. So we're continuing to see pretty strong opportunities there. It really hasn't slown down. Even with the shortage of capacity that's out there in the airline fleet around the world, we're pretty pleased with how that's all going.

Okay. Good. Last question for me. You're taking a lot of strategic actions, which is great to see. I know Test has seemingly been a work in progress for, I don't know, 5, 10, 15 years. You've got the EACs, but you're also bringing in outside consultants. I mean, are you -- is there a thought process to maybe more broadly just evaluate strategic alternatives for the entire Test segment and move to be just a pure-play aerospace company?

We don't have any immediate actions in place along those lines. Frankly, we've got our head down trying to get through this difficult patch that we're in. And we think we have line of sight towards improved performance. It's too early to talk about 2026. But I expect that when we get to the end of the third quarter and we start our budgeting process for the next year, the outlook for our Test business will be much better than it has been or is now. And at that point, we may sit back and take a few deep breaths and figure out where we go from there. But at this point, that is not an active discussion here.

This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Well, thank you all for tuning into the call. We look forward to reporting again to the third quarter when we presume we will have a much cleaner quarter to talk about. Thank you for your attention. Have a nice day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.