Astronics Corporation

Q1 2026 Earnings Call — May 12, 2026

John Tagwanton (CJS Securities): Hey, good afternoon. Thank you for taking my questions. Nice quarter and outlook. Pete, I was wondering if you could just address, I know you're seeing strength now from the airlines and there's all these underlying drivers for it, but I was wondering if you look further out and maybe the Iran conflict isn't resolved, where would you expect to see weakness first? Is it from your Mideast airline customers or maybe more airlines going out of business like Spirit but maybe going out the chain? Just help us think through the scenario there.

Pete (Executive): Well, it's a little hard to read the future in this area, John, as you might expect. I guess my first instinct is just to, I guess, say what I said before in the prepared remarks, that we're not seeing any impact at this point. Certainly, in terms of traffic and flights, the Middle East airlines are being affected. I would expect that not to be a permanent thing. I would expect that to bounce back when the conflict ceases, however it ceases. I do think the rising fuel prices could have a problem, could be more of a problem for the low-cost providers. And, you know, for better or for worse, low-cost providers are not typically our major customers for our IFEC products. They tend to be, you know, more bare bones in terms of their product offerings. So I don't see that as a major risk for our company. I also, you know, in a worst case scenario, if there's some kind of degradation in aircraft ordering, I'm expecting that there's so much extra demand out there that leasing companies, for example, would take the slots of any airlines that want to give up their slots. So maybe I'm optimistic, but I don't see it being a big deal.

Of course, the longer this goes and the worse it gets, who knows? We're going to be in uncharted territory, but that is not our feeling today. It's kind of a weird situation. If we were just to look at our internal business and not pay attention to the internet or the news, we would think everything was going absolutely great in the world. So there is a little bit of a disconnect between this ranging conflict and the way our business feels inside our four walls. But, you know, for now, that's how it is.

John Tagwanton (CJS Securities): Got it. That's helpful. I was wondering on the flip side, is there an opportunity to perhaps upgrade those planes that come out of Spirit if they move to other stronger carriers or to leasing companies like you might have mentioned?

Pete (Executive): Absolutely. I mean, if the airlines go to some of our established airline customers, they would be reconfigured to come up to the standard of the adopting airline. So that would help us. Spirit was not a major customer of ours, not a customer at all, I don't think, other than what was line fit on the aircraft. So if it were to go to another airline, it could be a pickup for us.

John Tagwanton (CJS Securities): Got it. Last question, I'll jump back in queue. Can you just bridge us from the prior revenue guidance to the new one? What's increasing in the underlying assumptions?

Pete (Executive): It's nothing single specific, I would say. It's across the board surge in demand and, you know, the whole machine that we've built in terms of operations continues to get better and better and better. In the first quarter, we were doing a pretty major relocation in one of our biggest operations in Seattle. That went smoothly. It makes us more and more encouraged that we're going to continue to accelerate as we go forward. I'd also point to bookings in the first quarter, which were just super. And usually when we have really, really high bookings, it's because we got a really, really big order on some program or from some customer. But in this case, bookings were as high as we've, higher than we've ever seen. And that wasn't the situation. There wasn't kind of a big single driver or couple drivers that kind of put us over the top. It was rather a surge in demand really across the business. And that's part of what prompted me to go through that laborious presentation of five points about what's driving our business. It really is very comprehensive. Three of those five points, I'm not going to replay them for you, but they were smaller parts of our business, 10% each. And those three 10% pieces of business are looking at very significant growth initiatives in addition to the areas of our business that traditionally have driven our growth. So it's an encouraging mix across the board from my perspective.

Greg Palm (Craig Hellam Capital Group): Yeah, thanks. Pete, for what it's worth, I think you laid out a pretty compelling investment thesis. So I appreciate some of those thoughts. There was like an overwhelmingly, I think, positive sort of across a lot of parts of the business. So maybe I'll start with something that was a little bit softer relative to our expectations. But anything in the margins in Q1 that stood out on the negative side, you know, if we back out the $2.8 million margin catch up, I think it would have been a little bit more disappointing in terms of gross and EBITDA margins. And even with that, I think incrementals were a little bit light of what you realized last year. So just curious if you want to call anything out specifically.

Pete (Executive): Yeah. So, I mean, there's the impact of tariffs, Greg. Tariffs were up almost $2 million year over year. So that's, you know, that's certainly a negative. You know, we didn't have, we haven't booked anything in terms of potential refunds for tariffs. So, I mean, that could very well turn into a benefit as the year goes on, as that refund process plays out. But yeah, we did incur $2 million of additional costs year over year related to the tariffs. I would also point out that one of the problems with our first quarter is it followed the fourth quarter. Yeah. And the fourth quarter was a super quarter. So, you know, volume does a lot to a business, and we predicted a drop-off in volume, not because of a drop-off in demand, but it was more just scheduling and timing more than anything else. And actually – Volume was higher than our internal forecast and just above the high end of our range. So we weren't disappointed with that. We thought it was a pretty good first step, especially since one of our biggest operations was involved in a move during the quarter.

So I think in the second quarter, you know, is one of these, you know, show me kind of quarters. We're forecasting revenue at $245 to $250. That would by far, even at the low end of that range, be a record for the company. And we talk about incremental margins being important. This will be a chance to show it. I think that'll be a really good indicator for where we're going to be for the rest of the year.

Greg Palm (Craig Hellam Capital Group): So, sounds like you're pretty comfortable with us saying incremental margins should improve quite a bit as that top line accelerates through the rest of the year. Is that a fair statement?

Pete (Executive): Absolutely. That's what we're counting on.

Greg Palm (Craig Hellam Capital Group): Okay. And then... On the radio test program, you know, the long-awaited coming week, so it sounds like it's more definitive this time around, but just curious what is built into this year's guide at this point in terms of revenue contribution and just remind us what, you know, kind of a full run rate annual contribution might look like, you know, for next year.

Pete (Executive): Sure. We think a full year should be something like 40 to 50 million, and we're thinking it'll probably be a 20 million contribution in the second half. It's a revenue over time program, which accelerates revenue over, you know, point in time. And we are thinking that that award, I mean, all the hoops have been declared and jumped through, and as they say in the business, the paperwork's been on the general's desk, and we think there's a clock ticking that suggests a signature and potential award, although there could be a delay between signature and award yet in the second quarter. So we're pretty excited about that. I also need to, you know, Greg, we love having your involvement in our business, but we've been waiting for this thing a heck of a lot longer than you have. So we're very much looking forward to saying we got it in hand and issuing that press release. It should come soon.

Gautam Khanna (TD Cowan): I was wondering if you could update us on what you think the mix will be between retrofit and OE in the commercial aerospace market segment this year?

Pete (Executive): Our general guideline there is 50-50 for retrofit and OE, and they're both doing well. Obviously, build rates you're well familiar with. We're putting more and more content on narrowbodies, and the widebody rate's going up also, both at Boeing and Airbus, so that's all positive. And at the same time, there is this trend where airlines around the world are continually looking for ways to be more in step with their customer expectations, and customers increasingly have this demand to be connected and entertained and powered pretty much at all times. So we're benefiting from that on the aftermarket or retrofit side also. I guess I'll take the opportunity also to remind that for us, an aftermarket sale isn't necessarily a higher margin sale than line fit. They're pretty much the same deal because we're selling them to the airlines, selling product to the airlines, and the airlines will either decide to put the product on a retrofit application or they'll have a ship at the Boeing or Airbus for a line fit application. So it's kind of the same sale either way. But I look at it as a nice diversity of market. So sometimes, you know, it hasn't happened, well, I guess it did happen not too long ago, but aircraft production can go down and retrofit applications can still hold steady or even increase and vice versa. But at this point, we're seeing them both in a very strong position.

Gautam Khanna (TD Cowan): That's helpful. I understand your comments on demand are quite positive. I just want to make sure that extends so far into the second quarter as well. Has it been as broad-based as it was in the first quarter?

Pete (Executive): Yes. Yep. We're comfortable with how it's – specifically the last couple months, you mean, since the hostilities began. Yeah, it's been – we have had a positive book to bill in that period of time also.

Gautam Khanna (TD Cowan): Okay. Are there any, I don't know what the right word is, but indirect impacts from higher fuel costs? I mean, not with respect to demand per se, but on the cost side or any other ways that that could creep into crimping profitability this year?

Pete (Executive): Uh nothing specific to fuel costs for us. I mean obviously we're subject to inflationary pressures just like everybody else so if you believe that there's going to be an increase in costs I can't say that there's anything specific other than perhaps we do use quite a bit of memory in some of our products and memory electronic components memory chips are definitely in a price squeeze right now but for our business overall, that is not a very – it hurts parts of our business, but it is not a major driver overall.

Gautam Khanna (TD Cowan): And have you guys – I don't know if you can comment on pricing and how that's trended, how much of a contribution that was to sales like for like in the first quarter, and if you're seeing any pushback with respect to pricing initiatives from customers.

Pete (Executive): We are continuing to exercise price levers where we can, when we can. We are one of those companies that prefers to stay on the good side of our customers, so we don't use price as a weapon. But we do want to be paid for the value we create for our customers. So we have, I feel, gotten much better at doing that over the last couple years. We Well, you know, you always have room to improve, and we will improve. It's slowing down, though. It was a major issue over the last couple years. A lot of companies, us included, got behind the curve in terms of inflation and dealing with pricing opportunities with customers. I think we've corrected a lot of that. Not all of it. We have a couple major programs, which will be updated and upgraded over the course of this year. But for the most part, I think we've kind of run that route, and I think we're in pretty good shape. So you asked, I think, how much of the improvement now is driven. Boy, that's a hard one to answer because there are a lot of moving pieces.

The other thing we've done over the last year, year and a half, two years, is quite a bit of rationalization of our product lines and facilities we've done quite a bit of moving and consolidating we exited a couple product lines and done a pretty comprehensive analysis of those opportunities and again all that will continue and there will be further benefits I think from that but for the most part what I really liked about last year, growth stabilized a little bit, and it gave us a chance to dial in and optimize a lot of those considerations. This year, I think it's going to be more and more about growth, especially with the first quarter bookings, which we were, again, pretty excited about. I think this is going to be a year where we can get low to mid-teen organic growth on a cost structure that's been rationalized and optimized. So, I think it'll be an encouraging picture. And the second quarter, again, will be a real kind of litmus test for all that.

John Tagwanton (CJS Securities): Thank you for the follow-up. I was just wondering if you could provide an update just on the size of the eVTOL and autonomous opportunities that are out there as you're looking at 27 and 28, and then maybe the same question for the 777X as it prepares to be certified and start shipping to customers.

Pete (Executive): Well, you're baiting me a little bit on the eVTOL question, John. There are widely divergent perspectives on the takeoff rate and the volume associated with that market. I think we're reluctant to go too big into the forecast because there are a lot of companies competing for a pie of unknown size, frankly. I will say, though, that we are well diversified in the customers that we're working with. We've developed off-the-shelf capability that they all need, and we are working with the vast majority of them. And we think there will be winners.

The question is which ones are going to be winners, and we don't know that specifically. I think they're going to generally make very good progress towards certification. Certification is not going to be the hang up. The hang up might be the business model that, you know, the aircraft are very different between the various suppliers. The business models are even more divergent. So it's unclear to us which ones are going to succeed. I will say our off the shelf to this market means that we're not going too far head over heels in any one program development or any two program development. We're not doing a lot. We're doing some certification work, and we're doing some, I call it, assisting engineering work, but we're not doing heavy NRE for any of the various OEMs at this point, so we'll see how that goes. I think 2026, 2027 is gonna be a really critical year for certification, and then we'll see which business models take off. They're starting to fly. There's a possibility that there will be some customer flights. I'll tell you, I will look forward to that opportunity personally. I know a lot of people won't, but I would love to fly on one of those things, so I will do that as soon as I can. And your other question was what? On the 777X?

Pete (Executive): I don't have that in front of me. I want to say that we're going to have 250 or so line fit on each and every airplane, and then there's the IFE opportunity, which could be more optional, but could be another 250 or so per airplane.

John Tagwanton (CJS Securities): Got it. Thanks, Pete.

Pete (Executive): Sure, John. Thank you.

There are no further questions

at this time, and this does conclude today's teleconference.

We thank you for your participation. You may disconnect your lines

at this time.

Q4 2025 Earnings Call — February 12, 2026

Analyst Gautam Khanna (TD Cowan): I just wanted to continue our program this afternoon. My name's Gautam Khanna, TD Cowan analyst. I cover Astronics and Aerospace and Defense broadly at Cowan. Very pleased to have with us Peter Gunderman, Chairman, President, and CEO, and Nancy Hedges, Chief Financial Officer of Astronics. Thank you for coming, guys.

Executive Peter Gunderman (Chairman, President, and CEO): Thanks for having us. You're right. It's good to save the best for last.

Analyst Gautam Khanna (TD Cowan): I was just going to ask Peter and Nancy to just give us a very quick kind of introduction of the company so that everyone knows what Astronics does, and then we'll go right into Q&A.

Executive Peter Gunderman (Chairman, President, and CEO): A quick overview. We're an aerospace system supplier. We're 90% aerospace. We do have a second segment that we call test. But most of our investors think of us as an aerospace company. We act like an aerospace company. We are 70% commercial transport and 10% military, 10% business jet, 10% test. That's a simple way to look at our company. And if you look back at our financials during the pandemic, that helps explain the drastic movement in our financial results. I mean, we got hit really hard by the pandemic. With that 70% exposure, we've also come storming back. This year, we're expecting top line revenue pushing a billion dollars. We just reported, or we pre-reported the fourth quarter. That was a record quarter for us. We just feel like 10% to 15% growth and improved income statement results in 2026 are so close we can taste it and feel it. It's going to be a good year for us. In terms of product lines, approximately half our business is derived by in-flight entertainment or connectivity. It's what passengers do in the cabins of commercial airplanes. Everybody's carrying electronic devices.

Everybody wants to be connected and entertained. And we provide a wide range of products and enabling technologies to make that happen. We work with 200 some airlines around the world. We work with all the OEMs. We work with the big connectivity companies and the entertainment companies. We're kind of a nose to tail hardware company in that space. We also have a lighting strategic thrust. So exterior, if you look at airplane lights out on the tarmac or flying by at night, you see the red light, the green light, the flashing white lights. In the cabin, you have reading lights or emergency escape lights, area lights, certain signage, and in the cockpit, of course, there's all kinds of pilot interface products that allow control of the aircraft. We're active in all those areas. We're actually one of the world's largest aircraft lighting companies right now. And then a smaller product thrust, but one that's getting a lot of attention, is what we call flight critical electrical power. So this is not a passenger amenity, but it's the basic electrical system that drives and powers the aircraft.

We're specialists in small aircraft, not big ones, and we employ some very modern technologies or advanced technologies, specifically electronic circuit breakers and high reliability generation machines. So instead of traditional wound electric motors, they're actually permanent magnet or induction based. And as a result, we've carved out a really unique position. We started in business jets. We're moving into military. The FLARA program, MV75, is one of our biggest opportunities. We're really punching over our weight on that program as a supplier to Bell, and it's going to be one of the largest shipsets or the largest shipset our company's ever had. And additionally, as it turns out, in today's world, with all the interest in drones and CCAs in particular, not the small ones but the bigger ones, our system is ideally suited for that kind of aircraft that's autonomous or remotely piloted. Because you don't have a thermal switch. You have an electronic switch, which can be controlled remotely. So we're actively involved in that space. And also eVTOLs.

So any kind of small aircraft, the flight-critical electrical system is something that we have a pretty exciting value proposition for. Our test business, just real quickly, it's a 70 or 80 million dollar business. It has been a struggle. We've done a lot of cost cutting. We have it contributing now, and positively, so we think we're in a good spot, and the great hope there is a radio test program for the US Army. It's like a 215 million dollar IDIQ that we expect to turn on sometime yet in the first half of 2026. So that should layer on $40 or $50 million a year of profitable business on top of an $80 million base. Should be a good story. So a lot of tailwinds as we move into 2026, and we're pretty excited about it.

Analyst Gautam Khanna (TD Cowan): Is that enough?

Executive Peter Gunderman (Chairman, President, and CEO): Yeah, that's perfect. No, it's a great overview. You did mention that you guys pre-announced Q4. Maybe if you could just talk through what drove the better results, both on sales and EBITDA. What came in better than expected?

Executive Peter Gunderman (Chairman, President, and CEO): I don't think we feel like anything came in better than expected. It's just, it's a kind of a continuing trend. You know, again, we bottomed out at 445 million in 2021. And, you know, we have bounced back with some years, I think we averaged like 18% growth up until 2025. 2025 was a slower year, 8% growth or so, but a strong year of fine-tuning the cost structure and getting margins where we want them. So the fourth quarter saw just a continuing build trend. It was a record quarter for us. And of course, volume, more than anything, drives bottom line results. So we typically say that we can expect like a 40% marginal contribution on incremental revenue dollars. So when you, I think our first three quarters averaged like 210, 210 million. We came in, much closer to 230 or 240 in the fourth quarter. So we think that's a new neighborhood for us, and it provides a good base as we get into 2026.

Analyst Gautam Khanna (TD Cowan): It raises a question on visibility. Walking into a quarter, how much kind of books and ships in the same quarter, do you guys have, I'm just curious, like how the backlog actually converts?

Executive Peter Gunderman (Chairman, President, and CEO): Yeah, I don't have that number off the top of my head, but I know about 75% of our revenue will ship within a year.

Analyst Gautam Khanna (TD Cowan): Within a year, yeah. So there still is a fair amount of book and ship business.

Executive Peter Gunderman (Chairman, President, and CEO): Because it's interesting you walked into Q4. Maybe you guys knew it was going to be better than what the guidance was. But your point is it wasn't particularly surprising. It wasn't like there was a surge of orders or something weird that was unexpected. If you look back at really our last probably six, seven quarters, ever since the supply chain kind of quieted down. And, you know, OEM production rates stabilized and started to increase. We've actually beat our guidance pretty regularly or been right at the high end or slightly beyond. And fourth quarter was kind of another one of those, but just at a higher level.

Analyst Gautam Khanna (TD Cowan): And you're not seeing any sort of pull forwards or anything weird around tariffs or anything else? There's no comp issue as we move into 2026. I mean, he guided 10% to 15% sales growth. 40% contribution margins are better. So if there is any, it's not obvious to us on the outside. I'm just curious, was there any headwind? Tariff headwind?

Executive Peter Gunderman (Chairman, President, and CEO): Definitely was, I mean, tariffs don't help. No, I agree. They hurt. And if they're ever applied kind of reciprocally by other countries on us, it's going to be another story. But... No, there was nothing kind of fluky in it. We're not pulling stuff in. Lead times are coming down a little bit, so that makes our backlog look even better because otherwise, as lead times come down, backlog should shrink a little bit. We are, again, at a record backlog even with normalizing lead times, so we're pretty happy about that.

Analyst Gautam Khanna (TD Cowan): And what's allowing the lead times to compress?

Executive Peter Gunderman (Chairman, President, and CEO): Supply chain. Supply chain's better.

Analyst Gautam Khanna (TD Cowan): And where's the biggest improvement been?

Executive Peter Gunderman (Chairman, President, and CEO): Electronics out of Asia.

Analyst Gautam Khanna (TD Cowan): You guys have described of the 70% or so of sales that's commercial air transport, half is new line, off the line, new production, half is retrofit. Can you talk a little bit about the retrofit business and what you're seeing there and how do campaigns, how do you get, how do you work with the airlines to make it happen? How far in advance do you typically do so?

Executive Peter Gunderman (Chairman, President, and CEO): I think there's an increasing recognition on the part of the airlines that in-flight entertainment and connectivity are absolutely critical. Not flight critical, but passenger critical. There was a time when airlines, especially in the narrow body world, felt like we don't fly that far, people don't need to be on their phones or computers or whatever, and it's heavy and it's expensive, but pretty much today there's widespread recognition that actually people want to be connected, even on a short little flight, and they want to get off the airplane with a fully charged device. So power is important. And so the interesting thing about our business is that if you think of the life cycles of in your average consumer electronics, they're relatively short compared to what we see in the aerospace industry. You put a brake system, say, on a 737, it's largely going to be there for 30 years. You might rebuild it, repair it, refurb it, but you're not going to change it.

What's interesting about our business is that a new 787 rolling off the production line has a certain... is configured with a certain in-flight entertainment system, that in-flight entertainment system is not gonna be there for 30 years. It might be there for five or seven. And so the retrofit opportunity is huge for us because there's constant pressure on the part of the airlines to keep up with consumer electronics. And that's everything from power to WAP protocols to satellite constellations, it's a constant upgrade opportunity for a company like us. The way to think about it is people want to be able to do in airplanes what they can do in their living rooms. And the reality is that the airplane's always going to be behind the times. So there's going to be constant pressure to upgrade those systems.

Analyst Gautam Khanna (TD Cowan): And so do you work directly with the airlines? Do you work with seating manufacturers? I'm just curious, what's your access to market?

Executive Peter Gunderman (Chairman, President, and CEO): We sit right in the middle of the cabin in many respects. We work with 200-some airlines around the world because they always want to know what the next thing's going to be, and they, in some cases, buy directly from us. We'll work with the in-flight entertainment companies. The most prominent ones are Panasonic and Talos and a saffron company that just went private or was spun off. And we also work with connectivity companies. So think of Viasat, MRSAT, Intelsat, people like that. We have to be offerable at Boeing and Airbus, so we have full ranges of offerability there. And then we have to, you're right, the seat companies are very important too. If you're a company that designs and develops seats and you're going to go through all that expensive crash testing, you want to make sure that you can accommodate our hardware because we have such high market share in many things. So we work with them. We don't necessarily sell to them very often, but if you walk around an interiors show, for example, you'll see a lot of different seats. And if you look underneath or you look through the details, you'll see a lot of Astronix equipment in all the different booths because they want to demonstrate that they know how to work with our system. So we're kind of right in the middle of everything there.

Analyst Gautam Khanna (TD Cowan): And so does the retrofit side of the business look pretty strong in 2026 and beyond?

Executive Peter Gunderman (Chairman, President, and CEO): It correlates with airline profits, and airlines have generally been starting to make money, and they've been pulling a lot of airplanes that were parked in the desert. Those all had to be retrofitted. We view it as a pretty consistent part of our business these days. We say 50-50, 50% line fit, 50% aftermarket or retrofit. It's kind of the same sale, by the way. Most companies in the aerospace industry think of aftermarket as a margin opportunity. For us, it's kind of the same sale. It doesn't matter if it goes aftermarket or line fit. It's generally the same product being used the same way by the same customers.

Analyst Gautam Khanna (TD Cowan): Gotcha. And actually, it's interesting because you guys have talked about the difference between wide-body aircraft penetration opportunities for in-flight entertainment versus narrow-body. Could you give the audience a little bit of flavor on how those are different?

Executive Peter Gunderman (Chairman, President, and CEO): The big difference is seat back displays. I mean, a wide body airplane, pretty much every seat of every airplane built over the last 10 plus years has a screen in the back of every seat. Narrow body, and they also have streaming content, they also have satellite connectivity of some sort usually. Narrow body is much more limited. New aircraft being built generally have streaming content and maybe some type of satellite connectivity built on. 60, 70% have power for the passengers, but the installed base around the world is much lower than that. And so there's a big aftermarket opportunity as airlines increasingly outfit or their installed base of aircraft, which is something we're actively involved in. And that's part of how we get 50-50. So there's a lot of activity both in ramping production rates, Boeing Airbus, narrow body, wide body, but also in the aftermarket, especially in the narrow body world.

Analyst Gautam Khanna (TD Cowan): That makes sense. One of the things that people sometimes ask us is Starlink is becoming a bigger player in Wi-Fi on aircraft, like United talks about it, what have you. Do you guys, how do they play into this ecosystem, and how do you play with that?

Executive Peter Gunderman (Chairman, President, and CEO): So let me broaden it out a little bit and talk about LEO, Low Earth Orbit, instead of Starlink specifically. And it's another example of that constant technology churn, I'd call it. Over the last decade, maybe a little bit longer, the prominent pioneering connectivity technology was air-to-ground, a company called GoGo, which is now, well, Intelsat or SES. And then it went to geostationary or geosynchronous satellite technologies, KU first and then KA, and now LEO is on the scene. We don't fly satellites and we're not really active in antenna technologies. We do stuff in the airplane and the stuff in the airplane is kind of the same. It all has to be there regardless of what the connectivity technology is. So we have found a way over time to transition from ATG familiarity and involvement to KU, to KA, and I'm quite confident that Leo will be more of the same. As far as the market dynamics, you're right. Starlink has a lead, and Starlink is making a lot of waves, but they're not the only ones involved. Telesat, Utilsat, Amazon is developing a network. We expect it's gonna become a more competitive landscape in the very near future. But to your point, it doesn't really matter. We can work with any of them or all of them. And again, our connections with the airline can be very helpful also in navigating that changing technology because we know what they're going to do well in advance.

Analyst Gautam Khanna (TD Cowan): You mentioned the retrofit cycles tend to be five to seven years. We've seen just in your phone example, the old plugs, I don't know what the heck they call them now, it's USB-C. Is that one of the triggering events for this kind of retrofit cycle right now is upgrading the power outlets themselves?

Executive Peter Gunderman (Chairman, President, and CEO): It's a great example, yeah. We actually, we developed that technology way back probably 25 years ago. And it was originally DC only, because the FAA was reluctant to let AC be in the cabin of an airplane, although we have AC in pretty much everywhere else. And eventually we got there, so it was 110 volts AC. And then it was USB type A, and most recently USB type C. And I will predict boldly here that you're going to see another evolution coming forward, which will be wireless charging in the cabins of airplanes. You're already seeing it if you fly international first class in some airlines. But the magnetic back might enable the mounting of a phone on the seat ahead of you so you can charge and stream content like a seat back display, but it's not a seat back display.

Analyst Gautam Khanna (TD Cowan): And is that something you guys are already kind of working to address?

Executive Peter Gunderman (Chairman, President, and CEO): Maybe.

Analyst Gautam Khanna (TD Cowan): Okay. That's fine. No, it's interesting.

Executive Peter Gunderman (Chairman, President, and CEO): We are actively involved.

Analyst Gautam Khanna (TD Cowan): And I imagine the customers are bringing you along with them. You're working with them to do this.

Executive Peter Gunderman (Chairman, President, and CEO): Absolutely. It's not speculative. Absolutely. No. Part of what we do is act as a liaison between the consumer electronics industry and the airlines. And so we're very much up to speed with what is happening with consumer electronics, and the airlines have learned to come to us to help them anticipate what the next wave of technology is going to be and what they should look out for and try to integrate.

Analyst Gautam Khanna (TD Cowan): I know we, I didn't want to skip over FLARA because that program seems to be, the MV75 seems to be accelerating, it appears. And if you could talk a little bit about how that impacts Astronics and when. How should we think about the ramp on that program?

Executive Peter Gunderman (Chairman, President, and CEO): It's a huge program for us. Our ship set content is still being developed. We're doing the entire electrical distribution system after the generators, before the end-use systems on the aircraft. Bell has been a good, solid, long-term customer of ours. I talked very briefly about the technology that we employ for small aircraft. We did their 525 first. We did the 505 second. We ended up on their FARA entry, which is no more. And then FLARA. And they kind of use us as their outsourced electrical engineering department. It's an example of how in this industry, if you do a good job for a customer, they tend to be pretty loyal. The FLARA aircraft is very electrically intensive. It's being designed for a wide range of missions. And our product ship set, while it's still being negotiated, I'm suggesting that people model it in at a million dollars a ship, which is very significant for a company our size. Production rates are all over the map. Nobody necessarily knows. The number 1,000 seems to be a low estimate that people use. 2,000 seems to be a more common estimate.

We are well along in our development process at this point. It's, for us, a total of about 100 million, let's say, and we're probably a third through it. At this point, we expect to wrap it up towards the end of 2026 and into 2027. And then there's an open debate about accelerating that program and ramping it up, and you probably are as familiar with that as I am.

Analyst Gautam Khanna (TD Cowan): Yeah, no, I got you. Is there a big aftermarket opportunity on that program once it gets fielded?

Executive Peter Gunderman (Chairman, President, and CEO): That should be, yeah, absolutely. I mean, they're still building Blackhawks, right? They started that program in the 70s. We expect a similar production run and long use case with the FLARA program, and it ought to be a real game changer for our company.

Analyst Gautam Khanna (TD Cowan): Okay, and we didn't talk about general aviation, but what do you guys do there?

Executive Peter Gunderman (Chairman, President, and CEO): Lighting and flight-critical electrical power.

Analyst Gautam Khanna (TD Cowan): Okay, so that's what you're talking about. So Pilatus PC-24, Cessna Denali, Cicada Deher, what am I... Drawing a blank, but we do, again, if it's a small aircraft and they want to have an advanced electrical system, we're the ones who do that.

Analyst Gautam Khanna (TD Cowan): Gotcha. I wanted to just touch on M&A because last year you guys did a couple acquisitions. Could you talk about what the M&A strategy is? What are you looking to... What do you look for and...

Executive Peter Gunderman (Chairman, President, and CEO): We take an open book to acquisitions. We have bought companies for product line extensions. We've bought companies for customer relationships. We've bought companies for market share. And sometimes you buy a company and you know it's going to be a kind of a reboot and require a lot of effort. And sometimes you buy it and let it run. So we're open to all those kind of strategies. We have not been very active over the last five years during the pandemic. We didn't have the balance sheet to do it, frankly. And as we come out of it now, we've done some refinancing. Our balance sheet looks a lot better. So we're more capable now and we have our eyes open. But frankly, we're pretty convinced that the best thing we can do is focus on the opportunities that are right in front of us on our plate. And if we execute well, we'll create a lot of value there. And acquisitions are exciting. They're fun. They're also a little bit risky. So the last thing we want to do is distract ourselves with all the opportunities that we have.

Analyst Gautam Khanna (TD Cowan): Is the pipeline pretty full, though?

Executive Peter Gunderman (Chairman, President, and CEO): It's picking up. Yeah, I'd say it's picking up. I think that there were a lot of transactions on hold while the industry worked through the pandemic. So I think deal flow will start to pick up, yes.

Analyst Gautam Khanna (TD Cowan): Gotcha. Actually, it does beg the question on the balance sheet, and I did want to touch on this. Nancy, a little bit about the convert. So you originally had a convert, and that was, if you could talk about the genesis for why that happened, and then you refined the convert, which was a creative move, and if you could talk about that process.

Executive Nancy Hedges (Chief Financial Officer): Sure, so about a year or so ago, a year and a half ago, we have an outstanding patent litigation, and our attorneys were advising us we should prepare for potentially a negative outcome. So looking at our different funding, potential funding sources, we decided on a convert. We did a $165 million, five and a half percent convert. Subsequently, that ruling came in much better than was anticipated. Instead of $112 million that they were seeking, the award was $12 million. But ultimately, the conversion price of that original bond was about $23. We have blown past that. We also, so we decided to, as we continued to go past the conversion price, that bond was getting expensive to settle. So again, looking at our options that were available, we entered into a new convert, 225 million, 0% note. We bought back 80% of the initial convert. That eliminated 5.8 million shares of potential dilution to shareholders. And it lowered our average cost of debt. So the conversion price on that is $54, about $55, which, again, we've gone past that as well.

But this time around, we purchased what's called a capped call, which basically sets the conversion price functionally at about $83. So up to between that conversion price and the upper limit on the capped call, there's no exposure that would be covered by the capped call counterparties. So it's not dilutive to the shareholders unless and until our stock price exceeds that upper limit on the cap call.

Analyst Gautam Khanna (TD Cowan): Gotcha. And at that point, it sort of gradually becomes more dilutive.

Executive Nancy Hedges (Chief Financial Officer): Yep.

Analyst Gautam Khanna (TD Cowan): And are there any plans to deal with that convert? I mean, to deal with the dilution in any way proactively? Is there anything you can do?

Executive Nancy Hedges (Chief Financial Officer): We're not going to do another one. There's things we can do, but at this point, it's not an immediate priority for us. We're continuing to strengthen our balance sheet. We recently also entered into a new revolving credit facility with a higher limit. We're feeling pretty confident with our balance sheet right now. I would just add that on the second convert, we committed to paying back the coupon in cash. So there's no dilution. On the principal, yeah. On the principal. And it only is a possible dilution on the excess value over the $83 capped call price. And we can pay that back in cash, too. And so we have four years to figure that out. And it's a relatively low level of dilution compared to a full convert.

Analyst Gautam Khanna (TD Cowan): Right. Okay, that's actually pretty smart. One other thing I was going to get on, you'd mentioned it at the outset, which is a test system segment, which we didn't spend much time on, but the contract you were expecting or are expecting sort of what has been the delay? Cause you've had the equipment at the ready for a while and sort of what's the catalyst for that contract moving forward?

Executive Peter Gunderman (Chairman, President, and CEO): So the contract is basically to provide a test station to the US Army that would allow them to verify functional performance or diagnose faults in any of the 28 families of radios that they use. As you can imagine, the US Army has a lot of soldiers. The soldiers use pretty complex radios for coordination and communication when they go out and do their jobs. And they want to make sure that those things are working functionally. And they operate around the world. So instead of having a dedicated test capability for each family of radio, they want one that can do the whole job. The U.S. Army picked our system two years ago. Oh. Three years ago? I think four years ago now. A long time ago. And we developed it and rounded it out. And we've been waiting for a production turn on ever since. And I am very impressed with what our armed forces can do and quickly when they want to. They just don't always want to. So it's just been slow to take off. The previous technology that they standardized on was supplied by another company, and that system's obsolete.

It can't be supported, so they're cannibalizing those systems in order to keep the train rolling, so to speak. So there's clear demand and a requirement in the user community. We feel it's a matter of when and not if, and all of the kind of pre-production steps that have been required are largely complete or within sight. So it's really a matter of getting signatures and getting the authorization going. We thought last summer, last fall, that we'd be turned on by the end of the year. The government shutdown did not help us. And then everyone came back to work just in time to enjoy the holidays. So now everybody's back at the desk, and we're thinking we get turned on sometime probably early in the second quarter is what we're thinking.

Analyst Gautam Khanna (TD Cowan): Okay. Well, thank you very much, guys. I appreciate you participating in our conference again.

Executive Peter Gunderman (Chairman, President, and CEO): Thanks for inviting us.

Executive Nancy Hedges (Chief Financial Officer): Thank you, Peter. Thank you.