Astronics Corporation (ATRO) Q4 FY2025 Earnings Call Transcript & Summary

Greetings, and welcome to the Astronics Corporation Fourth Quarter and Fiscal Year 2025 Financial Results. [Operator Instructions] It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Astronics. Thank you. You may begin.

Thanks, Shamali, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call with me are Peter Gundermann, our Chairman, President and CEO; and Nancy Hedges, our Chief Financial Officer. You should have a copy of our fourth quarter and full year 2025 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 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 or at sec.gov. During today's call, we'll 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. Pete?

Hello, everybody, and welcome to our fourth quarter 2025 year-end call. We closed the year on a very strong note and are happy to share the results. I'll start off with a summary of the headlines for the quarter, and Nancy will go through the financials in some detail. Then we will discuss our early look at 2026. Finally, we'll open the lines for questions. Simply put, our fourth quarter was very strong. revenue of $240 million easily set a new record, besting our previous high watermark set in the third quarter of 2018 by almost 13%. Sales were up on the comparator quarter of 2024 by 15% and the preceding quarter also by 13.5%. Sales growth was due to the strong market conditions we see across our business and solid execution across our operations. The strong sales volume, combined with a number of efficiency, pricing and productivity initiatives that we have implemented across the business resulted in a much improved Q4 margin profile for the quarter. We also benefited from a favorable mix in the quarter. Operating income was 14.8% and adjusted EBITDA was 19% for the quarter, both post pandemic records. The improved margins drove improved cash flow with $27.6 million in cash from operations for the quarter. We also completed a planned transition from an ABL line of credit to a cash flow revolver. At the end of the quarter, we had available liquidity of $231 million. To top it all off, we had total bookings in the quarter of $257 million for a book-to-bill of 1.07, leaving us with a year-end backlog of $674 million and $0.5 million, another new record. All in all, our fourth quarter was an excellent close through the year. I'll turn it over to Nancy now to cover a range of specifics on the quarter.

Thanks, Pete, and good afternoon, everyone. I'll walk through our fourth quarter and full year results in more detail, provide some color by segment, review cash flow and the balance sheet and then close with key financial priorities. As Pete noted, we delivered on our expectations of a step-change improvement in revenue growth in the fourth quarter. The 15.1% revenue growth also drove strong operational results. Gross profit increased nearly 29% to $80 million, and gross margin expanded 350 basis points year-over-year to 33.3%. The majority of margin expansion was the result of higher volume and favorable mix. This included a surge in aircraft spares orders that we expect will benefit the first quarter as well. The 2025 period also benefited year-over-year from repricing actions taken throughout 2025. Margin was also supported by some normal course catch-up pricing on a couple of programs, overall productivity gains and the benefit of earlier test systems restructuring actions, which more than offset the $2.9 million of increased tariff expenses. R&D expense was $10.6 million or 4.4% of sales, which is within an expected 4% to 5% run rate. Levels can vary from quarter-to-quarter based on the timing of projects. The $7.3 million decline in SG&A expense was primarily the result of a $9 million reduction in legal reserves and litigation-related expenses. SG&A included the incremental SG&A expense gained from the Buhler acquisition as well as the onetime legal and accounting costs related to it. At 14.1% of sales, we were at the lower end of our historic operating rate of 14% to 15% of sales. We expect to continue to benefit from lower litigation expenses and the cost saving measures we've implemented. Stronger gross profit and lower operating expenses flow through to operating income, which was $35.5 million, up sharply from $8.9 million a year ago, and operating margin expansion of 10.5 points to 14.8%. On an adjusted basis, which excludes the acquisition expenses and continued patent litigation costs, operating income was $38.3 million, and adjusted operating margin expanded 450 basis points to 16%. We had solid conversion to net income, which was $29.6 million or $0.78 per diluted share in the quarter compared with the loss in the prior year period. I do want to point out that our diluted shares for the 2025 fourth quarter included 1.4 million shares associated with the assumed shares underlying the remaining 5.5% convertible bonds as the average share price for the quarter was above the conversion price on those bonds. However, there was no diluted EPS effect in the quarter related to the 0% new convertible bonds as the average share price was below the $54.87 conversion price. As a reminder, we do have a capped call in place, which means that there is no actual potential dilution unless and until our share price exceeds $83.41 after which potential dilution comes on gradually beyond that price. Nonetheless, the calculation for the diluted average weighted share count will reflect the implicated shares associated only with the premium on the bonds as long as the quarter's average share price exceeds the $54.87 conversion price. Adjusted net income was $28.5 million or $0.75 per diluted share which is lower than the GAAP reported net income as a result of normalizing the quarter's tax rate. The volume, mix, reduced litigation expenses and pricing recovery benefited Aerospace operating profit in the quarter, which was $41.7 million or about 2.5x greater than the prior year period and resulted in operating margin of 19% of sales. On an adjusted basis, Aerospace operating profit margin expanded 380 basis points to 19.8%. Even on a relatively low level of sales, Test Systems produced operating profit of $1.1 million compared with slightly below breakeven results a year ago. The improvement reflects the benefit of simplification and restructuring actions taken in 2024 and 2025, partially offset by continued unfavorable mix and under absorption of fixed costs at our current volumes. We expect profitability to improve meaningfully once production on the U.S. Army radio test program ramps. Before we turn to the balance sheet, I wanted to touch on tariffs for a moment. As you all know, the U.S. Supreme Court held a tariffs imposed under the International Emergency Economic Powers Act or IEEPA, exceeded the authority granted by the statute. We're reviewing this decision with our advisers to understand any implications for previously paid tariffs and our go-forward cost structure. But at this time, we're not assuming any benefit in the outlook. To date, we've treated these tariffs as a normal cost of doing business and have not recognized any asset for potential refunds. Time will tell if there will be an opportunity to recoup any or all of the approximately $8 million in incremental tariffs previously paid. We will, of course, be monitoring the situation closely. Now moving on to cash and the balance sheet. We had a strong cash quarter and generated $27.6 million in cash from operations in the quarter and $74.8 million for the year. Strong cash earnings in the quarter were partially offset by higher working capital to support increased order volume. Operating cash flow also included a tenant improvement allowance reimbursement of $5 million for the quarter, which is offset by the CapEx investments in the build-out and consolidation for our new Redmond, Washington facility. For the year, we had $8 million in reimbursement. Capital expenditures were $11.8 million in the quarter and $31.7 million for the year. We still have some work to do on the Seattle facility consolidation, so there will be carryover in 2026. We're expecting CapEx of $40 million to $50 million for 2026. Not included in that number is approximately $14 million to $18 million of investment into a global enterprise resource planning system. Because of the accounting treatment for those types of projects, that spend will not be reflected in CapEx but instead will come through as cash outflow from operations. We're planning a staged implementation of ERP and the project is projected to take approximately 5 years to complete, with the costs expected to be heaviest in 2026. We will be relying on both outside resources and a dedicated team to execute on the implementation. We closed the year with $18.2 million in cash and cash equivalents. Net debt was $324.8 million at the end of the year, up from $156.6 million at the end of '24. The increase reflects the refinancing actions that we executed in September '25. That included the repurchase of 80% of the $165 million principal, 5.5% convertible bonds, which required $285.8 million, given how far in the money those bonds were at the time. We also purchased a capped call for $26.9 million, which elevated the strike price on the new bonds issued to $83.41. To pay for the purchase in the cap call, we issued $225 million of 0% convertible bonds. We borrowed on our revolver, and we used cash on hand. As Pete mentioned, in October of last year, we also entered into a new $300 million senior secured cash flow-based revolving credit facility, of which we had $85 million drawn at year-end. We closed the year with $231 million in available liquidity, including the remaining available on the revolver and $18 million in cash. Our capital allocation priorities remain oriented on funding organic growth and critical capacity and infrastructure investments while maintaining a prudent and flexible balance sheet. We believe our current capital structure improves profitability and healthy liquidity position us well to execute on these priorities. Our financial priorities for 2026 include to deliver on our revenue outlook, supported by a record backlog and strong demand in aerospace, drive further operating margin expansion with an emphasis on achieving sustainable high-teens operating margins or better over time, improved Test Systems profitability as volume ramps on the Army radio test set program, and to maintain a strong liquidity position while investing in our future. With that, we're pleased with the progress we made in 2025 and the foundation that we built for 2026 and beyond. Pete, I'll turn it back to discuss our outlook.

Thank you, Nancy. One more comment on 2025. It was, in retrospect, very much a year that played out as we originally expected. When it began, we thought it would be a year of more modest growth compared to the 3 years prior but it would also be one where we would dial in and fine-tune our efficiency initiatives and cost structure while realizing the benefit of pricing actions to bring about significantly improved margins. And that's pretty much what happened. Growth in 2025 was 8.4%, down from an average of over 20% for the 3 years prior as we clawed ourselves out of the pandemic. But the more manageable growth we saw in 2025 allowed us to work on our margins, which today are much improved over the prior year. 2025 saw adjusted operating margin of 12.2%, up from 7.7% in 2024. Adjusted EBITDA was 15.6%, up from 12.1% in 2024. It is now time to talk about 2026, and we think 2026 is shaping up to be a very good year for our company. Long story short, we anticipate growth picking up significantly over 2025 and we believe our margin journey has plenty of more room to run. A few weeks ago, we issued preliminary 2026 revenue guidance of $950 million to $990 million. The midpoint of that range, $970 million would represent growth of 12.5%. The high end of the range, $990 million would represent growth of nearly 15%. This level of growth is a solid step-up from 2025, but not as crazy and challenging as the years before that. As for margins, we do not issue bottom line guidance, but we believe that the broad range of initiatives that helped us make progress in 2025 remain in place and we expect to see continued progress given the higher sales volume we expect to see in 2026. As for cadence, our current expectation is that first quarter sales will be in the range of $220 million to $230 million. We expect a modest step-up from there in subsequent quarters such that the second half of the year will see quarterly sales above $250 million. We expect that the sales volume will play well with our evolving cost structure and efficiency initiatives. There are, of course, some risks. The most prominent of those include geopolitical risks, which are wide-ranging and macroeconomic in nature, tariffs on another question mark, which is as unpredictable as ever. Closer to home, we continue to wait for the U.S. Army to turn us on for volume production of our 4549/T radio test program. The government shutdown late last year did not do us any favors in this regard. We now believe that we will get the long sought after turn on early in the second quarter of 2026 or shortly thereafter. In summary, we expect 2026 to be a remarkable year for our company. We expect to post strong growth and continued progress with our bottom line. We look forward to updating you regularly on our progress as we work through the year. And that ends our formal discussion. Shamali, we can open up the line for questions now.

[Operator Instructions] And our first question comes from the line of Jon Tanwanteng with CJS Securities.

This is [ Ron ] on for Jon. Assuming you achieved the midpoint of your Q1 and full year revenue guidance, you'll be doing $245 million to $250 million in quarterly revenue on average in Q2 to Q4. Can you do a similar 19% to 20% EBITDA margin in those quarters.

That would be a goal. That's what we're thinking we're shooting for. I would point out that the fourth quarter -- the quarter we're reporting on today, was a little bit unprecedented. We had not been at that volume before, and it did benefit from a strong lineup of tailwind. So we're hoping to repeat that kind of performance as we move through the year. And as we go further. One of the other questions that we will answer as the year progresses is what our marginal contribution on incremental dollars -- revenue dollars might be. We've consistently in the past, been in the 40% to 45%, 50% range. And that thesis will be tested as we move through the year into those higher volume levels. But at this point, that's our goal.

Super helpful. And then just one more, can you add some color to what you're hearing from the Army radio test program? And is that the biggest swing factor in terms of achieving the high or low end of your revenue guidance? .

It's less and less of a swing factor as we move through the year, actually. We've discounted a little bit. We originally thought it would get started right around year-end 2025, the government shutdown, pushed it out. And the wheels are in motion, I guess, I would say. We believe it's a matter of when and not if. We believe that most of the task items that have to be accomplished in order to get a green light on the project have been or are being completed. So we think the user community is definitely in line to get it going, and we expect that to happen shortly here. But again, it's a little bit hard for us to predict when and how the Army will act on this kind of matter. But we are planning a second quarter turn on.

Our next question comes from the line of Gautam Khanna with TD Cowen. .

Yes. Just wondering if you could characterize the order influx in Q4. Was it concentrated in any specific product areas? Was it broad-based? Maybe you could talk about some of the customers? Was it aftermarket orientation or OE, et cetera? .

Yes. I would tell you that it's -- there was nothing singly outstanding or specific. It was pretty broad-based and across the board both for line fit and aftermarket pretty consistent with our revenue base. That being said, there are a few pretty significant programs out there that we were waiting for and hoping to bring in, in the fourth quarter. Had we done that, it would have been a blowout fourth quarter bookings number. But as it is, we feel like there's pretty good targets for the first quarter and second quarter as we work to pursue those things that have maybe slipped a little bit. But nothing really special, I would say, that drove fourth quarter bookings. It was just rising tide lifts all ships and we were beneficiaries of that. .

Yes. And that leads me to my follow-up, which is just can you characterize what you're seeing in Q1 and the pipeline beyond Q1 with respect to orders?

Yes. We're pretty optimistic. I mean we obviously have to keep bookings above shipments to some extent in order to achieve kind of 10% to 15% growth rate in 2026. But at this point, obviously, it's early in the year, but we feel pretty optimistic. We've got kind of a target-rich environment that we're working in, that we should be able to convert into revenue dollars in plenty of time to achieve that [indiscernible]. At this point of all the things we kind of sweat about the bookings and the demand in the market is not really one of them. .

Good to hear. And then just lastly, on pricing broadly. I don't know if you could characterize how that's trending. And I don't know if you're willing to comment beyond the '26. But with respect to pricing opportunities for the overall portfolio guide? .

That's a good question. I think the -- I'm pretty pleased with the achievements we've had kind of repricing our business mix on the heels of the inflation that we saw over the last few years. That definitely has been beneficial to our results. And I would tell you that if I look across the book of business, this is kind of a hard thing to estimate. But we're probably somewhere in the 70% to 80% complete range there. We have a few major programs that will be coming due over the next year, 1.5 years, and we will execute on those as we have on the others. But for the most part, we've kind of fixed the deficit that we found ourselves in when inflation kicked up cost faster than we could raise prices. I think we're catching up. We're well on our way. We got a little bit further to go. But for the most part, I'd say we're 70% or 80% done.

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

Nice results. Apologies for the background noise. I'm on the move. Just Peter, Nancy, on the Aerospace margins, really great performance. I mean, can you maybe just unpack that a bit? I mean, obviously, it sounds like you got a pretty big tailwind from reduced litigation and reserves. But then I think I heard you call out a pretty significant order for spares. You got the pricing I'm assuming we're not going to take this run rate it forward, but maybe if you kind of remove some of those items, I'm thinking litigation and spares. Are you still trending above that maybe high 16%, 17%? Or do you think you kind of do better than that going forward here with these volumes? .

No, I think there's definitely -- you saw, like our adjusted table in the back, which removes the litigation and the nonstandard types of items. So we're at 19.8% on an adjusted basis for Aerospace. There's obviously mix was beneficial in there, and we had some of those repricing actions that we mentioned. But we still think that high teens is achievable. We've been in that mid- to high teens all year. This quarter was quite favorable. We think some of that mix is going to continue on into the Q1, as we mentioned. So yes, there can be some puts and takes quarter-to-quarter. But yes, I mean, that mid- to high teens is where we expect to run. .

I would also add, Michael, that one of the things that except me about our situation right now is it's not one thing. It's not one program. It's not one driver that's really producing the results. It's more a groundswell of things all across the board, and we don't dive into them all in too much specificity. But the strength of the results is based on a real broad-based set of drivers, which gives us a lot of confidence that it's going to continue. So I just wanted to throw that in there. .

Okay. Okay. And Nancy, yes, I was looking at the table. I guess the press release talked about a $9.3 million decrease in litigation. And I mean we could probably take it offline because I see the $1.4 million in there. But was there any way to quantify the benefit to the margins from the spares?.

Yes. In terms of quantifying, we could probably -- it was just a favorable aftermarket environment, Mike. So there's not necessarily one program. It's just it was -- like Pete said, we've got some broad-based tailwinds that were behind us, and it happened to be a particularly strong quarter in terms of aftermarket.

Right. And add a little color to that. We're not a business that generally has a whole lot of spares and repairs kind of aftermarket business. We do a lot of retrofit business. But as you know, Michael, that for us, that's pretty consistent with how we sell to OEM applications also. So it's not a retrofit. It's -- this quarter benefited from kind of a spares and repair element, which is a little bit over and above what we typically see. So that's why we called it out. .

Okay. Okay. That helps. And then, Pete, if I may, just on the outlook for '26, any -- maybe can you give us a sense of what kind of production rates you're thinking about? I mean obviously, we heard from Boeing, there might be 2 rate increases on the MAX. It sounds like maybe the bigger content widebodies are certainly moving in the right direction. But any sort of assumptions underpinning kind of the revenue guidance? .

I guess what I would tell you is that we get the same message from the OEMs that everybody else does, and we are planning and spooling accordingly. But when we publish our numbers, we're discounting that a little bit. We're sliding some of those rate increases 3 or 4 months, not as though we will be unable to keep up if they do that. But just to be conservative, we feel like it's appropriate to discount it just a little bit. So there is some conservatism built into the numbers there.

Okay. Okay. And then last 1 on '26 and maybe just cadence of one program. Any general update on the MV-75 and then kind of where to stand with that opportunity and that ramp? .

We're chugging away with it. Again, it's a little bit of a situation where the Army is pretty public in saying that they want to accelerate that program. We understand that that's not always an easy thing to do, but I can tell you that we won't be the hold up. If they want to accelerate the program, we think we're on schedule to do it as they want. In terms of revenue for the year, I don't have this exactly in front of me, but I believe that we generated something like $30 million of revenue in 2025 on that program, approximately $20 million the year before that, and we expect to step up this year to somewhere in the neighborhood of $40 million. So it becomes a bigger portion of our overall task list. We expect that we're going to be done with the development phase of the program in the first half of 2027. So largely done by the end of this year. .

Our next question comes from the line of Greg Palm with Craig-Hallum Capital Group. .

Congrats on a good way to finish the year. Maybe just looking back, and you talked a little bit about Q4 specifically. But as it relates to kind of the commercial aero segment, can you give us a sense on how both OE and retrofit performed for the year, like on an absolute and maybe relative to one another and just based on your expectations for this year. Any change in how both of those perform relative to one another? .

We're -- our sense is that they're both going to continue to be pretty strong, Greg. The production rates are well publicized. They're well discussed in the industry. We don't have any insight beyond those, beyond what I've already talked about. If they can build the airplanes, we'll ship the product. There's no question about that. And otherwise, we continue to benefit from what I describe as a secular trend where people when they travel have almost an insatiable desire to be connected and entertained. So there's pressure on the airlines in the aftermarket to keep up with people's desires, passenger desires when they step on board a commercial airplane. And that's -- half our business is basically in-flight entertainment and connectivity. And we see -- we continue to see strong tailwinds, both on the OE production rate side and the aftermarket side. And we benefit also, as you know, that the technology life cycles in that part of the Aerospace industry are pretty short. So even though products may be functional, perfectly fine, just as intended, it becomes technically absolute and needs to be updated. So we're in a constant position where we get the opportunity to try to replace ourselves really with newer product that keeps up with consumer electronics. So it continues to be a pretty good picture. I can't tell you there's a meaningful shift one way or the other in terms of aftermarket versus OE production rates. We're fairly optimistic on both at this point.

And yes, that's good color. And on the retrofit, specifically, as I think about some of that you sort of alluded to, there's a lot of new things going on inside the plane. I mean I can think about how we access to the Internet and WiFi and how that might change from GEO to LEO, maybe even the exact way we charge our phone. So how might that impact you this year, what type of opportunities might sort of emerge over the coming years? .

Well, it's an interesting question. I don't know how much time we have on this call. But that's a big part of what we live for at Astronics and I can think off the top of my head, there are all kinds of things happening with satellite geometries or geologies, architectures. The carrier systems that -- and the security protocols on wireless access points, even electrical power, I mean people think of that as relatively stayed but it hasn't been too long since we moved from a 110-volt AC to USB Type A, the USB Type C and now there's pressure for new wireless kind of protocols for charging in airplanes. So it's, again, a target-rich environment, and we have a pretty comprehensive product line that addresses all those product areas and one of our challenges is to see where consumer electronics is going and stay in front of it and find a way to get it offerable and commercialize so it can get on airplanes. And we have a pretty good road map in a range of areas to address those opportunities. So it takes some time for some of those to play out. But I expect 2026 will be a meaningful year and we'll talk about those developments as they get a little firmer down the road in our regular calls. But we think it's an optimistic setup for the year for sure.

Yes. Okay. And I guess just last one, I wanted to just spend a minute on flight critical power. And you mentioned FLRAA, but just given the attention, some of the interest in, I don't know, like unmanned aircraft, CCAs, it just seems like maybe there's an opportunity that is emerging there that could provide some additional opportunities as well. I just wanted to get your thoughts. .

It's a very good question, and it's an exciting topic. It's one of our main strategic thrust, flight-critical electrical power, and we have become specialists basically in designing electrical power generation and distribution systems primarily for smaller aircraft. I mean we do work across the board. But in that particular product line, we're specialists in small aircraft. We started off primarily focused on business jets we have found our way into military programs, the FLRAA program where the MV-75 being the kind of the big highlight so far that we're really excited about. That's a transformational program for our business. And -- but while we're busy doing these things, these other classes of aircraft have come up like eVTOL, which are, again, small electrically intensive aircraft and drones, not the smaller dispensable drones that may or may not come back to fly a second mission, but the higher-end ones, the CCAs, like you mentioned, those are right up our alley. We do -- we have technologies that make ourselves very well suited for the smaller remotely piloted or autonomous aircraft. And we're heavily involved in a range of development programs right now, but most of them are unofficial and not programs of record at this point. So we can't go into a whole lot of detail and there are more questions and answers, but we're very excited about where that business is going to go. It's about 10% of our total right now, but it's 1 of the most potentially explosive growth areas in our business. So we're excited to see how it plays out. MV-75 gets the big headlines. It will continue to be the big headlines this year. But kind of in the background, there are going to be a number of other development programs that -- and things we can maybe talk about more freely when the time comes that could be pretty exciting for our company.

Thank you. And ladies and gentlemen, this does conclude today's question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.