Astronics Corporation Aktie

Greetings, and welcome to the Astronics Corporation Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Deborah Pawlowski, Investor Relations for ATRO. Please go ahead.

Thanks, Joe, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call with me here are Peter Gundermann, our Chairman, President and CEO; and Nancy Hedges, our Chief Financial Officer. You should have a copy of our second quarter 2026 financial 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 likely 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 as at sec.gov. During today's call, we will have some non-GAAP measures that we'll discuss, 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 GAAP results. 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.

Thanks, Debbie, and hello, everybody, and welcome to the call. We're here to talk about our second quarter results and our outlook for the remainder of 2026. Nancy and I will do our usual back and forth and then open up the lines for questions.

In summary, the second quarter was very strong for Astronics. We set records all over the place for revenue, for operating profit, for bookings, for backlog and more. Our adjusted EBITDA was just shy of 20% of sales, which is a modern day high. It was a very good quarter from every angle, and we feel good about it. It also puts us in a great position as we enter the second half of the year. We have strong momentum and are raising our revenue guidance to $1.02 billion to $1.04 billion. We'll talk more about this at the end of our presentation, but we are excited to finally be crossing the $1 billion threshold.

Nancy will talk through Q2 numbers in due course. But first, I want to focus a little on margins. We've been working on our margin profile heavily, and we have made significant progress. Our adjusted EBITDA margin, for example, was in the low to mid-teens just 1 year ago in the first half of 2025 and practically all of 2024 for that matter, and now we are pushing 20%. There are a number of levers that we have used to accomplish this, and I'll discuss them one by one.

The first lever and arguably the most important is the strong market demand that we see for our products as evidenced by the bookings trends we have been experiencing. A few years ago, at the height of the pandemic, we averaged bookings of $100 million to $150 million per quarter. Since then, our bookings level has risen steadily, culminating in our Q2 bookings of $306 million, which is an all-time high. Indeed, over the last 4 quarters, our sequential booking totals have been in order, $210 million, $257 million, $290 million and now $306 million. Bookings can be lumpy, of course, and we can't count on that type of progression indefinitely, but the overall trend is prominent and unmistakable.

In our first quarter call, I discussed a range of factors driving our bookings. I'm not going to go into a lot of detail here to repeat all that. But to recap, they were: first, increasing aircraft production rates; second, airline passengers desire to be entertained and connected at all times; third, the growth of our flight critical power franchise for smaller and emerging aircraft; fourth, the trend towards high-end aircraft seating that uses our seat motion systems; and fifth, the expected growth in our test business based on the U.S. Army radio test program that we have been talking about for some time. Interested listeners who want to review that discussion to check out the transcript that's available on our website. Higher bookings, of course, leads to higher shipments and higher shipments leads to better overhead absorption and increased profitability. I have said many times in recent years that we were not sized to be profitable at the reduced revenue levels we saw during the pandemic.

Now we are growing into our cost structure and our income statement is responding well. In the second quarter, there were a couple of bookings that deserve special mention. The first was a $27 million booking for FLRAA MV-75 development work, which is a follow-on to a $57 million order we received back in 2025. We expect another relatively small order in early 2027, which should carry us to completion of the engineering development phase of the program. The MV-75 is the U.S. Army's planned replacement for the Black Hawk helicopter and promises to be the largest military program our company has ever seen. I don't intend to go into more details on it now, but I recommend that interested listeners who are unfamiliar do some research and look that one up. The MV-75 will be a big deal in our future.

The other significant booking in the quarter was the long-awaited production go ahead for our radio test program with the U.S. Army called 4549/T. The order was for $45 million and will cover deliveries over the next 18 months. We expect similar orders annually for the next 4 to 5 years under an IDIQ award we received back in 2024. The production award was not a significant factor to our Q2 results, but will begin to be so as production ramps up in the second half of this year. When it is in full swing, we expect margins in our test business to be comparable with what we get from our Aerospace segment today.

The second margin lever we have been using is pricing. About 1/3 of our volume involves deliveries that are tied to long-term contracts, typically with terms of 3 to 5 years. On these contracts, our pricing suffered when inflation picked up during the pandemic. Inflation has since cooled down generally, and we have been able to reprice most of the affected long-term contracts, which has certainly benefited our overall profitability. We estimate that we are still waiting to reprice about 1/4 of our long-term contracts, which will come due over the next 12 to 18 months. The majority of our business is shorter term in nature, and we have learned to price to value more than to cost, which has also driven increased profitability. We believe that the cumulative effect of pricing actions has been and will continue to be an important aspect of our margin improvement journey.

The third lever for discussion is organizational efficiency. And the point here is that we have suffered very high employee turnover during the pandemic at times approaching 20% in a year. High turnover meant that we had a workforce that was relatively inexperienced in their jobs, and that in turn hurt our efficiency and our quality. Today, our employee turnover rate has dropped to about half of what it was. And in many of our locations, it's well below 10%. As our workforce has become more stable, it has also become more effective and competent. I'm describing the well-known learning curve principle. And while it is hard to measure, we certainly see our workforce becoming more efficient and predictable, which helps deliver better margins.

The final lever with respect to margins that I want to discuss is structural to our organization, which some might call simplification or portfolio shaping, which we have done a fair amount of in recent years. As evidenced, we have shut down and consolidated 7 production sites in recent years and discontinued or limited a number of product lines and/or businesses. This activity helps us stay focused on the product lines and customers that matter to us the most. And there's more to do on this front. As our business accelerates and we continue to evaluate our market goals and competitive positioning, we will work to make sure our organization is structured appropriately to align with those goals.

So those are the 4 levers that are driving our improving margins, volume, pricing, efficiency and simplification. But what's exciting is that each of these levers has room to run. In other words, the actions we have taken continue to be active, and we expect will lead to further margin improvement in the coming periods. So we are not at the end of our margin journey at all, but methodically moving along the process.

Finally, before I turn it over to Nancy, there are a couple of other topics from our second quarter worthy of discussion. The first is the B share distribution that we did during the quarter, announced on June 1 and executed on June 29. It was a 20% distribution of B shares to all shareholders of record and was intended to reward shareholders and encourage long-term interest in the company. B shares have been an important part of our capital structure since the early 1980s. And because they don't trade, but are convertible to common at any time, the share count drops over time as investors transition their holdings. The recent distribution was to replenish and rebalance the share count to historical norms. We have done approximately 20 share distributions over the years, about half of which have involved B shares.

The final issue on my list is the decision by the U.K. Court of Appeals in our long-running patent dispute with Lufthansa Technik. This is a dispute that has been winding its way or maybe I should say, grinding its way through the courts in the U.S., U.K., France and Germany since 2010. We won in the U.S. and the matter there is closed and final. The U.K. was the second jurisdiction to hear the case, and we feel good about where that is headed. The damages case heard in late 2025 went our way, and this most recent ruling altered the original ruling for the better.

A final appeal to the U.K. Supreme Court is possible if the court agrees to hear it, which at this point is uncertain. There will be an appeal in France in October of a lower court's ruling in validating the subject patent, while Germany waits in the background. So the battle continues, but it is exciting to think that with a little luck, we may have line of sight to conclusion of the matter in the U.S., the U.K., if there's no appeal to the Supreme Court and France, if the lower court's nullification of the patent is upheld. All this could happen by the end of the year.

With all that being said, I'll turn it over to Nancy now to review second quarter accounting results. Nancy?

Thanks, Pete, and good afternoon, everyone. I'll walk through our second quarter results in more detail, provide color on our product lines and segments, review cash flow and the balance sheet and then close with our outlook.

As Pete noted, the second quarter was an important proving ground for the profitability of our operating model and the organization delivered. Sales reached a record $260 million, up 27% from the prior year period. Higher volume, improving productivity and continued execution across the organization drove significant margin expansion, record operating income and an adjusted EBITDA margin of 19.8%. We also delivered record bookings and backlog, providing strong visibility as we move through the balance of the year. Gross profit increased to $86.9 million or 33.4% of sales compared with $52.8 million or 25.8% of sales in the prior year period. The 760 basis point expansion reflects higher volume, improved productivity and a $2 million IEEPA tariff refund recognized during the quarter. The refund contributed about 70 basis points of margin and somewhat offset what we now view as an ongoing tariff run rate at current volumes of about $3 million to $4 million per quarter prior to any mitigation.

Also for context, the prior year quarter was adversely impacted by a $5.8 million charge associated with aerospace simplification initiatives and a $6.9 million impact from unfavorable revisions to estimated cost to complete certain long-term mass transit contracts in our Test Systems segment. R&D expense was $10.9 million, down modestly from $11.6 million in the prior year quarter. We continue to expect R&D to run roughly about $10 million to $12 million per quarter. However, it can fluctuate based on project and customer activity. SG&A expense was $35.6 million, down about $900,000 year-over-year and declined to 13.7% of sales from 17.8%. Lower litigation-related expense was largely offset by higher wages and benefits, higher incentive compensation costs associated with improved profitability and incremental expenses related to BMA, which we acquired last October. Income from operations was a record $40.5 million or 15.6% of sales. Given the factors affecting last year's quarter, the comparison on a GAAP basis isn't truly meaningful.

Looking sequentially, though, operating income increased $13.2 million over our first quarter this year, driven by the $29 million increase in revenue. I'll note, though, that the second quarter did have the benefit of the $2 million tariff refund. On an adjusted basis, operating income was $43.2 million and adjusted operating margin was 16.6%, which compares with 8.9% in the prior year period. An approximate $800,000 or 24.7% decline in interest expense reflects the lower interest rates following our September 2025 refinancing activities. Tax expense was $2.8 million in the quarter, reflecting the benefit of a partial reversal of our valuation allowance as well as the expected expensing of R&D costs that are -- that's now permitted under the new tax law.

Based on our current outlook, we expect to release the portion of our valuation allowance associated with deferred tax assets that are expected to be realized from our 2026 income. The benefit of that release will continue to be reflected in normal course during the second half of 2026. As we move through the third and fourth quarters, we'll also continue to evaluate the potential for an additional valuation allowance release of approximately $40 million to $50 million. Any such release would be recognized in the period when we have objectively verifiable evidence of sufficient future taxable income beyond 2026 to support realization of those deferred tax assets.

Our strong performance in the quarter dropped through to the bottom line with net income of $35.1 million or $0.75 per diluted share and adjusted net income of $32.6 million or approximately $0.70 per diluted share. The weighted average share count for all periods reflect the 20% Class B stock distribution that was done in June. Adjusted EBITDA was $51.5 million, more than double the $25.4 million reported in the prior year quarter and up 36% or $13.6 million over the trailing first quarter. Adjusted EBITDA margin also expanded 340 basis points compared with the first quarter to 19.8% of sales. This performance reflects the operating leverage in our model as volume grows, along with the ongoing benefits of our productivity and simplification efforts.

Turning to Aerospace. Segment sales were a record $237.3 million, an increase of $43.7 million or 22.6% from the prior year period. We had growth across all our markets, which include commercial transport, military aircraft and general aviation. I'll review our major product lines, starting with our largest product category, in-flight entertainment and connectivity, which had sales growth of 19% to $126 million. Growth was driven by continued demand for our connectivity and passenger power products, including strength in our commercial transport and VVIP applications.

Planning and Safety sales increased 5.5% to $59.2 million. This product line continued to grow on solid underlying demand from improving aircraft build rates. Flight critical electrical power sales increased 49.4% to $23.7 million, reflecting stronger demand for airframe power products, particularly in the military aircraft market. With the finalization of the engineering contracts for the MV-75 FLRAA program, we're expecting to achieve approximately $35 million in revenue on that program in 2026. Heat Motion sales increased $12 million to $22.2 million. The increase reflects strong market demand as well as the $5.9 million contribution from the BMA acquisition.

Aerospace segment operating profit was $48.3 million or 20.3% of sales, measurably improved over $18 million or 9.3% of sales in the prior year quarter, which granted did have a lot of noise. The improvement in profitability reflects leverage on higher volume, improving production efficiencies, the $2 million tariff refund, lower litigation-related expense and the absence of current year simplification charges. The strong operating leverage inherent in the Aerospace business is best analyzed sequentially, where operating leverage, excluding the tariff refund benefit was 47%. On an adjusted basis, Aerospace operating profit was $50.7 million and adjusted Aerospace operating margin was 21.4%, an increase of 510 basis points from the prior year period. Aerospace bookings were $243.1 million for a book-to-bill ratio of 1.02. During the quarter, as Pete mentioned, the contract for the current engineering phase of the MV-75 FLRAA program was finalized, resulting in a $27.4 million booking. Aerospace backlog ended with the quarter at a record $657.2 million.

Turning to Tech Systems. Sales were $22.7 million, up $11.6 million from the prior year period. The comparison also reflects the $6.4 million reduction in the prior year revenue, resulting from revisions to estimated cost to complete certain long-term mass transit contracts. Segment operating profit was $600,000 compared with an operating loss last year. Current quarter profitability was impacted by approximately $4.1 million of 0 margin revenue related primarily to raw material purchases for the U.S. Army and U.S. Marine Corps radio test programs. Because those programs are revenue recognition over time, we recognize revenue as costs are incurred rather than upon shipment.

Likewise, margin on that raw material-related revenue will be recognized as production progresses through the remainder of '26. While ramping, the program won't necessarily demonstrate the solid margin profile of the program, but should begin to be realized as we exit the year. Test Systems bookings were $63.1 million for a book-to-bill ratio of 2.78. That included the $44.7 million order from the U.S. Army initiating full rate production for the 4549 program, which is expected to support deliveries over the next 18 months. Test Systems backlog ended the quarter at $123.3 million.

Turning to cash flow and the balance sheet. We generated $30.1 million in cash from operations during the second quarter, reflecting higher cash earnings, partially offset by higher working capital requirements, including inventory to support our expected growth. Capital expenditures were $5.7 million in the quarter and $16.9 million year-to-date. We continue to make the necessary catch-up investments in the business, including the consolidation of operations and capacity improvements at our Seattle facility. We continue to expect full year CapEx to be in the range of $40 million to $45 million with the Seattle consolidation, which is concluding here in the third quarter. We expect to be free cash flow positive for the remainder of the year.

Long-term debt decreased by $24.1 million from year-end to $310.3 million at the end of the quarter. Our capital priorities are internal investments and debt reduction at this time. Although acquisitions, if the right fit and price are not out of the question. We believe we have the financial flexibility with our available liquidity, which was $253.2 million at quarter end. We also continue to advance our global ERP implementation. Through the first half of the year, we incurred approximately $700,000 in incremental operating expense and capitalized approximately $4 million in costs related to the project. Visibility on our spending on the project is pretty straightforward. You can find the capitalized amount on the cash flow statement under cloud computing implementation costs, and we adjust out the external expenses from adjusted EBITDA.

Turning to our outlook. I'll briefly summarize what we expect for our third quarter. We expect third quarter sales to be in the range of $265 million to $275 million, which would represent another quarterly sales record. We expect fourth quarter revenue rate to improve modestly from there. Regarding margins, the second quarter demonstrated progress toward our high teens adjusted operating margins. We'll benefit at some point from the estimated $6 million to $8 million of future IEEPA tariff refunds, though timing of any receipts remains uncertain. Continued volume leverage and the addition of the U.S. Army radio test program should contribute while mix can add some variability as well. We're pleased with the progress made during the first half of the year. Our focus remains on executing against the opportunities in front of us, supporting growth while maintaining the discipline necessary to sustain strong profitability and cash generation.

And with that, I'll turn it back to Pete for final comments.

Thanks, Nancy. I'd just like to reiterate what Nancy said about the second half of 2026. We're pleased with our second quarter results and with the first half for that matter, and we are entering the second half of the year with lots of momentum. Our forecast has us crossing the $1 billion threshold for the first time, and we look forward to living on the other side of that line.

And that ends our prepared remarks. Joe, we can open it up for questions now.

[Operator Instructions] And our first question comes from the line of Greg Palm with Craig-Hallum.

This is Jackson Schroeder on for Greg Palm. First off, congrats on the quarter, more impressive results. I just wanted to see if you could start out on what really surprised you in the quarter relative to when we were going into it, whether that be end markets, customers, I mean, whatever segments you want to say, but we really just surprised in the quarter.

I don't know if there were any real surprises. We went in with a certain forecast. And actually, what has become kind of routine is we beat our internal forecast. I think I didn't do this in preparation for this call. But I think if we go back and look at like the last 6 quarters or so, every quarter, we come in right at the top of the range or a little bit beyond it. So I wasn't very surprised by that at all, nor was I surprised by the 2 big bookings that we talked about. We've been anticipating the radio test booking for the U.S. Army forever. I mean we thought we were going to get that last fall and then a bunch of things happened like the government shutdown, so on and so forth. But momentum was building, and we were trying to lean into that a little bit in our first quarter call and it actually came up like, I think, the next day or pretty close to it.

And then the -- similarly with the FLRAA MV-75, that program is getting a lot of attention in our company. It's going very well, and we have a very constructive working relationship with Bell. We were expecting, though that, that would happen a little bit sooner than it did. So we -- again, big orders tend to take longer than you would think originally. But beyond that, I can't say there was anything that was a real big surprise. I mean, like I spelled out in my little speech here, higher volume is a major driver for higher margins. And we've been seeing our volume increase. And as our volume increases, our margins increase. So it's a good virtuous cycle there.

Nancy, I don't know if there's any surprises you'd like to point to.

No, I agree with that. It's just general strength in the industry.

Perfect. And then maybe if you could talk more on like these emerging aircraft trends, thinking eVTOLs, some of the drones and other opportunities in defense. How are you guys kind of playing into that? Is there anything from like a product development perspective you can touch on and where you kind of see for demand in there?

Yes. I don't know if there's much we can say that we haven't already said. We are quite involved and invested in the eVTOL market and some of our technologies, especially on the power generation side, play very nicely in the drone unmanned or autonomous aircraft side. Those programs are progressing. eVTOL aircraft are moving closer to certification and actually flying missions. So we're excited about those things. We do not have a big commitment to those in our 2026 forecast. It's more of an if come, I would say, in 2027. So we're going to start our 2027 ground-up planning over the next couple of months. And I think it will be -- there'll be a bigger role for those programs in 2027. But at this point, it's still pretty preliminary, and there's not much more to say than what I just said.

The next question comes from the line of Jon Tanwanteng with CJS Securities.

This is Will on for Jon. How should we think about your Test segment margins as you ramp up production for the Army radio test business over the next 2 to 3 quarters?

Well, I'm pretty optimistic about it. So I think you should be, too. It's a really well-priced program, and we're going to get into it as quickly as we can. However, we're going to walk before we run. So the exact pace of implementation is a little bit hard to predict. I think it's safe to say that as we exit the fourth quarter, we'll be at full run rate production. And that -- once we get into full run rate production, that $44 million order should be -- should last about a year of effort. So depending on how quickly we can accelerate and get going in the third quarter here and the fourth quarter, I expect there will be good it will reflect well in our financials.

Once we're in full rate production, we are expecting that the margin profile in our Test business should start to approach what we routinely get out of our aerospace business, maybe not up at the 20% EBITDA level, but pretty close. So we'll know for sure as that program ramps, and we'll be sure to talk about it on these calls. I think by the time the fourth quarter is done and we're moving into the first quarter, we'll have a really good idea of where that's going to end up.

Nancy, would you say anything different?

Yes, I would agree with that.

That is very helpful. And just one more for me. Can you talk about the transition to LEO satellite connectivity and how you're seeing that play out in your markets and opportunity set?

I'm optimistic about the transition to LEO. There's not much I can say about it today, but we are working the situation pretty hard. The short-term impact, though, is disruption for some of our GEO customers and GEO programs. So it's probably worth pointing out that parts of our business, I mean, we're doing pretty well overall, but there certainly are parts of our business that are a little bit under the weather and the GEO part of our business is one of those. Think of it as maybe a $60 million piece of business at this point on an annualized basis. But I think the opportunity that's out there for LEO for us more than offsets the short-term pain that the GEO market is experiencing. So not much official we can say today, but we are working it hard, and we're optimistic about the prospects.

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

I had a couple of questions. First, curious on your pricing comment. How much of that has already manifested in -- of the stuff you repriced in the Q2 numbers? And should we think that in the second half, we're going to have higher pricing than what was experienced in the second quarter? And then I have a follow-up.

I would say not materially, but I think what you see now is what we're going to get with respect to pricing. The answer to your first question is a little bit hard to quantify. But I guess our feeling is that we're like 75% or 80% of the way through the big price adjustment journey that we were on as a result of the inflation that hit during the pandemic. But there is still more to go. And over the next 12 to 18 months, the remaining part of our long-term contracts should be renegotiated. That will be helpful. And we do have a fair amount of our business that is more short-term oriented. So there is pricing flexibility there in the sense that you don't get locked in long-term pricing. So if we get a disruption on the cost side, certainly, we can adjust there more quickly, whereas the long-term contracts are more difficult to manage in a changing environment. So I feel pretty good about where we are. A year ago, it was much more of a challenge. Two years ago, it was a real problem. I think we feel like we're on the other side of the -- near the end of the tunnel with respect to pricing now.

That's helpful. And then just curious about your expectations for second half mix. if anything? I know you called out the $2 million refund, but anything else in kind of the margin expectations in the second half that you could give us and then what it is going to be?

And the big thing there is the radio test program for the U.S. Army that we were talking about, just layering in that in the second half should pretty significantly change the margin profile in our test business, which has been hurting us more than helping us over the last few years. So that's the big mix issue. There will be other puts and takes in the aerospace part of our business. But at this point, I don't feel like there's anything that's too noteworthy that we know for sure that we can talk about.

Okay. And last one on MV-75. How much visibility do you have with Textron the prime on what you got because I know they have the funding concern if it's not done by September 30. But just do you guys have orders beyond September 30 to work on it?

We do -- we have orders, and we do work very closely with Bell. I can't say that we know anything about the funding status that's not generally known out there in the world. They've done a pretty good job, in my view, of being transparent to the extent they can about the situation. But they've been covering us. And so we feel good about that. We also recognize that our portion of the development cost of this program is probably pretty small compared to some other companies. So maybe we're not involved in some of the discussions that other companies are. I can't tell you that for sure. But we're -- overall, we remain highly enthusiastic about that program. We feel like our part of it is going very well, and we get supported well by Bell. So it's all good.

[Operator Instructions] The next question comes from the line of Alexandra Mandery with Truist Securities.

Great results. So how is the acquisition of BMA performed relative to your expectations? And what is your appetite for M&A going forward? Are there any capabilities you look to add or geographies to expand into or increase content in?

We're pretty pleased with the BMA acquisition so far. It's a smaller operation, and it was part of a private company. So bringing it up to public company standards in terms of accounting and the U.S. GAAP rules are quite different than the company is located in Germany. So it's used to -- private company German accounting. So there's some transition there. It also had a parent that was involved in the German automotive industry primarily, but also some other industrial areas, and that's been a difficult environment for a while. So they were a little bit capital starved. We're fixing that. We think they have good technology, good products, good relationships with customers. They're not as profitable as the rest of our aerospace business, so we're going to work on that. That's another part of the long-term contracting challenge with pricing, frankly.

But I'd say, overall, it's going pretty well. We have it reporting through our French operation. Those 2 companies were competitors. Now they're learning to work together. And that seems to be going pretty well, too, both our French team at PGA and Chateauroux and the BMA group at Lake Constance want to make that work. So we're encouraged by how that process is playing out also. As for your second question, we have done a number of acquisitions over the years. We've been pretty quiet on acquisitions over the last few years during the pandemic because our balance sheet, frankly, wouldn't allow us to do much, and there wasn't much to do. I mean there wasn't a whole lot of movement in the commercial aerospace market in terms of M&A activity during that period of time. We think our balance sheet is largely fixed now, and we think that the M&A market is opening up. So we're seeing a steady flow of opportunities.

And we are looking, but we are also mindful that we have just a great opportunity set ahead of us in terms of generic internal growth. So our first priority is definitely to execute on those programs. If M&A comes up, we'll take a look. I think we're capable and qualified to do that at this point. But that isn't -- we're not a company that's going to depend on M&A for a big part of our growth opportunity going forward. That's more -- I would call that more incidental if and when it happens. Does that make sense?

No, totally. And I appreciate that color. And I guess one follow-up. So you mentioned labor has improved and there are continued opportunities for improvement. What are the efforts you've taken to retain labor thus far and finding new labor?

Alex, I don't know if it's you or it's me, but that was really choppy, and I couldn't really hear you.

Hopefully, you can hear me a bit better now. Just wanted to see if you had any color on the efforts you've taken to retain labor and finding new labor. Joe, is there any way you can clear her line more?

Look Joe, is there any way you can clear her line more.

Not sure about it, Alexandra's question was is there any way you retain labor or?

Okay.

Now, you're choppy, too, Joe. So maybe it's on our line.

Alexandra, can you repeat your question one more time?

Yes. I just wanted to see if you guys had any color on the efforts you've taken to retain labor thus far and finding new labor.

We're going to try to call in our cell phone momentarily . See you in Texas.

Okay. Ladies and gentleman, please stand as we are trying to fix this technical issue. Thank you. Okay, everybody. The speakers are back in. Alexandra, if you're still there, can you restate your question, please?

Hopefully, you guys can hear me now. I just wanted to see if you had any color on the efforts you've taken to retain labor thus far and finding new labor.

Sure. And we can hear you, Alex. Sorry about that. Yes, it's interesting. as kind of an armchair economist. We have -- we're a smaller company, but we run operations really all across our country, Seattle, L.A., Florida, New Hampshire, New York, Chicago. And it's interesting that there are pressures in different places at different times. But for the most part, they all -- the markets all kind of moved together. So during the great resignation during the pandemic, we had trouble hiring everywhere. And today, the labor market has, from my perspective, kind of bounced back and people have become much more available, including a lot of people who left who decided maybe the grass wasn't greener on the other side and are interested in coming back.

So at this point, we don't feel that hiring is a major issue. There are retention challenges in the sense that especially for certain production-related jobs, if you have 10 openings, you might have to hire 14 people to get 10 that stick. So our turnover metrics still don't look the way they did prior to the pandemic. But we went from 3,000 people down to 2,200. And as you climb back up to 3,000, instead of hiring 800, you got to hire, I don't know, 1,200 or something to make that work. So it's never easy. It's always a challenge, but I would say that we feel much better about labor availability than we did at any other time during the last 3 or 4 years.

Again, Nancy, would you change that at all?

No, I wouldn't.

Okay. That's what I like about Nancy. She very rarely changes what I say. So does that answer your question, Alex?

Yes. Perfect.

Thank you. Ladies and gentlemen, this concludes question-and-answer session, and this also concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to the Astronics Corporation First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Deborah Pawlowski, Investor Relations for Astronics. Please go ahead.

Thanks, Rochelle, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call with me here are Peter Gundermann, our Chairman, President and CEO; and Nancy Hedges, our Chief Financial Officer. You should have a copy of our first quarter 2026 financial 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 as at sec.gov.

During today's call, we will have some non-GAAP measures that we'll discuss, 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?

Thanks, Debbie, and hello, everybody. Welcome to the call. We're here to talk about our first quarter results and our outlook for the remainder of the year. Nancy and I will do our usual back and forth and then open up the lines for questions.

In summary, the first quarter, we feel was a strong start to the year for Astronics. Revenue of $230 million was at the high end of our guided range and our second highest quarterly total ever, second only to the previous quarter, the fourth quarter of 2025. The strong volume, combined with a range of improvement initiatives we have put in place across the business resulted in solid margin improvement compared to the year ago quarter. I'll leave it to Nancy to talk through the details, but I will point out that our adjusted EBITDA margin of 16.4% compared to 14.9% in the comparator quarter shows continued improvement in this important metric.

I also want to call attention to our bookings, which were on the high end of $290 million in the quarter for a book-to-bill of 1.26. The bookings total was an all-time record. And even though we had a strong shipping quarter, resulted in a backlog of $734 million at the end of the quarter, which is another all-time record. We call attention to our bookings because it is a leading indicator of where our business will be going in the near to midterm. Bookings can certainly be lumpy quarter-to-quarter, but the overall trend, say, over a rolling 4-quarter period is telling.

Further, the strong booking performance in the first quarter was not the result of any large or unusual orders that boosted the total. Rather, it was driven by growing customer demand across our business, demonstrating strong market conditions for our full range of products.

Our strong start to 2026 has caused us to increase our expectations for the rest of the year. We're increasing our revenue guidance to the range of $970 million to $1 billion, up from the original range of $950 million to $990 million. The midpoint of the new range would be a 14% increase over 2025 sales. The high end of the range, which is certainly possible, would be an increase of 16%. This is all assumed to be organic growth.

As an aside, because I know we will get questions, we have seen no impact from the current slate of global geopolitical confrontations on our business, and I'm particularly referring to the Iran war. We have seen no war-related push-outs, delays or cancellations since hostilities began in late February.

We believe we are well positioned for a strong showing in 2026 and are benefiting from a wide range of factors that are driving us forward. I'm going to turn it over to Nancy now to cover some of the specifics of our first quarter results as well as the change to our reporting practice. But when I get the mic back, I'll briefly talk through the major market tailwinds that we are enjoying. Nancy?

Thanks, Pete, and good afternoon, everyone. I'll walk through our first quarter results in more detail, provide some color by segment, review cash flow and the balance sheet and then close with key financial priorities for 2026.

As Pete noted, Q1 was a solid start to the year with strong top line growth, meaningful margin expansion and record bookings and backlog that support our decision to raise the full year outlook. First quarter sales were $231 million, including $4.6 million from the BMA acquisition. Sales grew 12% from $206 million in the first quarter of 2025. Growth was driven primarily by strength in our Aerospace segment with continued robust demand in commercial transport, solid contributions from general aviation for VVIP projects and improving results in Test Systems.

Gross profit increased to $75 million or 32.6% of sales compared with $61 million or 29.5% of sales in the prior year period. The 310 basis point gross margin expansion was driven by higher volume, improved productivity and a $2.8 million cumulative catch-up adjustment on the MV-75 program, which added about 120 basis points of margin based on updated program estimates. These benefits were partially offset by a $1.7 million increase in tariff expenses. Last year's first quarter also included a $1.9 million negative revision on a long-term mass transit contract in Test Systems, which depressed the prior year margin.

R&D expense was about $12 million in the quarter, up modestly from $11 million a year ago, reflecting the timing of projects and consistent with our intent to continue investing in differentiated technology.

Selling, general and administrative expense decreased slightly to $35.8 million from $36.6 million and declined as a percent of sales to 15.5% from 17.8% in the prior year, reflecting operating leverage and substantially lower litigation-related expense year-over-year, partially offset by higher wages, incentive compensation and incremental costs from the acquired BMA business.

Income from operations more than doubled to $27.2 million from $13.1 million in the prior year quarter. On an adjusted basis, which excludes litigation-related items, ERP consulting and certain other nonrecurring items, operating income was $29.6 million, and adjusted operating margin was 12.8%, up 180 basis points from 11% in the prior year period.

Interest expense was $2.3 million in the quarter, down $800,000 or 25.8% from $3.2 million a year ago, primarily reflecting the lower interest rate environment following our September 2025 refinancing.

As you know, taxes have been quite variable in the last few years. In the quarter, we recorded a tax benefit of $800,000, driven largely by a $2.7 million discrete adjustment related to stock-based compensation, a valuation allowance reversal and the treatment of R&D costs. This compares with a $600,000 tax expense in the prior year period, which included a discrete $1.1 million benefit. While on the topic of taxes, I should point out that we expect in the coming quarters, possibly as early as the second quarter to meet the accounting requirements to release the valuation allowance related to our deferred tax assets, having demonstrated sufficient earnings power to utilize that asset. The reversal will result in a significant onetime tax benefit in the applicable quarter.

Net income for the quarter was $25.5 million or $0.67 per diluted share compared with $9.5 million or $0.26 per diluted share in the first quarter of '25. Adjusted net income was $22.5 million, up 32.6% from $17 million last year. Adjusted diluted EPS in the 2026 first quarter was $0.59, up from $0.44 per diluted share in the prior year period. Adjusted EBITDA was $37.9 million in the quarter, up 23.3% from $30.7 million in the prior year period, and adjusted EBITDA margin expanded 150 basis points to 16.4% of sales. As Pete mentioned, this continues the margin improvement trajectory we've been focused on over the last several quarters.

Weighted average diluted shares outstanding were 38.2 million in the quarter, down from 43 million in the prior year period. That decrease was largely driven by the repurchase of a portion of our outstanding convertible notes completed in 2025.

Turning to the segments, starting with Aerospace. Aerospace segment sales were $213.8 million in the quarter, which is an increase of $22.4 million or 11.7%. Commercial transport sales increased 13.7% to $156.4 million, driven by higher demand for seat motion and lighting and safety products, along with continued strength in in-flight entertainment and connectivity or IFEC. General aviation sales grew 40.7% to $21.4 million, primarily on higher IFEC product sales into the VVIP market, while military aircraft sales were essentially flat year-over-year at $33.5 million.

Other aerospace revenue declined by $2.9 million as we wound down noncore contract manufacturing arrangements. The other segment won't be as meaningful going forward, but does include some noncore machined products.

Beginning this quarter, we've recast our product line sales to align with our strategic thrust, which we have been presenting supplementally in our investor presentations for several years. We believe this is a clearer and more effective presentation that explains the key drivers of the business. To provide perspective on the business by the new product categories, we've provided quarterly sales by product line for 2024 and 2025 as a supplemental table in the earnings release.

Our largest product category is IFEC, which is comprised of passenger power as well as connectivity hardware, such as servers, modem managers, wireless access points, outside antenna equipment and associated kits. Revenue for these solutions was $110.7 million, up 7.4% year-over-year and representing just over 48% of our total sales. Our next largest product category is lighting and safety, which represents about 23% of sales and includes lighting for interior, exterior and cockpit lighting, including evacuation path lighting as well as safety equipment such as the passenger service units, emergency flashlights, survival kits and other emergency system solutions. Revenue for this product category increased 1.6% to $52.8 million.

Flight critical electrical power is, as the name implies, critical to the operation of the aircraft. This includes starter generators, electronic circuit breakers and advanced switching technologies. Sales for this product category grew 16.2% to $24.8 million. Seat Motion revenue was historically reported within our former Electrical Power and Motion product group. The Seat Motion Product group has seen strong growth with sales of $13.2 million, up nearly 200% from $6.7 million in the prior year quarter, reflecting strong demand and the $4.6 million contribution of the BMA acquisition.

Aerospace segment operating profit was $35.3 million or 16.5% of sales, an improvement from $22.3 million or 11.6% in the first quarter of '25. The improvement reflects higher volume, better production efficiencies, the MV-75 profit catch-up and a $7 million reduction in litigation-related expense and reserve adjustments related to the U.K. patent dispute, partially offset by higher tariffs. On an adjusted basis, Aerospace operating profit was $37.2 million and adjusted Aerospace operating margin expanded 120 basis points to 17.4%.

Bookings in Aerospace were $264.4 million, up 11% sequentially and our second highest ever, trailing only the first quarter of 2025, which included the initial MV-75 engineering order. The Aerospace book-to-bill ratio was a very robust 1.24 with demand broad-based against product and market categories.

Aerospace backlog reached a record $651.4 million at quarter end, up from $600.8 million at year-end 2025. That gives us strong visibility into the remainder of the year and underpins our raised outlook.

Turning to Test Systems. Sales were $16.8 million in the quarter, up $2.2 million or 15.4% from $14.6 million in the prior year period. Again, recall that last year's first quarter sales and gross profit were negatively impacted by a $1.9 million cost estimate revision on a long-term mass transit contract, which reduced revenue and profit recognized in that period. Segment operating profit was slightly above breakeven at $400,000 compared with an operating loss last year. The benefits from our cost rationalization and simplification initiatives have continued to take hold and provide a solid foundation from which we can expand once the production order for the Army radio test program is received, which we expect in the next several weeks.

Bookings for Test Systems were $26.1 million, resulting in a book-to-bill ratio of 1.55. Backlog for the segment ended the quarter at $83 million. We plan on announcing the rate the Army test program order when received and expect the order will contribute to revenue for a year or more.

Turning to cash on the balance sheet. We generated $10.6 million of cash from operations in the first quarter compared to $20.6 million a year ago. The year-over-year difference reflects higher working capital requirements to support anticipated revenue growth including an increase in inventory, partially offset by higher cash earnings. Accounts receivable rose in line with sales, and we continue to manage past due balances and collections closely.

Capital expenditures were $11.2 million in the quarter, up from $2.1 million a year ago as we continue to invest in capacity, productivity and facility consolidation. Elevated CapEx also reflects catch-up investments on previously deferred spending and the ongoing consolidation of operations and capacity expansion in our new Seattle facility, which we expect to complete here in the second quarter. As a reminder, we expect CapEx for full year 2026 to be in the range of $40 million to $45 million.

We ended the quarter with total debt of $334.9 million, essentially unchanged from year-end, and cash and cash equivalents of $11.9 million. We had $231.8 million of available liquidity at year-end, which includes 19.1% of available cash -- I'm sorry, $19.1 million of available cash and undrawn capacity on our revolving credit facility. Our leverage position and liquidity provide us with flexibility to fund organic growth, support capital investments and advance our strategic initiatives.

I'll also remind you that we're in the early phases of implementing a new global enterprise resource planning system. We expect to invest approximately $15 million to $17 million in 2026 on this initiative, excluding internal operating expenses, with $2 million to $3 million flowing through P&L as incremental operating expense and the remainder to be capitalized and reflected as a cash outflow from operations. Over the 5-year life of the project, we anticipate total spend of $35 million to $40 million, of which roughly $25 million will be capitalized.

Before turning it back to Pete, I'll briefly summarize our outlook for the second quarter. We expect second quarter sales to be in the range of $245 million to $250 million, which would be a new quarterly record for our company. And we expect revenue to step up further in the second half of 2026 as the Army radio test program moves into production and our aerospace programs continue to ramp. From a margin standpoint, our focus remains on achieving sustainable high teens adjusted operating margins on a consolidated basis with continued progress toward that goal in '26. We expect to be supported by volume leverage, improved productivity, lower litigation costs and a richer mix within both Aerospace and Test.

We also expect Test Systems profitability to improve meaningfully as volume builds on the U.S. Army radio test program and as we continue to execute on cost and mix initiatives.

We're pleased with our start to 2026 and believe we're well positioned to deliver another year of strong growth and improved profitability. And with that, I'll turn it back to Pete for some final comments before we open the line for questions. Pete?

Thank you, Nancy. Now, I want to spend a couple of minutes talking through the range of major market forces that are driving our business forward. Understanding these principles or these forces is key to understanding how our company is going to perform in the coming periods.

There are 5 points that I want to make. The first one and perhaps most obviously, rising production rates for commercial aircraft are very important for our company. About 70% of our sales go to commercial aircraft with half of that going to the production of new aircraft and half going to aftermarket retrofits. New aircraft production at both Airbus and Boeing is therefore very important to us. And both OEMs are working to increase the rate of both their wide-body and narrow-body offerings as quickly as possible. Both have plans to increase the rate of aircraft production in the coming years, 30% to 50% from current levels, depending on the model.

It will take time for these rate increases to be fully realized, but the rate increases are necessary due to the overwhelming demand from airlines around the globe. Additionally, the Boeing 777 will come online next year, which will be a significant program for us. Simply put, when the OEMs increase their build rates, we ship more product and the table is set for significant and consistent rate increases in the coming years.

Second, there is a clear trend whereby airline passengers want to be connected, entertained and powered at all times, including when they're flying on airplanes. Airlines around the world are well aware of their passengers' wishes and are outfitting an increasing proportion of their fleets with the capabilities to accommodate their customers. Our company is well positioned to benefit from this trend as approximately half our sales comes from in-flight entertainment and connectivity or IFEC applications, which for us includes our passenger power or in-seat power franchise. We have the widest product range of all suppliers to this market and count the full range of IFE companies, connectivity companies and over 200 airlines around the world as customers. As the airline industry outfits more and more aircraft to meet the expectations of their passengers, we stand to benefit.

What is more because the technology life cycles associated with connectivity and entertainment systems are short by aerospace standards, airlines are continually under pressure to make their IFEC offerings more up to date and we get lots of opportunities to help them retrofit and upgrade their fleets consequentially.

Third, our flight-critical electrical power product line is an important growth opportunity. It is only 10% of our sales currently, but we expect big things from this product line in the coming years. We serve the general aviation or business jet and small military aircraft market and have key positions on some important emerging programs like the MV-75, where we are a prominent supplier to Bell. We also have interesting positions in the coming wave of eVTOL aircraft and unpiloted drones, both of which are nearing certification and getting serious investment.

Fourth, seat motion has become a more meaningful contributor to our growth profile. We're a leading provider of motion systems for high-end aircraft seating and demand for premium seating is strong. Long-haul airlines around the world are reconfiguring their fleets to cater to high-end passengers, and we are benefiting. The new product line categories detailed on Page 12 of the press release shows first quarter seat motion sales of $20 million, 3x what it was last year. We expect that the Q1 rate will accelerate slightly as we move through 2026, such that year-over-year growth in 2026 will be north of 100%.

And fifth, we expect our Test business to accelerate in the second half of the year as the U.S. Army radio test program finally moves into production. We've taken significant cost out of the business over the last couple of years and incremental volume on this program will have a meaningful positive effect on both revenue and profitability. As a reminder, we were the sole source winner of an IDIQ program valued by the Army at $215 million with an expected performance period of 5 years. We are expecting a production turn on in the coming weeks, making the program an important contributor in the second half of 2026.

So those are the main tailwinds we see, rising aircraft production rates, continued demand for onboard connectivity, entertainment and power, growth in flight-critical electrical power in emerging aircraft, strong momentum in seat motion and an improving outlook for tests. We believe these forces will continue to build as we move through 2026 and beyond.

And that ends our prepared remarks. So Rochelle, I think we can open up for questions now.

[Operator Instructions] Our first question today will come from Jon Tanwanteng with CJS Securities.

Nice quarter and outlook. Peter, 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, maybe the Iran conflict isn't resolved, where would you expect to see weakness first? Is it from your Mid-East 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.

Well, it's a little hard to read the future in this area, Jon, 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 for 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 for better or for worse, low-cost providers are not typically our major customers for our IFEC products around the world. They tend to be more bare bones in terms of their product offerings. So I don't see that as a major risk for our company. I also, 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 4 walls. But for now, that's how it is.

Got it. No, 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?

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.

Got it. Last question, I'll jump back in the queue. Can you just bridge us from the prior revenue guidance to the new one, what's increasing in the underlying assumptions?

It's nothing single specific, I would say. It's across the board surge in demand and 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 -- higher than we've ever seen, and that wasn't the situation. There wasn't kind of a big single driver or a couple of 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 5 points about what's driving our business. It really is very comprehensive. 3 of those 5 points, I'm not going to replay and point up, but they were smaller parts of our business, 10% each. And they're all -- those 3 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.

Our next question, we'll hear from Greg Palm with Craig-Hallum Capital Group.

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? If we back out the $2.8 million 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 anything -- if you want to call anything out specifically?

Yes. So I mean, there's the impact of tariffs, Greg. Tariffs were up almost $2 million year-over-year. So that's certainly a negative. 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 yes, we did incur $2 million of additional costs year-over-year related to the tariffs.

I would also point out that the -- one of the problems with our first quarter is it followed the fourth quarter. The fourth quarter was a super quarter. So, 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, the second quarter is one of these show-me kind of quarters. We're forecasting revenue of $245 million to $250 million. 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 it'll -- I think that will be a really good indicator for where we're going to be for the rest of the year.

So it 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?

Absolutely, yes. That's what we're -- yes, that's what we're counting on.

Okay. And then on the radio test program, the long awaited coming weeks. 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 kind of a full run rate annual contribution might look like for next year?

Sure. We think the full year should be something like $40 million to $50 million, and we're thinking it will probably be a $20 million contribution in the second half. It's a revenue over time program, which accelerates revenue over a 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 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 -- 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, I want you to know that. So we're very much looking forward to saying we got it in hand and issuing that press release. It should come soon.

And next, we'll move to Gautam Khanna with TD Cowen.

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?

We -- 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 wide-body rates going up also both at Boeing and Airbus. So that's all positive. But -- 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 have a ship it to 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 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.

That's helpful. And I understand your comments on demand were 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?

Yes. We're comfortable with how it's -- specifically the last couple of months, you mean since the -- since the hostilities began, yes, it's been -- we have had a positive book-to-bill in that period of time also.

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?

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.

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?

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 of years. You always have room to improve and we will improve. It's slowing down, though. It was a major issue over the last couple of 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 of 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, but 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, 1.5 years, 2 years is quite a bit of rationalization of our product lines and facilities. We've done quite a bit of moving and consolidating. We've exited a couple of 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 will be an encouraging picture. And second quarter, again, will be a real kind of litmus test for all that.

[Operator Instructions] And we'll move on to a follow-up question from Jon Tanwanteng with CJS Securities.

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 look into '27 and '28. And then maybe the same question for the 777X as it prepares to be certified and start shipping to customers?

Well, you're bating me a little bit on the eVTOL question, Jon. 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 that 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 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 approach to this market means that we're not going too far head over heels in any 1 program development or any 2 program development. We're not doing a lot -- we're doing some certification work, and we're doing some, I call it a system 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 going to 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.

777. 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.

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.

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.

Greetings, and welcome to the Astronics Corporation Third Quarter Fiscal Year 2025 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Craig Mychajluk. Thank you. You may begin.

Yes. Thank you, and good afternoon, everyone. 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 third 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 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 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 table that accompany today's release. So with that, I'll turn it over to Pete to begin.

Thanks, Craig. Hello, everybody, and welcome to our third quarter call. We feel it was a very positive quarter, and we are pleased to share the results. As is our practice, I'll start off with a summary of the headlines for the quarter, then Nancy will go through the financial fine points, then we will discuss expectations for the future for both the fourth quarter and also we'll take an early look at 2026. Finally, we'll open up the lines for questions.

The first headline for the quarter is that we had solid volume with revenue of $211.4 million. This is our second highest quarterly level ever and just marginally below our record. That sales level is a tick up from the first couple of quarters of 2025 and is the result of broad-based demand across our product lines, markets and customers as well as improved performance in our supply chain and better efficiencies in our production system. Our Aerospace segment led the way with sales of $192.7 million, a level consistent with recent periods. Our Test business had sales of $18.7 million, which is down from the third quarter of 2024, but higher than the earlier 2 quarters of this year.

The second headline has to do with margins. As one would expect, higher revenue together with efficiency improvements have led to higher margins. Operating margin of 10.9% in the quarter was higher than last year's 4.1%. Adjusted operating margin, taking into account expenses related to restructuring, litigation and acquisitions was 12.3% for the quarter. Our Aerospace segment specifically had operating margin of 16.2%, generating all of our operating income for the quarter. Test operating margin was essentially breakeven at negative 0.1% while no one is happy with 0% operating margin, this actually represents progress and is a testament to the cost reduction initiatives we have put in place in recent periods. To break even on a modest revenue level of $19 million in the quarter promises good things in the future since we expect test sales to increase. Adjusted EBITDA was at 15.5% of sales, our highest since the pandemic struck in 2020.

Our third headline has to do with bookings. Even though third quarter shipments were on the strong side, bookings kept right up. Total bookings of $210 million yielded a book-to-bill of 1.0. We ended the quarter with backlog of $647 million, a very high level by historical norms, which sets us up well for the coming periods. Our fourth headline has to do with acquisitions. We have made a couple of smaller acquisitions recently, one early in the third quarter and one just recently early in the fourth. The first one was Envoy Aerospace, which we previously discussed in our second quarter call in August. Envoy Aerospace is an ODA, which stands for Organizational Designation Authority. ODA is a program in which the FAA grants certification approval authority to outside organizations by which the FAA extends its capacity and reach.

We believe having an ODA is a competitive differentiator as we are often involved in aircraft retrofit programs and FAA certification is becoming a more important capability in the eyes of our customers. Having certification authority lessens program and schedule risk, both for us and for our customers. Envoy has external sales of about $4 million annually. Prior to the acquisition, we were consistently one of their largest customers. The second acquisition is that of Bühler Motor Aviation or BMA. Located in Southern Germany, BMA is an established manufacturer of aircraft Seat Actuation Systems with a broad product portfolio that includes actuators, control electronics, pneumatics and lighting.

BMA competed with our PGA operation in France in the seat actuation market, and now they will work cooperatively with each other to better serve the needs and opportunities of that market. We expect BMA to have sales of $20 million to $25 million in 2026, and we paid less than onetime sales for the acquisition. Much of the costs related to the acquisition, legal and diligence and the like were included in our third quarter expenses. The acquisition's operating contributions will be captured in the fourth quarter and onward.

Finally, our last headline, we completed a couple of important refinancing actions in recent weeks, one in the third quarter and one just after its close. These financings lowered our cost of debt, improved our financial flexibility and importantly, reduced future dilution potential. Nancy will cover the accounting treatment, which is a little bit complex, but basically, in the third quarter, we issued a new $225 million 0% convertible bond to buy back a majority of an earlier convertible bond that was significantly in the money, meaning it was already fairly expensive to settle. And if our stock continued to rise as we expect it to do, it would get even more expensive.

Using proceeds of the new convert plus some borrowings under our existing revolver and available cash, we successfully repurchased 80% of the previous 5.5% convertible note, effectively lowering our cost of debt while also eliminating 5.8 million shares of potential dilution. As part of the transaction, we also bought a capped call on the new 0% notes that effectively raises the equity conversion price to $83, meaning that there will be no dilution on the new bond unless and until the market price of our stock exceeds $83. So this transaction significantly reduced the potential dilution we would otherwise be facing.

The earlier convert had a face value of $165 million. Since we bought in 80% of it, there is now 20% still outstanding or $33 million. We can pay the smaller bond off when it comes due in about 4 years in either cash or stock. We intend to use cash. But even if we use stock, the dilution will be a maximum of 1.4 million shares or about 4% based on our existing share count. This is a significant reduction in the potential dilution risk that existed before the buyback. We also benefit in terms of interest, obviously. The new bond has a 0% coupon, while the older bond is at 5.5%. So we replaced some more expensive debt with much cheaper debt.

Our second refinancing step completed just a couple of weeks ago was a transition from the ABL facility we had in place to a cash flow revolver. The size of the ABL was $220 million and the cash flow revolver is sized at $300 million. The interest expense is comparable, but the new facility offers less administrative burden and increased financial liquidity for the future. The financial implications of the new convertible bond and the repurchase of the majority of the previous bond is fully reflected in our third quarter financials. The ABL to RCF transition will be reflected in our fourth quarter financials. Now I'll turn it over to Nancy.

Thanks Pete. I'll review profitability and various accounting and other events related to our Q3 2025 financials. We had gross profit of $64.5 million, up nearly 17% compared with the prior year period as the benefits of higher volume, pricing actions and productivity improvements helped to offset the $4 million impact of tariffs in the quarter. Last year's third quarter also had a $3.5 million impact from an atypical warranty reserve. Gross margin of 30.5% reflects the 31.4% gross margin realized by the Aerospace business, which was muted somewhat by the Test segment gross profit of 21.6%.

R&D expense declined $2.3 million to $10.2 million or 4.8% of sales based on the timing of projects. We believe we're at a more normalized run rate currently at about 5% of sales. Of course, this can vary based on the timing and opportunity of new projects. The $3.1 million decline in SG&A expense was primarily the result of a $4.3 million decline in litigation expense. While it's been quite a while since we can claim any form of normalcy, historically, we've operated the business with SG&A at about 14% to 15% of sales. Operating income was up over 2.5x to $23 million. We recorded a loss on debt settlement of $32.6 million. I'll cover the details of the accounting treatment for the new 0% convertible bond in the cap call here in a bit.

We had a $1.2 million tax benefit as we reversed the valuation allowance for R&D expenses that can now be deducted in the current year for tax purposes as a result of recent tax reform. Notably, we generated $34 million of cash in the quarter and had free cash flow of $21 million, driven by strong cash earnings combined with lower working capital requirements. I should point out that $3 million of the cash from operations was from a tenant improvement allowance reimbursement. This is offset by the CapEx investments in the build-out and consolidation for our new Redmond, Washington facility. We expect an additional approximately $5 million in reimbursement for the project in the fourth quarter. This project is what's driving our fourth quarter CapEx to be around $20 million to $30.

Year-to-date, we've generated $47 million in cash from operations and have had $20 million in capital expenditures for free cash flow of $27 million. We would expect to be free cash flow positive for the year. Our fourth quarter cash flows will reflect the purchase of BMA, both in terms of the purchase price and the operating activity from the acquisition date forward. Turning to our balance sheet and refinancing actions. Let me talk a bit about the convoluted accounting treatment for the new 0% convertible notes that Pete discussed.

First, I'll point the impact to the income statement. We recognized a noncash loss on the settlement of debt of $32.6 million, which represents the inducement charge for bondholders to redeem the $132 million in principal of the 5.5% convertible notes. Second, let me talk to the source and use of funds related to the new convertible note as well as the implications to the balance sheet. Proceeds from the new convertible bond were $217 million after payment of $8 million in fees and expenses. That $217 million, coupled with an $85 million draw on our ABL revolver plus $11 million in cash on hand were used to repurchase 80% of the old convertible note for approximately $286 million and to purchase the capped call for $27 million.

Debt increased about $175 million from the end of the second quarter to $334 million. That's a function of 3 factors. First, we incurred new debt of that $217 million related to the new convertible bond, which is the $225 million netted down by $8 million in issuance fees and expenses, which are required under GAAP to be presented as an offset to the debt on the face of the balance sheet. Second, as I mentioned, we borrowed $85 million on our ABL to fund part of the repurchase transaction. And third, debt was reduced by $128 million, representing the $132 million in principal paid off on the previous convertible, net of $4 million in associated issuance fees that also needed to be written off.

Shareholders' equity declined as a result of the transaction. The premium paid of $121 million plus the cost of the capped call of $27 million, plus $4 million write-off of the unamortized debt issuance costs related to the repurchased 5.5% notes resulted in a $152 million reduction in shareholders' equity. The net result is, as Pete discussed, lower cost debt, significantly reduced potential dilution and combined with the refinancing of our revolver to being cash flow based, meaningfully greater financial flexibility. I should point out that we currently have $95 million outstanding on the $300 million cash flow revolver and liquidity of $169 million. And let me hand it back to Pete.

Thank you, Nancy. I'll now turn the discussion to the future and what we expect for both the fourth quarter and our initial expectations for 2026. We expect the fourth quarter to be a step change for the company. We have generated average revenue of $207 million over the first 3 quarters of 2025. In the fourth quarter, however, we are expecting revenue to climb to a range of $225 million to $235 million, which is a significant step-up. The increase is due in part to our recent German acquisition, but mostly to the various market forces that are driving our business. The higher volume should mean good things for our income statement as we typically see 40% to 50% marginal contribution on incremental revenue dollars.

Further, we think the higher volume expected in the fourth quarter will provide a baseline for 2026. We are not ready yet to issue formal revenue guidance for next year, but we are well along in our budgeting process, and it appears 2026 will be a year of solid growth. Our belief at this point is that we will see 10% growth or better. We are working to refine the range and expect to release initial revenue guidance closer to year-end 2025.

You may ask what is driving the growth? Our company has been and continues to benefit from a wide range of industry trends. I'll cover the major ones briefly, and I'll try to be concise. First and most obviously, increasing OEM build rates are a big positive for us. Narrow-body and wide-body production rates are trending up at both Airbus and Boeing and to a lesser extent, across private aviation OEMs also. Our typical content for major aircraft programs is spelled out on our investor presentation, which is available on our website. And quite simply, when OEMs make more planes, we ship more product.

Second, we are heavily involved, as you all surely know, in passenger connectivity and entertainment in aircraft, and it is a well-established secular trend in our world today that people want to be connected and entertained at all times, including when they are riding in airplanes. This reality, combined with the fact that the consumer electronics industry is characterized by high levels of innovation and short life cycles, means that adoption rates on new aircraft are increasing and retrofit and upgrade opportunities across the existing fleet are regularly present. We work with more than 200 airlines around the world, along with the broad set of in-flight entertainment and connectivity providers to help ensure that the expectations of airline passengers around the world are met. These expectations are high and getting higher, which provides an excellent field of opportunity for us.

Third, we are specialists in developing technically advanced flight critical electrical power distribution systems for smaller aircraft in particular. And our electrical power franchise is gaining acceptance on a wide range of new and innovative aircraft types that are in development today. We started with business jets and turboprops, but today, we are also involved with a wide range of emerging types, including eVTOLs, electric vertical takeoff and landing aircraft, unmanned drones and smaller military aircraft, both rotary and fixed wing. A high-profile example, which is getting lots of attention these days is Bell's V-280 aircraft, now known as the MV-75, which is the U.S. Army's replacement for the Sikorsky Black Hawk.

This program is in development currently, and Bell has chosen Astronics to supply the electrical power distribution system. There's a lot I could say about this program, but suffice it now to say it has the potential one day soon to be a very significant aircraft production program for our company and to run for a very long time. Finally, there are some other important new programs, which we expect to come online in short order, particularly for our Test business. One of the most significant is the radio test program that we've talked about before on this call for the U.S. Army called 4549/T. We have been in development on this one for some time and expect production turn on at year-end or shortly thereafter. It's a $215 million IDIQ contract to start that will run for the next 4 to 5 years.

Our Test business with all the cost reductions that we've implemented is running at breakeven currently. But when the 4549/T program gets layered on top, the financial profile in that segment will be much improved. We believe these industry trends and opportunities have legs. We've been benefiting from some of them for a while, but others will only begin to positively impact our business in coming quarters. Collectively, we feel they provide an excellent opportunity set as we move into 2026 and beyond.

So again, the growth from these drivers should have a positive impact on our earnings as we ramp. And as such, we expect to turn in a strong finish to 2025 and believe 2026 will be a very good year for Astronics. That ends our prepared remarks, so we can open up the lines now for questions.

[Operator Instructions] First question comes from Greg Palm with Craig-Hallum.

Congrats on the results, the execution and probably most impressively, the profitability or operating leverage in the quarter. I wanted to maybe first maybe bridge Q3 to Q4 in terms of the expectation, what is built in for Test relative to the revenue that you achieved in Q3?

We expect Test to take a little step up. I don't have that in front of me. I guess it's in the $20 million, $21 million range. They were at $18 million in the third quarter. So that will be a little bit of a step-up, but it will be their strongest revenue quarter for 2025. So it hopefully lays a good foundation as we round the corner to 2026 also.

Okay. So that implies that aerospace should see a bigger step-up even excluding the impact of acquisitions. So I guess it begs the question, what are you seeing there, whether it's increased build rates, whether it's higher retrofit activity, anything in military with the FLRAA program? Just a little bit more color on maybe the step-up there expected in Q4.

Yes. I'd say a couple of things. First of all, we are expecting a general ramp between where we were in Q3 and where we will be in the first quarter. I'm getting a little bit ahead of myself because we're still in the budgeting process, but the early look at 2026 is that we'll run a sustained rate that's above what we're forecasting for the fourth quarter.

So the fourth quarter we will see, to a large extent, a general ramp across the business, but there are a few kind of significant programs that are in play, hence, the wide range of the revenue forecast for the fourth quarter. We're not sure if a lot of them are going to fall in the fourth quarter and therefore, be 2025 revenue or you always run the risk at the end of the year that things can slip into the new year. So it's a little bit of a wider range than we prefer to have at this point. But basically, it's just scheduling of major point in time -- that's not true. The revenue overtime programs for the most part.

It's a mix.

It's a mix.

Yes. Understood. Okay. Well, and then I was going to maybe dovetails into my question on fiscal '26, just in terms of the confidence level at this time to provide not guidance, but expectations of that low double-digit growth. And specifically, what is baked in, in terms of the Army test program at this point? And just given the shutdown, I mean, I wouldn't have expected your visibility levels to be all that good. But what -- it still sounds like you expect that ramp-up to begin sort of end of this year, maybe early next.

Yes. It's a very good question, and we are guessing a little bit, and that's a little bit why we're hedging. But long story short, we were -- when the government shut down, hoping for production turn on towards the end of the year, it might be this year, it might slip into the next year, but basically either late fourth quarter or early first quarter. At this point, we don't have reason to think that, that's going to slide a whole lot. It's probably reasonable to think it's going to slide day per day with the shutdown. And obviously, the longer the shutdown goes on, the more at-risk year-end turn on becomes. But we've had some unofficial contact with program managers and executives who have reiterated that the funding is secure.

The user community really wants to have the product get going. And so it's just not obvious at this point if there's going to be a big delay there or not. So we will have to make a decision there as to what we include or what we don't include. But in general, we're still on a track where we think it's going to be a pretty significant contributor over the course of 2026.

And just to be clear, in terms of that full year '26 expectation, there's some, I guess, presumably significant level of contribution that's baked in or not necessarily?

No, there will be, absolutely. It's a -- we expect that program to be an important contributor, both top line and bottom.

Next question, John Tanwanteng with CJS Securities.

This is actually Jeremy on for John. Kind of working off of what we were just talking about, how should we think about the FLRAA program revenue and margin over the medium to longer term as it transitions out of development and into production?

Well, into production is a little bit early to say because we don't know the ramp, and we don't have pricing ready to go on that one. We don't have pricing agreement with the customer, I should say. And also, I don't know if you're aware, but there is an active debate going on in the industry about when production is actually going to start. The Army is interested in trying to accelerate that program, which would mean production -- the production ramp would start a couple of years earlier than it otherwise would.

But closer to home and from what we can tell right now, we had revenue of about $28 million in 2025 we're planning. And we're thinking that 2026 will be closer to 38% to 40%, something in that range. From a margin standpoint, it's worth pointing out that we basically have been doing development work at 0 margin thus far because we're still negotiating a development program. Once that program is developed, we will catch up on margin that we would otherwise have recognized earlier. And so it should be a pretty significant contributor as we turn the corner and go through 2026. Would you say anything?

Okay. That's right.

Very helpful. And then switching gears a little. Could you just talk more about the Bühler and the capability it brings to the table and the accretion you're expecting over the next year?

Well, it's a smaller company. We expect revenue of $20 million to $25 million. At that level, we do expect it to be profitable. So I think it's a reasonable assumption that its margin profile will be consistent with the rest of our company. It's going to report through our PGA operations. So you're basically going to take 2 competitors and have them act as one. And there are certain efficiencies that you might expect there. There's market knowledge and reach that can be beneficial. Their products basically do what a lot of our products do. We're talking about seat motion here, high-end aircraft seats, first-class seats, business class seats where you have a lot of moving surfaces, think lie flat and things like that, reclining seats.

So the product lines are complementary, but they are not really interchangeable. So their products are sold to seat companies that are designed around their type of system, and our products are designed into seats and seat customers that use our system. But we'll be able to get some efficiencies. We might have some -- the market concentration might yield some pricing efficiencies. Those are things that will play out over the next few years. It's a smaller market. We don't talk a whole lot about it. But combined, we should be somewhere in the $80 million a year range.

[Operator Instructions]Next question comes from Alexandra Mandery with Truist.

This is Alexandra Mandery on for Michael Ciarmoli, Truist Securities. Great results, guys. Can you talk about the integration of these 2 recent acquisitions and any additional capabilities you may look for in the future?

Sure. Well, the integration of BMA or Bühler will be reporting through our PGA operation in France. So that will -- that's already underway, and we intend to maintain both operations. We think moving and consolidating, it's often easier, in my opinion, to calculate savings than it is to actually achieve them. So that is not our objective. Our objective is to work efficiently from a 2 operation setup, both in Germany and in France. We're early on in that. This thing just closed 2 weeks ago, 3 weeks ago. So we've got a long ways to go, but it's a smaller operation, and so we should be able to get our hands around it pretty quickly. We don't think it represents any systemic risk necessarily whatsoever.

Envoy, I think of Envoy as a consulting company. It's basically a bunch of engineers who are well versed in FAA rules and regulations. And we have it reporting through our CSC operation, which is where we do most of our connectivity and in-flight entertainment electronics out of Waukegan, Illinois. So Envoy is essentially part of CSC. The exercise that we're going to go through from an integration standpoint is figure out how we can take the Envoy expertise and apply it more broadly across our company to our other operations.

And again, the real advantage of Envoy is it gives us the ability basically if we can maintain the ODA, which is our full intent to certify our own development programs, which is where we get into a competitive advantage with other companies because we can more realistically guarantee program and schedule success to our customers when they know that we can self-certify with the blessing of the FAA. That's the whole idea. And we'll report back on that as time goes by, but we do a fair amount of retrofit work. And to the extent that a company does retrofit work, having an ODA just makes it -- it's like reaching the wheels. It just makes everything go a little bit easier.

Okay. Great. And then I just had one follow-up. I might have missed it, but can you add more color on 4Q guide for interest expense, CapEx and depreciation and amortization?

So in terms of interest expense, like Pete said, the interest rate on the ABL is -- and the RCF are very similar. We are going to have a pretty heavy CapEx quarter in the fourth quarter. So a tick up in the debt is not unexpected under the revolver. We're still carrying $33 million of debt on the convertible -- on the 5.5% convertible bond. So that will contribute as well. But then the remainder of the debt, that $225 million is at 0%.

And then in terms of depreciation and amortization, that's -- I don't have those numbers, unfortunately, in front of me. I would expect a slight tick up there as well as the -- we're working through the valuation of the 2 acquisitions, but it's fair to assume that some portion of that is going to be allocated to intangibles, and there will be a life assigned to those as well, and those will start to amortize during the quarter as well. I mean I don't anticipate a material change from what our quarterly run rate has been.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.