Greetings, and welcome to the Astronics 4th Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. 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 Astronics. Joining me on the call are Pete Gunderman, our Chairman, President and CEO and Dave Berney, our Chief Financial Officer. You should have a copy of the 2019 Q4 and full year financial results, which were released earlier this morning. And if not, you can find them on our website at astronics dotcom.
Let me mention first, as you're likely aware, that we may make some forward looking statements during this formal discussion as well as during the Q and A session. 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 Securities and Exchange Commission. These documents can be found on our website or atsec.gov. During today's call, we will also discuss some non GAAP financial measures.
We believe these 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 to comparable GAAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin. Peter?
Thanks, Debbie, and good morning, everybody. Our agenda today is as follows. I'm going to start with a discussion of some of the major issues facing the company, not only in the Q4, but looking a little bit backward and looking a little bit forward. There are a number of them, 3 on the aerospace side and 2 on the test side. Then I'm going to turn it over to Dave and he's going to walk us through the numbers both on the income statement and the balance sheet.
Then we'll talk a little bit about the future to the extent that we can see it and do the normal question and answer at the end. So major events, starting with the Aerospace segment and probably the elephant in the room, the 737 is a challenge for us. When we last talked, when we released Q3 results in the 1st week of November, we at that time issued preliminary revenue guidance for 2020. And there were some assumptions stated as part of that revenue guidance. Specifically, we assume that the 737 MAX would see a return to service at or near year end.
And at that time, we would expect a pretty quick production ramp from 42 airplanes a month to 47 a month, eventually going to 57 probably sometime out in 2021. Those expectations proved way out based, instead 42 aircraft a month have gone to 0 and 800 airplanes plus remain grounded. The 40 2 airplanes a month going to 0 affects us because we put about just shy of $100,000 of product on each airplane as it's built. That's about $4,000,000 a month in revenue. That's good business for us.
It's one of our largest production programs actually at 42 or 52 units a month. The 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 of you know, most of our stuff is not flight critical that we do in the aftermarket. It is an amenity. And with the shortage of capacity, we have seen starting late last year a tendency towards deferral where programs that were in process have been kind of pushing out to the right.
This was evidenced in our Q4 bookings, which you see. Our Aerospace bookings were $140,000,000 That's the last page of our press release. That is well off the pace of recent history. You got to go back a few years for us to be at that level. So we have been asking questions and continue to ask questions of ourselves and of our customers, specifically when will production restart.
At this point, we, as I said, are on a production pause and we have discussions going on with Boeing. There's not a clear resolution to those discussions at this point. So we don't really know. And also when will the return to service occur? That's not so much a Boeing question, that's an FAA question.
Once return to service starts, of course, we'll have to figure out how those 800 airplanes get implemented by the airlines and when will the airlines how will they react and when will they kind of respond to normal. So in the meantime, given 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. We're down approximately 50 people, mostly on the direct side in 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 of and that is the 3 problem kids or problem companies that we've talked about quite a bit over the last year and a half or so.
And we actually feel like we're making lots of progress in this area. The 4th quarter operating loss for the 3 combined was $5,100,000 That's a lot, but it's down from the average of the first three quarters, which was $9,000,000 So a brief summary of the 3. We've talked in the past about Armstrong. Armstrong in the 4th quarter was within the shouting distance of breakeven, dollars 200,000 loss, down from an average of $800,000 over the 1st 3 quarters. We've talked in the past about how we feel Armstrong's basically out of the woods and okay.
It's not probably sustainably profitable at this point. But we've integrated it into our CSC operation in Chicago. We've taken 3 Chicago locations down to 2 and we expect it to be basically at or near breakeven throughout 2020. We think basically Armstrong is out of the woods. CCC similarly, our second challenge, had a relatively good 4th quarter.
The big highlight here is that CCC in the 4th quarter concluded the development process for its Avenir product, which is a state of the art cabin management system for VVIP airplanes that we've been struggling with for about a year and a half, a little bit longer. CCC in the 4th quarter ended up with $700,000 loss, which again is a lot, but it's way down compared to its average over the 1st 3 quarters of a $3,300,000 loss. So going forward, we expect that drop in development expense to basically combined with the revenue increase to bring CCC atornearbreakeven also for all of 2020. That brings us to AeroSat. I announced in our last call that we were doing a review of the AeroSat 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 4 business initiatives to 1. To give you an indication of the scope, the headcount 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 $40,000,000 level to $10,000,000 today. This was not an inexpensive exercise. 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 $29,000,000 for the quarter. AeroSat had about a $4,000,000 operating loss in Q4.
We expect 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 3 problem kids in cumulatively, the operating loss excluding impairments and restructuring charges for 2019 was about $32,700,000 We are quite confident today that that's going to be as we get to the end of 2020, depending on how things evolve with AeroSat at or near breakeven. There could be a minor loss there cumulatively, but in general, the numbers won't be anywhere near what they've done in the past. The 3rd issue on our Aerospace segment was we took a reserve for a legal process that we've had ongoing in Germany. We talked about this in advance in the 4th and Q3 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 the process that's been playing out since 2010. The original filings in 2010 were both in the U.
S. And Germany. Now they have been initiated in France and the U. K. Also.
The technology in question frankly is not critical. It is not important. And in fact, we designed it out about 5 years ago in 2013, 2014 when we first figured out that we were going to have an issue here. In the U. S, we over the last couple of years defeated the patent and 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 $17,900,000 additional, bringing the total to Germany to 20.6 percent, that number is a bit of an estimate. There's a lot of moving parts to the order and some things that we don't know for sure at this point. So it could bounce around a little bit as we go forward.
But until the appeal is heard and resolved, and again, we expect that in 2021, we don't think there's going to be major news in Germany. France and UK are just getting started. The UK is 1st, France will be 2nd. And again, we think that will probably mostly be 2021 news. We don't expect too many issues to happen here in 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 saw 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 $100,000,000 The net gain on the sale was about $79,000,000 dollars 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 84,000,000 total for the year, dollars 9,700,000 in 2019, so a big drop off. So year over year comparisons for GAAP revenue recognition purposes are quite a bit misleading. And the revenue shows a lot stronger in 2018, the gain on sales shows in 2019. This is a big part of the reason why we've gone to an adjusted presentation over the 4th quarters of 2019. In the second half of twenty nineteen, 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 that complements our military focus with a product line geared more at municipal users like police forces or first responders or border patrol. Diagnosis is a complementary fit in the transit area for train tests. 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. Our test business on an adjusted basis backing off the semiconductor sales saw a very strong growth in 2019 of 62%, 2 thirds organic, 1 third acquisition. Margins are not where we expect them in part due to purchase accounting, but we'll 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%. We're not issuing guidance today. We rescinded that earlier this month, as you know, in a press release we issued on February 3. 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 in 2020.
With that, I'll pass it over to Dave to talk through the numbers and take it back a little bit later.
Thanks, Pete. As Pete touched on there was a lot of noise in the Q4 to cut through. So in addition to looking at GAAP results, as he mentioned, it makes sense to talk to adjusted results, removing sales and direct costs from our semiconductor test business, which we own for the full year of 2018, but sold in February of 2019. Also, we'll remove the impact of the restructuring and impairment charges for an antenna business and the legal reserve 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 8 of the release, you can see geographically the income statement lines impacted by these items. Getting to the 4th quarter operating results, 4th quarter consolidated sales were down $4,500,000 to $198,400,000 This reflects a $10,300,000 decline due to the divested semiconductor test business, partially offset by added sales from the Diagnosis and Freedom Communications acquisitions that were also in our Test segment. Those added $9,900,000 of sales. Aerospace segment sales decreased by 1.8 percent to $172,100,000 This is a point where 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 $36,900,000 in the Q4 of 2019, which reflects $46,700,000 of restructuring and impairment charges and an increased reserve for the ongoing lawsuit. More specifically, in our antenna business, we took charges totaling 28,800,000 dollars relating to the restructuring and refocusing of that business and additionally we increased the legal reserve by $17,900,000 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. Making these adjustments, we end up with an adjusted operating income of $8,100,000 or 4.1 percent on adjusted sales of $196,500,000 compared with adjusted operating margin of 8.1% in the prior year. The 2019 Q4 operating margin was affected by higher legal and warranty costs, both primarily in the Aerospace segment.
Additionally affecting operating margins was $6,000,000 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 on those sales to be in the 30% to 40% range. Going to the Aerospace segment for the quarter, Aerospace segment sales compared with the prior year's 4th quarter decreased by $3,100,000 or 1.8 percent to 100 and $72,100,000 The drop was mainly in the avionics product line, which declined $4,100,000 or 13.1 percent relating to soft inflate entertainment and communication hardware sales in the quarter. The Aerospace segment GAAP loss from operations was $32,300,000 Adjusting for the restructuring of the antenna business and the legal reserve, the adjusted operating income was $14,500,000 or 8.4 percent of sales compared with 12.7% last year. The 2019 Q4 was negatively impacted by the previously mentioned increased legal and warranty expenses.
The 3 struggling businesses had 4th quarter losses of $5,100,000 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. And had they been breakeven in the Q4 this year, aerospace margins would have been closer to 11% to 12%. Going to the Test segment sales in the quarter, sales were $26,300,000 compared with $27,700,000 in 2018 Q4. Adjusting out sales of the semiconductor business from both periods, Test Systems segment sales rose from $15,500,000 in the 2018 Q4 to $24,400,000 this year. The increase was driven by the acquired businesses which contributed $9,900,000 in sales
in the quarter.
Test segment had adjusted operating loss of $1,500,000 this year compared with an adjusted operating loss of $2,300,000 in the prior year. Operating margin was impacted by approximately $6,000,000 of sales that had little or no margin as I previously discussed. For the full year, consolidated sales were $772,700,000 a decrease of $30,600,000 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 $763,000,000 which was an increase of $44,000,000 or 6.1 percent for the ongoing business.
Aerospace sales increased by $17,000,000 and test sales increased by $27,000,000 GAAP consolidated income from operations was $1,700,000 in 20 19 compared with $63,700,000 in 20 18. Applying the same adjustments previously discussed to remove the impairment and restructuring charges of $28,800,000 legal reserve of $19,600,000 and the direct margins from the semiconductor business of $6,800,000 Adjusted full year operating income was $43,400,000 or 5.7 percent compared with adjusted income from operations of $40,600,000 or 5.6 percent in 20 18. Full year Aerospace segment sales increased by $17,000,000 to 692 point $6,000,000 or 2.5 percent compared with the prior year. Electrical power motion sales increased 35,100,000 dollars Lighting and Safety increased $11,100,000 and avionics sales decreased by $25,100,000 Aerospace GAAP operating profit for the year was $16,700,000 Adjusted operating income was $65,100,000 or 9 0.4% 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 the 2019 by increased tariff costs, which increased $5,900,000 compared with the prior year as well as increased legal fees and warranty costs.
Full year test segment. 2019 test segment sales were $80,100,000 compared with 100 $27,600,000 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 $70,400,000 in 20 19, up 62.3 percent from adjusted 2018 sales of $43,400,000 Organic sales increased $14,100,000 and acquisitions added $12,900,000 GAAP operating profit for the segment was $4,500,000 compared with $10,700,000 in 2018. Adjusting out the direct profit margin from the divested business, adjusted operating loss was $10,300,000 in 20.19 $13,400,000 in 20.18.
Most of the loss in 2019 was a result of the $2,000,000 of restructuring charges that we recorded in the Q2. Over to the balance sheet, our balance sheet continues to be in good shape. Net debt was $156,000,000 and our trailing 4 quarter leverage ratio is defined by our borrowing agreement was 0.9x adjusted EBITDA as defined by the agreement. This reflects the $80,000,000 gain that we recognized on the sale of the semiconductor business in the Q1. Excluding that gain, the leverage ratio would have still been very low at 1.7x EBITDA.
Our maximum leverage is 3.75 times for our revolving borrower borrowing capacity. Regarding capital deployment, on February 3, we issued a press release announcing the pausing of a share buy back. Given the uncertainty surrounding the timing of the 7/37 MAX return to service and production and the impact that the coronavirus 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 Q4, we did buyback 28,000 shares at a cost of $800,000 and prior to the pausing of our share back this year in 2020, we purchased another 282,000 shares at a cost of $7,700,000 That's it, Pete.
Okay. So looking forward for the rest of 2020, again, on February 3, we issued a release saying we were pulling our revenue guidance for the year until the situation got clear. 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 7 37 MAX and we need some estimate or some quality predictions on return to service for the airlines. 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 beforehand, we'll issue guidance sooner rather than later. But I think for now, a reasonable expectation is that May press release. However, we are in late February and within shouting distance of the end of the Q1, we're expecting 1st quarter revenue to be light, dollars 155,000,000 to $165,000,000 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 a return to production and some reasonable return to service.
But even apart from 7 37 MAX activity, we have kind of a schedule that's biased towards the end of the year with the rest of our book of work. 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 more results when we soon as we can. But we've been surprised enough, I guess, by issuing expectations and having to pull them back that we are reluctant to do it again at this point. So I think that concludes our prepared remarks.
Christine, we can open it up for questions now.
Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, gentlemen. Thank you for taking my questions.
Good morning.
Pete, maybe to start with, you were down 50 people, I think you refer to in operations related to the 737. I didn't catch if there was a charge related to that. And if those cost savings were evident in Q4, I'd expect not because they're still producing. How should we think of that expense coming down in Q1 and the operating margin in aerospace heading forward?
There wasn't much of a restructuring charge associated with those reductions and they were late Q4, so you wouldn't see them much in Q4. But 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, we have a really hard time cutting costs proportionally, just because we have too much infrastructure in those operations that we have to maintain and other business we have to execute on. So it's going to compress margins until we get back into some regular production cycle on 7 37. Now you want to add anything to that?
No, I think that's accurate.
Okay. And assuming we get to production, if you're starting by mid year, I don't know what Boeing actually ends up doing or the FAA, but for 40 planes maybe kind of aggressive in the beginning, but assuming we get the 40 somewhere between 4057 by 2021, When does the aftermarket actually come back for your business, particularly given all the plants that are being over run over capacity right now?
It's a very good question, John. To be honest, we are asking the same question of ourselves. The 7 37 affects us those 2 ways. If Boeing announces they're going to restart production at whatever quantity, it's easy for us to kind of plug that into our models and into our factories, assuming that it doesn't stay shut down too long, because then you lose some of that capacity permanently or it's much harder to bounce back. But the aftermarket side that you're asking about is a very important question for us and frankly we're in a little bit of an unknown situation.
We've never been in a situation where the industry has gone through this kind of hiccup with this many planes on the sidelines. There are wildly varying 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 that you're asking is even beyond that, which is when does the airline when do the airlines start kind of resuming normal behavior as we would understand it? 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 a half to get airplanes into the air, it could be that the airlines resume their plans and their fleet upgrades immediately knowing for sure when they're going to get airplanes and they can start in advance with that work. It could also be on the other hand that they are some of them are more conservative and want to wait until they have the airplanes in their hands and in their 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't honestly sit here and tell you we know the answer.
Okay. That's fair. Maybe a bit more color on that, I guess, 800 planes that are sitting on lots right now. How many of those have your aftermarket products installed on them and maybe how many are in the queue to get them installed? Because those would be the quickest to come back into service, I would assume.
Very few of them have our aftermarket product on it. Very few. Half of them are new build, half of them are new build, so they just got off the production line. So they would have no aftermarket by definition. The other half are relatively new airplanes, been out there for less than a year or so, a year and a half maybe, you know, a year and a half in service, I mean.
With them sitting on a lot be an opportunity for them to be upgraded to NC power and connectivity and all that
I can tell you nobody is doing that. Nobody is touching those airplanes.
Okay. Dave, one last one. Just how much legal and warranty expense was there outside of the reserve that you took and does that roll over into 2020?
Well, I don't expect the warranty expense will roll into 2020. Combined, it was about $4,000,000 in the quarter. And I
assume that was the legal side bigger than the warranty side or were they about to say?
No, the warranty was about 2 thirds of it.
Okay, got it. Are there any other charges that we should be aware of that may impact Q1 or Q2 or anywhere going forward?
No.
No. Okay, great.
Thank you. Thank you.
Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.
Yes. Hi, good morning, Pete and Dave.
Good morning.
I just wanted to ask on the MAX. I mean, a lot of suppliers that sell to Boeing directly like you do out of for the PSUs have indicated that they're getting signals that they should start production again in April or around that timeframe, obviously at sort of lower rates. Is there anything else you can comment on or anything else that you can share regarding sort of where your discussions stand and your expectations as to when you might start to ship MAX product again to Boeing directly?
Sure. We do have ongoing discussions that are not firm at this point. We are asking for certain accommodations to keep the production line going, frankly. We've not gotten a positive response to that. But in general, we read and hear and similar things to what you're describing, Ken, kind of a slower rate start up at the March, April timeframe and that going for quite some period of time till late in the year.
But we don't have firm guidance on that at this point. 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 with the cost actions you've taken, when you do start to ramp MAX production, how long will it take or what volume do you need to get back to before on the MAX your maybe a sort of segment margins or how do we think about the margin progression on that?
It's a good question. I think if we can get back into production at a steady state at even half of what we did last time, we can manage or up until the shutdown, we're at 42 a month. If we could get half that, I think we'd be in pretty good shape, especially given 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 with 7 30 7, a little bit of CCC because CCC's market for VVIP airplanes is dependent on the MAX a little bit.
But for the most part, that margin pickup should happen kind of regardless of what's 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, return to service is also important for the reasons I've already discussed.
Okay. That's helpful. And just finally, you obviously did 2 small acquisitions on the test side in the second half of twenty nineteen. As we think about capital allocation, how should we think about M and A activity this year? And is it still something you're looking at?
Or should we is that maybe getting sidelined a little bit here just until you get better certainty on the business?
Yes. Think it's probably safe to say it's a little bit sidelined. 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 execute on the things that are in front of us and prepare ourselves for the future as best we can read it.
And to that extent, that takes some attention away from the possibility of acquisition. I think also it's probably safe to say that most sellers in the market right now are probably thinking twice about that and pulling back a little bit. So I think the whole activity level is slowing down a little bit.
Okay. And just one final question. There's obviously a lot of concern with the virus on supply chains and I know you've 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, either supply chain or customer demand or how we should think about that? Obviously, a lot of uncertainty there, but any more color around that would be great.
Yes. Well, a lot of uncertainty, as you said, and it wasn't in our prepared remarks because we don't have anything firm to say about it. But there are 3 potential impacts for us. 1 is, obviously, it is hurting airlines right now and anything that hurts airlines risks hurting us. But we've not seen or 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 in most of our businesses, but we do some sourcing out of China. For better or for worse, we've been actively trying to move many of those supply chains in part because of tariff expense. And we've made a lot of good progress. And so far, we're not aware of major supply wrinkles. But people in China are slow getting back to work.
Factories are slow getting back to answering phone calls. So we're not exactly sure if we're going to have much of an issue or not. Most of what we do there is pretty low level assembly, mechanical or electrical, you know, electronic circuit boards or 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 third area, excuse me, is 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 an 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 2 or 3 months to go and to run the course and you have to run the course before you get kind of a big production order. And we are seeing those efforts push out. So again, not major things that we necessarily are wringing our hands over, but 3 areas where we're watching it, kind of airline traffic, our development programs and sources of supply, but nothing major to say today.
All right. Thanks for the color. Sure.
Our next question comes from the line of George Godfrey with CL King. Please proceed with your question.
Thank you. Good morning and 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 5 years and the challenges you faced in the semiconductor business and the three businesses we have. Do you think 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 towards share buyback and anticipating you saying no, we can do more acquisitions. But I'm thinking about AeroSat, for example, where the issues were not with Astronics, but with the partners.
So even if you've got your arms around the companies you buy, 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 your charge there. And certainly acquisitions bring complexity, no doubt about it. So that's something you have to weigh in from a risk analysis. And we've obviously missed a few here recently. So I think we've learned some lessons and you carry that forward.
And like I said, you have to keep your eyes open because you never really know. But at this point, we're not feeling a tremendous amount of pressure to do an acquisition for sure. And your other question about buybacks with the share price where it is currently, I think that's a compelling use of capital compared to anything else we might do with it right now. We're not buying shares. 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 7 37 MAX, we want to get that under control.
But we're aware of the trade off of external investment versus internal investment. And I think we will continue to balance our priorities as opportunities permit.
Okay. And then my second question is, if I look at the 3 month period just ended versus last year and I'm looking specifically at the Aerospace segment, $172,000,000 this year versus $175,000,000 And if I look at the margin and add back the $5,100,000 you talked about to the adjusted Aerospace operations, we're still below what the margin was a year ago and I'm guessing those 3 problem businesses were contributing to the loss there. So my question is, is the product mix today fundamentally less profitable than it was a year ago or is 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 in it being less profitable a revenue stream as we move forward? Thanks. And if that didn't come through clearly, I'll restate it.
Yes, I think George, we also have the increase in the legal 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. So to ask 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 $100 should be every bit as profitable as it was today or 5 years ago.
Yes. I mean, we typically talk about the leverage we have on our incremental sales being 40%
plus.
So I think that's still applicable to the model today. Okay.
Thank you for taking my question.
Thank you.
Our next question comes from the line of Dick Ryan with Dougherty and Company. Please proceed with your question.
Thank you. Say, Pete, at the Q1 guided level, are you guys anticipating profitability?
We are, Dick. It will be close, but we should be profitable at that level.
Okay.
When you look at the It's kind of a it's a low single digit operating income level at that point. But to be clear, if we expected we were going to continue to operate at that $155,000,000 to $165,000,000 quarterly revenue level, we would make some changes. More changes than what we've seen over the last 6 months. We don't expect, while we're not providing some detailed guidance, the business is not currently staffed to run at $163,000,000 rate. We're staffed to run up to a $200,000,000 plus quarterly rate And that's if we didn't expect that at some point, we would be making some significant adjustments, I think.
Sure. Okay. On the legal side, is there any historical precedent that would suggest the U. K. Or France goes more towards a U.
S. Ruling or towards a German ruling?
That's a very good question. The rules, it turns out, vary pretty dramatically from country to country. So there's a set process that you go through and you kind of start 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 this a couple of times now.
So we wouldn't expect to have the same level of cost repeating the argument in the new countries. But they are different. The period of performance is different. The damages calculation techniques are different and the some other rules like, one of the things well, the way the product gets to the country, the applicability towards the patent infringement rules there varies too. And I'm talking a little bit in code because I've got to be a little bit careful, but it is basically starting all over.
And you can't help but notice that 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, I wonder how many times the U.
S. Company wins in Germany and the German company wins in the U. S. It would be interesting to run an experiment. I don't know.
But we're moving to relatively neutral turf in 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 expect it to be a little bit more even in those other two locations.
Okay. Thank you. Now that AeroSat is more focused on the business connectivity front, can you kind of handicap where you think the competitive landscape is today, Pete? I mean, you've got satellite options obviously with your offering and you've got some air to ground competition as well. How is the progress with the new partners on the business jet offering looking and what's your sense of that market rolling out?
Well, our main partner there is Collins Aerospace and they're a very credentialed company. They are very successful obviously in a lot of ventures and they have a lot of fingers in 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 put detailed plans out there as to how we're going to succeed.
But we're optimistic. And you're right, there are competitive offerings today for a plane that flies primarily domestically over North America, an air to ground installation is relatively cheap and effective. It may work better 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 we're a little bit cautious obviously based on our experience, but we're given everything we got to this one program and 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 mostly a certification exercise.
Our next question is a follow-up question from George Godfrey with CL King. Please proceed with your question. Mr. Gaffer, your line is live.
Sorry. Thank you. I'm 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 you're in the right and fully recognize that the NPV of victory is just not as great as the time it uses up with management's bandwidth to focus on other issues.
And so I'm using that as a data point or an issue in the California plant or Washington where you say, you know what, we just I just can't deal with that right now. I've got to focus on other things. Does that thought process come in where you just have to spike the bullet and just say, yes, we're right, but we need to move on? Thanks.
Well, in this case, just for a little more background, 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, which we've owned for, I don't know, 17, 18 years, about that time. And there is not a reasonable there has not been and is not a reasonable option to walk away based on disagreement of the parties. Just not an option, frankly. So this is something that we have to go through.
We don't prefer not to spend time or money doing this. But you don't always have your choice. We prefer not to deal with 7 37 groundings either, but we don't have a choice. This is one of those things that's kind of 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 and answer session. I would now like to turn the floor back over to management for closing comments.
No closing comments. Thank you for your attention. We'll look forward to talking with you at the end of the Q1. Have a good day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect