Q4 2019 Earnings Call
Greetings and welcome to the Astronics fourth quarter 2019 financial results Conference call.
This time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should require upper assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Deborah Pawlowski Investor Relations. Thank you you may begin.
Thanks, Christine and good morning, everyone. We certainly appreciate your time today and your interest in a strike joining me on the call or Pete Gundermann, <unk>, Chairman, President and CEO, Dave Bernie Our Chief Financial Officer.
Should have a copy of the 29 PM fourth quarter full year financial results, which were released earlier. This morning, if it not you can find them on our website at <unk> Dot com.
Let me mention versus your likely aware that we may make forward looking statements. During this formal discussion as well as during the Q any session. These days, it's quite a future events that are subject to risks and uncertainty as well as other factors that could cause actual results to differ materially from what I've stated here today.
Risks and uncertainties and other factors it provided in the earnings release as well as with other documents filed with Securities and Exchange Commission.
These documents can be found on our website, where it FCC dot Gov.
During today's call. We will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance.
Would not consider the presentation of this additional information in isolation or the substitute for results prepared in accordance with gap.
We have provided reconciliation reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release.
So with that let me turn it over to Pete to begin here.
Thanks, Debbie and good morning, everybody our agenda today is.
Follows I'm going to start with a discussion of some of the.
Major issues.
Some of the company not only in the fourth quarter, but looking a little bit backward looking a little bit forward.
There are a number of them three on the aerospace side.
Two on the cost side.
I'm going to turn it over to Dave and he's going to walk us through the numbers are both on the income statement and the balance sheet.
And we'll talk a little bit about.
The future to the extent, but we can see.
And do the normal question and answer it beyond.
So major events.
[music].
Starting with the aerospace segment.
Probably the elephant in the room.
The southern three seven.
It is a challenge for us.
When we last talked when we released third quarter results from the first week of November.
We at that time issued preliminary revenue guidance for Twentytwenty.
And there were some assumptions stated as part of that revenue guidance, specifically, we assume that southern through seven Max What's your returns service at or near year end.
And at that time, we would expect a pretty quick production ramp from 42 airplanes amongst a 47 amounts eventually going to 57, probably sometime out and 2021.
Those expectations.
Well, there's instead 42 aircraft a month have gone to zero.
And 800 airplanes plus remain grounded in the 42 airplanes, a month going to zero effect for us because we brought about.
Just shy of $100000 the product on each airplane as its built.
That's about $4 million a month and revenue that's good business for us. It's one of our largest production programs actually at 42 or 52.
That's a month.
800 airplanes grounded.
Essentially cuts the capacity for their airlines around the world and given the lack of capacity that they have they are reluctant to take airplanes out of service for the passenger amenity aftermarket products that we offer so.
As many of you know most you know most of our stuff is not flight critical that we do in the aftermarket.
<unk> is an amenity.
With a shortage of capacity, we have seen starting late last year.
ER.
Hey tendency towards deferral work programs that.
We're in process had been kind of pushing out.
So right.
This is evidenced in our Q4 bookings, which you see our aerospace bookings were 140 million. That's the last page of our press release that as well off the pace of recent history. You Gotta go back a few years for us to be about level.
So.
We have been asking questions and continue to ask questions of ourselves enough [laughter] our customers.
Typically one well production restart at this point, we as I said or on a production pause and we have discussions going on with Boeing there's not a clear resolutions of those discussions at this point.
So we don't really know and.
Also one world are returned to service occur that's not so much a Boeing question that's enough of a question.
Once returns service starts of course will have to figure out how those 800 airplanes good.
Implemented by the airlines and when will the airlines.
Oh, how will they react and what they kinda response, a normal so.
In the meantime, giving them the lack of clarity.
We have managed down our cost structure as much as we dare in our operations that are specific to the 737 were down approximately 50 people mostly on the direct side.
And those operations.
That's one major issue that we're dealing with on the aerospace side. The second major issue is one that we're in a little bit more control over that is the three up or the three problem.
Heads are problem companies that we've talked about quite a bit over the last.
Your and a half or so and we actually feel like we're making lots of progress in this area.
The fourth quarter operating loss for the three combined is 5.1 million that's a lot, but it's down from the average of the first three quarters, which was 9 million.
So a brief summary of the three.
We've talked in the past about Armstrong Armstrong in the fourth quarter was it was within shouting distance of breakeven 200000 dollar loss.
From an average of 800000 over the first three quarters, we've talked in the past about how we feel armstrong's basically out of the words and okay. It's not probably <unk> sustainably profitable at this point.
Well weve integrated that into our CSC operation in Chicago, We've taken three Chicago locations down to two and we expected to be basically at or near breakeven throughout 2020.
I think basically armstrong's out of the woods.
Let's see Ccs Similarly, our second challenge.
I had a relatively good fourth quarter. The big highlight here is that CCC in the fourth quarter concluded the development process for its Avenue here.
Product, which is a state of the yard cabin management system for VIP airplanes that we've done.
A struggling with for about a year and Uh huh little bit longer.
CCC on the fourth quarter ended up with a 700000 dollar loss, which again is a lot, but its way down compared to its average over the first three quarters over 3.3 million dollar loss. So.
Going forward, we expect that drop in development expense to basically combined with the revenue increased to bring C.C.C.
At or near breakeven also for all of 20 Twond.
That brings us to aerostat announced in our last call, but we were doing a review of the Airsep <unk> Aero sat business and we were planning to do a restructure we have implemented that restructuring.
It is a substantial restructuring.
Basically, bringing the focus of the business down from about four business initiatives to one.
To give you an indication of the scope the head count in the business has gone from about 106 at the beginning of the year to about 44 today.
And the breakeven is down from about 40 million dollar level to 10 million today.
This was not an inexpensive exercise the.
In the restructuring and impairment charges were quite a bit more than we thought they would be when we started the process.
Ending up at about $29 million for the quarter.
We also had about a 4 million dollar operating loss in Q4.
We expect to that to drop to a level, that's approximately half of that going forward and getting down towards breakeven at the end of the year.
So when you look at the three problem kids.
And.
Cumulatively.
The operating loss, excluding impairments and restructuring charges.
For 2019 was about 32.7 million.
We are quite confident today that that's going to be as we get to me under 2020, depending on how things evolve with aerostat at or near breakeven there could be a <unk> a minor loss there cumulatively, but in general the numbers won't be anywhere near what they'd man in the past.
The third issue on our Aerospace segment was we took a reserve for a.
A legal process that we've had ongoing in Germany, we talked about this.
In advance in the fourth in third quarter call also.
The charge is more than we expected.
And we are appealing it we think the court's decision is deficient and we disagree and the appeal process, we expect will last well into 2021.
The longer story is that this is a process is playing out since 2010.
The original filings in 2010 were both in the U.S. and Germany, well they've been initiated in France, and the UK also.
The technology and question frankly is not critical it is not important and in fact, we designed it out.
Five years ago in 2013 2014.
When we.
First figure it out, but we were going to have an issue here.
In the U.S., we over the last couple of years defeated the patent in the case basically ended.
In Germany, the patent was downsized or reduced but still stood and the penalty that came down in December was significantly higher than we anticipated. So we took a reserve for 17.9 million additional bringing the total for Germany to 20.6.
Yes.
That number is a bit of an estimate there's a lot of Ah moving parts to the order and some things that we don't know for sure at this point so it could bounce all around a little bit as we go forward.
But until the appeal is heard and resolved and again, we expect that 2021, we don't think there's gonna be major news in Germany.
France and UK are just getting started.
The UK first France would be second and again, we think that will probably mostly be 2021 news, we don't expect too many.
Issues to happen here and 2020 on either of these cases.
Moving away from our aerospace segment.
Talking a bit about forces affecting our test business and our test business in 2019, so a significant year of transition.
We in February sold our semiconductor test product line.
Followers of the company remember that I'm sure. It was a price of 100 million the net gain on the sale was about 79 million.
That shows up in our 2019 income statements as a gain on sale.
The revenue from our semiconductor test product line in 2018 was substantial it was 84 million total for the year.
9.7 million in 2019, so a big drop off so year over year comparisons for.
GAAP revenue recognition purposes or.
Quite a bit misleading I mean, the revenue shows a lot stronger and 18 the gain on sale shows and 19 <unk>.
This is a big part of the reason why we've gone to an adjusted presentation or over the four quarters of 2019.
In the second half the 2019, we added a couple of smaller acquisitions to reshape and refocus our test business freedom.
Technologies in July and diagnosis in October.
Freedom is a radio test company it complements our military focus with a product lines geared more at municipal users like police forces or first responders or border patrol.
Diagnosis is a complimentary fit in the transit area for train tough that's an area, we've gotten into a little bit and we have some pretty strong hopes for this product line for 2020 and onward.
Or a test business on an adjusted basis backing out the semiconductor sales so very strong growth in 2019 of 62%.
Two thirds organic one third.
Acquisition.
Margins were not where we expect them in part due to purchase accounting, but well talk about the future in a few minutes, but kind of a sneak preview on the test side is that we expect 2020 to be another year of pretty strong growth organically in the range of about 20%.
Yeah, we're not issuing.
Guidance today, we responded that earlier this month the as you know in the press release, we issued in February Threerd, but the test business, obviously isn't affected by some of the unknowns in the aerospace World, We're thinking that our test business should see a 20% growth year.
And 2020.
With that I'll pass it over to Dave to talk through the numbers and take it back little bit later.
Hey, Thanks Pete.
He touched on there was a lot of noise in the fourth quarter to cut through.
So in addition to looking at gap results is as he mentioned that makes sense to talk to adjusted results.
Removing sales indirect costs from our semiconductor test business, which we we own for the full year of 2018, but sold in February of 2019.
I also will removes the impact of the restructuring and impairment charges for an antenna business.
And the legal reserves a that Pete just spoke to.
We believe these non-GAAP measures will help users of the financial statements better understand the core performance of the ongoing business included in our press release from this morning are a few tables on page 11, and 12 reconciling the GAAP numbers to the non-GAAP information.
Also if you refer to the footnotes at the bottom of the income statement on page eight of the release you can see geographically the income statement lines impacted by by these items.
Getting to the fourth quarter operating results.
Fourth quarter consolidated sales were down.
Four and a half million dollars to 198.4 million.
This reflects a 10.3 million dollar decline due to the divested semiconductor test business.
Partially offset by added sales from the diagnosis and freedom Communications acquisitions. There were also when our test segment those added $9.9 million of sales [noise].
Aerospace segment sales decreased by 1.8% to $172.1 million.
At this is a point, where I'd like I'd like you to follow with me on page 11 of the press release, where we have the reconciliation of GAAP to non-GAAP information.
We had GAAP loss from operations of $36.9 million in the fourth quarter of 2019.
Which reflects $46.7 million of restructuring and impairment charges and an increased reserve for the ongoing lawsuit.
More specifically in our antenna business, we took charges totaling 28.8 million.
Relating to the restructuring and refocusing of that business and Additionally, we increased the legal reserves.
By $17.9 million both of those are in the aerospace segment.
Additionally to aid in comparing this year to last year, we removed the direct profit generated by the semiconductor test business in each period.
[noise], making these adjustments we end up with an adjusted operating income of $8.1 million or 4.1% on adjusted sales of $196.5 million compared with adjusted operating margin of 8.1% in the prior year.
The 2019 fourth quarter operating margin.
Was affected by higher legal and warranty costs.
Both primarily in the aerospace segment. Additionally, affecting operating margins it was $6 million of sales.
Of the acquired test businesses that yielded very little margin.
Due to the stepped up basis to the related inventory required by accounting for acquisitions.
We would typically expect contribution margins.
Sales to be in that 30% to 40% range.
[noise] go into the aerospace segment for the quarter.
Aerospace segment sales compared with the prior years fourth quarter decreased by $3.1 million or 1.8% to $172.1 million.
The drop was mainly in the avionics product line, which declined $4.1 million or 13.1%.
Relating to soft in flight entertainment and communication hardware sales in the quarter.
Aerospace segment GAAP loss from operations was $32.3 million.
Adjusting for the restructuring of the antenna business and the legal reserve. The adjusted operating income was $14.5 million or 8.4% of sales compared with 12.7% last year.
The 2019 fourth quarter was negatively impacted by the previously mentioned increased legal and warranty expenses.
The three struggling businesses had fourth quarter losses of $5.1 million, excluding the impairment charges.
And we have a path forward to get these businesses as Pete mentioned to run near breakeven by the end of 2020.
In had they been break even in the fourth quarter. This year aerospace aerospace margins would have been closer to 11% to 12%.
Going to the test segment sales in the quarter sales were $26.3 million compared with 27.7 million in 2018 fourth quarter.
Adjusting else sales or the semiconductor business from both periods test systems segment sales rose from $15.5 million.
In the 2018 fourth quarter to $24.4 million this year.
The increase was driven by the acquired businesses, which contributed $9.9 million and sales in the quarter.
Test segment had adjusted operating loss of $1.5 million this year compared with an adjusted operating loss of 2.3 million in the prior year operating margin was impacted by approximately $6 million of sales that had little or no margin as I previously discussed.
For the full year consolidated sales were 772 million <unk> point $7 million.
Decrease of $30.6 million from 2018.
Again for comparability, we need to exclude sales from the divested semiconductor test business from each period.
This gives us adjusted sales of $763 million.
Which was an increase of $44 million or 6.1% for the ongoing business.
Aerospace sales increased by 17 million and test sales increased by $27 million.
GAAP consolidated income from operations was $1.7 million in 2019.
Compared with $63.7 million in 2018, applying the same adjustments previously discussed to remove the impairment and restructuring charges of 28.8 million legal reserve of 19.6 million in the direct margins from the semiconductor business a 6.8 million.
Adjusted full year operating income was $43.4 million or for 5.7%.
Compared with adjusted income from operations of $40.6 million or 5.6% in 2018.
Full year Aerospace segment sales increased by $17 million to $692.6 million.
Or 2.5% compared with the prior year.
Electrical power motion sales increased 35.1 million.
Lighting and safety increased 11.1 million in avionics sales decreased by $25.1 million.
[noise] Aerospace GAAP operating profit for the year was 16.7 million.
Adjusted operating income was $65.1 million or 9.4% of sales after adjusting for the impairment and restructuring charges and the legal accrual compared with 10.5% in the prior year.
Aerospace operating profit was negatively impacted in 2019 by increased tariff costs.
Which increased $5.9 million compared with the prior year. So while it is increased legal fees and warranty costs.
Full year test segment.
2019 test segment sales were $80.1 million compared with 127.6 million in 2018.
The decline was entirely due to the divestment of the semiconductor test business in February 2019.
Removing sales of the divested business from each period adjusted test segment sales were $70.4 million in 2019 up 62.3% from adjusted 2018 sales of $43.4 million.
Organic sales increased $14.1 million in acquisitions added $12.9 million.
GAAP operating profit for the segment was 4.5 million compared with 10.7 million in 2018.
Adjusting out the direct profit margin from the divested business adjusted operating loss was $10.3 million in 2019, and 13.4 million in 2018 most of the loss in 2019 was the result of the $2 million of restructuring charges that we recorded in the second quarter.
Over to the balance sheet, our balance sheet continues to be in good shape net debt was $156 million.
And our trailing four quarter leverage ratio is defined by our borrowing agreement was <unk> 0.9 times adjusted EBITDA as defined by the agreement.
This reflects the $80 million gain that we recognized on the sale of the semiconductor business in the first quarter.
Excluding that gain the gain the leverage ratio would have still been very low at 1.7 times EBITDA.
Our maximum leverage is 3.75 times for our revolving borrowings revolver borrowing capacity.
Regarding capital deployment.
On February Threerd, we issued a press release announcing the pausing of our share buyback.
Given the uncertainty surrounding the timing of the seventh or seven Max returned to service in production.
And the impact that the Corona virus might have on our markets. We feel the most prudent course of action is to take a conservative view on capital deployment.
Focusing on conserving cash or paying down debt until the picture becomes clearer for us.
In the fourth quarter, we did buyback 28000 shares at a cost of $800000.
And prior to the pausing of our share back this year in 2020, we purchased another 282000 shares at a cost of $7.7 million.
[laughter].
Pete.
[noise], Okay. So looking forward for the rest of 2020 again in February 3rd we issued a release thing we were.
We were pulling our revenue guidance for the year until the situation got clear a unfortunately today the situation is still not clearer.
We need a.
Little bit of a firmer estimate as to a return to production for the southern through seven Max and we need.
Estimate or some some quality predictions on returned to service.
For the Airlines [noise].
I'm, hoping that when we talk again.
Reporting first quarter results.
In early May that we will have that clarity if we get it before hand, we'll issue guidance sooner rather than later, but I think for now a reasonable expectation.
Is that May press release.
However, we are a in late February and within a shouting distance of the ended the first quarter.
We're expecting first quarter revenue to be light 155 to 165 million.
It is what we're predicting 90% of it will be aerospace.
We are expecting that we will strengthen significantly as the year progresses again that depends obviously on the returned to production and some reasonable return to service, but even apart from 737.
Max activity, we have oh kind of a schedule that's bias towards the end of the year with with the rest of our book of work So [noise].
So one way or another we expect the second half to be stronger than the first half. The question is how much and.
We will publish a more results when we soon as we can but.
We've been surprised enough I guess by issuing expectations than having to pull them back that we are reluctant to do it again at this point.
[noise]. So I think that concludes our prepared remarks, Christine we can open it up for questions though.
Thank you we will now be conducted a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
Hey, confirmation don't will indicate your line is my question Q.
Hey Press Star too if you would like to have moved your question from the Q.
For participants easy speaker equipment, it may be necessary to pick up your had said before I personally darkie.
One moment, please let me pull for questions.
Thank you. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, gentlemen, thanks for taking my questions.
Morning.
Maybe to start with you were down 50 people I think you've you referred to in a in operations relates to 737 I didn't catch if there was a charge related to that and if you know if those costs answer or evident Q4, I expect not because there's still producing how should we think of that you know.
Coming down in Q1, and the operating margin and aerospace heading forward.
[noise] [noise] there wasn't much of a restructuring charge associated with those reductions and they were late Q4. So you wouldn't feel much in Q4.
But you know I think it's probably fair to say that it's a good book of business for us on the 737, so when the volume goes way down that we ever really hard time cutting costs proportionally.
I'm, just because we have too much infrastructure and those operations that we have to maintain and other business. We have to execute on so it's going to come it's going to compress margins until we get back into some regular production cycle on 737, maybe you want to anything no I think that that's accurate.
Okay, and assuming we get to production to be starting by mid year I I don't know what balling actually end up doing or that's actually a but 40 plans, maybe a kind of aggressive in the beginning but certainly get the 40 to 40 57 by 2021.
When does the aftermarket actually come back for your business, particularly given you know the all the planes that are being over you know run over capacity right now.
It's a very good question John.
To be honest, we are asking the same question of ourselves.
[music].
The 737 effects are supposed to ways, if Boeing announces they're going to restart production at whatever quantity, it's easy for us to kinda plug that into our our models that into our and into our factories.
I'm, assuming that it doesn't stay shut down too long because when you lose some of that capacity permanently or it's much harder to bounce back.
But the aftermarket side it you're asking about is is a very important question for us and frankly, we're at a little bit of an unknown situation. We've never been in a situation where the industry has gone through this kinda hiccup with this money planes on the sidelines you know there while lead very making predictions as to how long.
It's going to take to get those airplanes back into service and we don't pretend to be experts in that we don't know I mean, I've seen predictions for a year and a half I've seen.
Much faster predictions like a quarter.
But the question the you're asking is even beyond that which is when does the airline when do the airline start kind of resuming normal behavior as as we would a understand it.
And I and I would assume that that's linked to a return to service, but I don't know how closely. So for example, if it takes a year and I have to get airplanes into the air it could be that the airlines resumed their.
Plans in their fleet upgrades.
Immediately knowing for sure when they're gonna get airplanes and they can start in advance.
With that work it could also be on the other hand that they are you know some of them are more conservative and want to wait till they have or the airplanes in their hands and in their fleets.
We just we just don't know the answer to that yet. It's a fair question. It's one that I think we need to keep asking but it's one that I can honestly sit here and tell you we know the answer.
Okay, that's fair, but maybe a a bit more color on that the I guess 800 planes that are sitting on lots right now how many of those have your off aftermarket products installed on them and maybe how many are the Q to get them installed.
Because those would be the quickest come back in a server side I would assume.
A very few of them have our aftermarket product on it.
Very few.
I have to them or new build half of them are new built so they just got off the production line. So they would have no aftermarket by definition. The other half are relatively new airplanes that out there for less than a year or so your and a half maybe.
You know your happens service I mean.
With them sitting on a lot be an opportunity for for them to be upgraded to it and see power and that kinda activity and all the us sitting there Oh <unk> I can tell I can tell your nobody is doing that okay, nobody's, but I'll just touch on those airplanes.
Okay. One last one just how much legal and warranty expense once the outside of the reserve that you talk.
And does that rollover under 2020.
Well I don't expect the warranty expense expense [noise].
[noise] rolling into 2020 or combine that was about $4 million.
And the quad and and I assume that with at least on site bigger than the warranty side, where they've got to say.
No the warranty was about two thirds of it.
Okay got it are there any other charges that we should be aware of that that may impact Q1, or two to <unk> and we're going forwards.
Uh huh.
No.
No.
Okay, great. Thank you.
Thank you.
Our next question comes through line of Ken Herbert with Canaccord Genuity. Please proceed with your question.
Hi, Good morning, Pete Dave.
Good morning, Oh, I just wanted to ask on the on the Max I mean, a lot of suppliers that sell to Boeing directly like like you do out of.
On the for the P.S. use.
Have indicated that they're getting signals that they should start production again in April around that time frame, obviously, it sort of lower rates.
Is there anything else you can you can comment on or anything else you can share regarding sort of where your discussion stand and your expectations as to when you might start to ship.
Max product again to Boeing directly.
Oh sure we do have ongoing discussions there or not.
They're not from at this point, so what you know where we are asking for certain accommodations to keep the production line going frankly.
We have not gotten a positive response to that but it but in general we read into here and.
Similar things to what you're describing can kind of a slower rate.
Start up at the you know March April timeframe.
And that going and you know for quite some period of time till late in the year, but but we don't have firm guidance on that at this point.
Right.
If we did that would be enough I think for us to put some kind of guidance out there, but we just don't have it yet.
Okay, that's reasonable and when would see what's the cost actions you've taken when you do start to ramp a Max production.
How long will it take or it will volume do you need to get back to before on the Max Youre. Your maybe it sort of segment margins or how do we think about the margin progression on that.
Good question.
Well I think if we can get back into production at a steady state and even a half of what we did last time, we can manage or you know until the shutdown were at 42, a month, we could get a half that.
I think we'd be.
In pretty good shape, especially given the the cost cutting and the progress we've made with the other three businesses I mean, that's a big margin pickup for us.
And for the most part.
That pickup has nothing to do at 737, a little bit at CCC, because see Ccs market for VIP airplanes is dependent on the Max.
A little bit but.
But but.
But for the most part that margin pickup should happen.
Kinda, regardless of whats happened <unk> happening with the 737, which affects us more in other parts of the business. So I will feel a lot better when we get back into production.
But then again of course returned to service is also important for the reasons I've already discussed.
Okay. That's helpful and just finally, you obviously did two small acquisitions on the test side in the second half of 19, as we think about capital allocation. How should we think about M&A activity. This year and is it still something you're looking at or should we is is that maybe get.
Sidelined a little bit here, just until you get better certainty on the business.
Yeah, I think it's probably safe to say, it's a little bit sidelines I mean, we have our eyes open you always have to because you can't it's not up to us when a good acquisition candidate becomes available.
But our first priority is to you know.
Execute on the things that are in front of us and prepare ourselves for the future as best we can read it and and to that extent that takes some attention away from.
From the possibility of acquisition I think also it's probably safe to say that most sellers in the market right now or are.
Probably thinking twice about that and pulling back a little bit. So I think the whole activity levels is slowing down a little bit.
Okay. Just one final question, there's obviously a lot of concerned with with the virus on supply chain to I know youve been working to maybe move some of the work out of China on your supply chain can you just give any high level comments on to what extent, you're maybe seeing the impact of this yet on your business use.
The supply chain or customer demand or how we should think about that obviously a lot of uncertainty there, but any anymore color around that would be great.
Yeah.
A lot of uncertainty as you said and it wasn't in our prepared remarks, because we don't have anything from the say about it but there are three potential impacts for us.
One is obviously it is hurting airlines right now.
And anything that hurts airlines risk hurting us, but we've not seen or had had that virus fear.
Used as an explanation for.
A lack of demand in the market that's not what we're hearing at this point. So we've got our eyes on it we obviously have close relationships with airlines.
But at this point, that's not a major driver.
The second.
Potential impact for US is sources of supply we are pretty vertically integrated and most of our businesses, but we do some sourcing out of China.
You know for better or worse, we've been actively trying to move many of those supply chains impart because of tariff expense.
Yeah, we've made a lot of good progress.
And so far we're not aware of major supply wrinkles, but you know people in a in China are slowly getting back to work factories are slow getting back to answering phone calls so we're not exactly sure.
If we're gonna have much of an issue or not most of what we do there is is pretty low level assembly mechanical or electrical <unk> electronic circuit boards or.
Or you know some some metal work, maybe but it's not terribly.
Limiting in terms of sources of supply. So we could do most of what we do in China somewhere else. So at this point, that's not a major issue for us.
The preferred area excuse me with.
We actually have.
Quite a bit of sales activity going on in China, and like anywhere else in the world, if you're going to do it aftermarket sale to an airline they have a process. They typically go through and that process typically involves flight trials.
And fit checks and some of these things can take two or three months to.
To go in there to run the course and you have to run the course before you get kind of the big production order and we are seeing those efforts push out so.
Again, not major things that we necessarily or or wringing, our hands over but three areas, where we're watching it kinda airline traffic.
Our development programs and sources of supply, but nothing major to say today.
Alright, thanks for the thanks for the color.
Sure.
Our next question comes run of George Godfrey with C.L. King. Please proceed with your question.
Thank you.
Good morning. Thank you for taking the question. The first one is I wanted to follow up Pete on your comments around acquisitions and thinking about.
The last five years and the challenges.
You faced in the semiconductor business in the three businesses. We have do you think the the complexity of the business is such that doing more acquisitions, just brings in more volatility or difficulty.
And therefore, perhaps the business or the capital should be allocated more excuse me towards share buyback and anticipating you, saying no. We can do more acquisitions, but.
I'm thinking about Aero sat for example, where the issues were not with Astronics. Both the partners. So even if you've got your arms around the company who by the partners you deal with May not and therefore, you have these problems that can keep lingering on that's the first question. Thanks.
Well I will grant you're a yard your charge, there and certainly acquisition spring complexities no doubt about it. So that's something you have to weigh in you know from a risk analysis and we've obviously missed a few a here recently, so I think we've learned some lessons.
And you carry that forward and like I said you'd have to keep your eyes open because you never really know but.
But at this point, but we're not feeling a tremendous amount of pressure to do an acquisition for sure and your other question about buybacks a with the share price word is currently I think you know that's.
Compelling use of capital compared to anything else, we might do with it right now we're not we're not buying shares for as Dave said I think we have a responsibility to be a little bit conservative as managers of the company's assets given the questions in the market and the continual.
I guess slide in one of our major programs the seven through seven Max we want to get that under control, but but we're aware of the trade off of external investment versus internal investment and I think we will continue to to balance our priorities as opportunities permit.
Okay and then my second question is if I look at the three month period, just ended versus last year and I'm looking specifically at the aerospace segment.
172 million this year versus 175 million and if I look at the margin an add back.
The 5.1 million you talked about to the adjusted Aerospace operations. It always still below what the margin was a year ago and I'm guessing those three problem businesses will contributing to the loss. There. So my question is is the.
Product mix today fundamentally less profitable than it was a year ago or the customer demand for the certain revenue mix changing such that the revenue might not look different but the profitability of the revenue mix results net being less profitable revenue stream as we move forward. Thanks.
And if I if that income through clearly as we stated.
Yeah I think.
George We also have the.
The increase in illegal and warranty costs that were primarily in the aerospace segment.
And we also we had an increase of tariffs.
Compared to the year before.
For the year anyways.
Okay. Okay. So.
So the aspect just very simple so $100 of aerospace revenue today and going forward, even if revenue mix shift with customer demand on specific products changes. The net result is that hundred dollars should be every bit as profitable as it was today a five years ago.
Right.
Yeah, I mean, we believe we typically talk I'm about to leverage we have on our incremental sales being you know 40, 40% plus so I think.
I think that's still applicable.
<unk> to the to the model today.
Okay. Thank you for taking my question.
Thank you.
Our next question comes your line of Dick Ryan with Dougherty and company. Please proceed with your question.
Thank you.
C P that the.
Q1 guided level, Oh, you guys anticipating profitability.
Yeah.
We are duck, it'll be close, but we should be profitable at that level.
Okay.
And you look at it.
It's it's kind of a it's a it's a low single digit operating income level at at that point, but.
[noise] to be clear if we expected we were going to continue to operate at that 155 to 165 million dollar quarterly revenue level.
We would make some changes.
More and more changes then what.
We've seen over the last six months or.
We don't expect while we're not providing.
Some detailed guidance the business is not currently.
Staffed.
To run at a 163 million dollar rate, where we're staffed to to run up to a 200 million dollar plus quarterly rate and that's if we didn't expect that at some point, we would probably would be making some significant adjustments I think.
Okay.
On the legal side is there any historical precedent that would suggest the UK air France goes more towards is a U.S. ruling or towards a German rowing.
That's a very good question [noise].
The rules it turns out very pretty dramatically from country to country. So.
There's a thought process that you go through and you kind of started at the beginning over and over in each country.
Different lawyers same material so from a cost standpoint, one of the good things I guess is that we've kind of been over the last couple of times now. So we wouldn't expect to have the same level of cost repeating the argument.
In the new countries.
But but they are different the period of performance is different the damages calculation techniques are different.
And the it some other rules like you know one other things well.
The though the way the product the gets to the country you know the applicability towards the patent infringement rules. There varies two on him I'm talking a little bit in code because I have got to be a little bit careful but.
But it is basically starting all over and you know like you can't help but notice that you know the U.S. company wins in the U.S. and the German company wins in Germany, and maybe that's just not the way it always works, but I wonder how many times the U.S. company, one in Germany, and the German company ones in the U.S. it'd be interesting to run an experiment.
I don't know, but we were moving to relatively neutral turf and these other two countries. So to the extent that there's a home advantage and I don't know if there is but to the extent that there's a home advantage you'd expected to be a little bit more even in those in those other two locations.
Okay. Thank you so yeah.
No that aerostats more focused on the business connectivity front can you kind of handicap, where do you think the competitive landscape is today Pete I mean, you've got satellite options, obviously with with your offering and you've got some you know air to ground competition as well.
How is the progress with the new partners on.
The business jet offering looking and what what's your sense of that market rolling out.
Oh, well our main partner, there's Collins aerospace and Ah you know, they're a very credential.
The company. They are very successful obviously in a lot of ventures and I have a lot of fingers and a lot of places and so far I'd say, we think things are going pretty well, we have made some changes to our product.
Partly driven by improvements on our side, partly driven by requests on their side and we think the combination makes it a compelling product.
It's a little early to.
To put detailed plans out there as to how we're going to succeed, but but we're optimistic and you're right. There are competitive offerings today, if a for a for a plane that flies primarily domestically over North America, an air to ground installation is relatively cheap and effective.
You know it may work better in many circumstances, but for bigger airplanes that go across the water those options don't work. So that's where our market really is and I guess, we feel.
You know were little bit cautious obviously based on experience, but were given everything we got to this one programming, we're very focused on that and.
As the year progresses, we should be able to start talking about installation rates and stcs at this point, it's it's mostly a certification exercise.
Okay, great. Thank you.
Sure. Thank you.
Our next question is they follow up question from George Godfrey with C.L. King. Please proceed with your question.
[noise] guarantee there Mr Guy, Georgia lives.
Perhaps you have your line a mute.
Mr. Rob for your line is lives.
Oh, sorry, thank you.
I just kicking this thing around in my head and I'm thinking back to my question on complexity and I want to use the lawsuit Pete you mentioned about winning in the U.S. and winning in Germany that even if youre in the right and fully recognize that the NPV of victory is just not as great as that time it uses up with.
Management bandwidth to focus on other issues and so I'm using that as a.
And data point or an issue in the California plant, a Washington, where you say you know what we just we I just can't deal with that right now I've got a focus on other things as it does that.
<unk> thought process come in where you just have despite the ball and just say yeah, we're right, but we need to move on.
Thanks.
Uh huh.
Well in this case just for a little more background to the history stems from activities that happened in way back like in 2000, 2001 2002 2003.
The activities are central to our in seat power product line would be loan for yeah. I don't know 17 18 years about that time.
And there is there is not a reasonable there has not been and is not a reasonable option to walk away based on disagreement other parties just not not an option frankly. So this is something that we have to go through we don't like preferred not to spend time or money doing us.
But you don't always had your choice you know would prefer not to deal with 737 groundings, either but we don't have a choice. A this is one of those things it's kinda central to one of our core technologies, we think.
It's frivolous to a large extent, but we got to compete it so.
Not much of an option.
Understood. Thank you for taking the follow up.
Sure.
We have reached the end of the question answer session I would now like turn the floor back over to management for closing comments.
[noise] no closing comments. Thank you for your attention, we'll look forward to talking with you at the end of the first quarter. That's a good day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.