Good afternoon. Welcome to day two of the 27th Annual Needham Growth Conference. My name is Chris Grenga, and I'm a Research Associate in the Advanced Industrial Technology team at Needham. We're pleased very much to have Astronics Corporation with us here today. Astronics is a leading supplier of advanced technologies and products to the global aerospace, defense, and other mission-critical industries. That provides an array of power, connectivity, lighting, structures, interior solutions. The company's headquartered in East Aurora, New York. Presenting from the company today is Peter Gundermann, Chairman and CEO, and Nancy Hedges, who was recently named CFO. Thank you for joining us, Peter and Nancy. Peter will present an overview of the business, and then we'll open it up for Q&A after that. Without further ado, Peter, take it away.
Thank you, Chris, and good afternoon, everybody. Sorry for the delay. Somehow we ended up with a presentation. Am I humming?
A little bit.
A little bit. Is that you or is that me? Anyway, we somehow ended up with a presentation from this conference last year, dated January of 2024. And our performance these days is much better than it was a year ago. So we thought it was worth waiting a few minutes to make sure we got the right presentation up on the screen. So appreciate you bearing with us on that. This is a kind of a standard company overview. There's some well-known faces in the crowd. For you, this is a review. You could probably know who you are, and you could do this presentation for me if you'd step forward. But for others, it'll provide a general overview. We're a small mid-cap company with a current market cap of close to $600 million.
A couple of unique things about our structure: we have pretty heavy insider ownership, about 9% of the company these days, and we have two classes of stock. The difference is that Class B shares have 10 votes per share. Common shares have one vote per share. Class Bs do not trade, but they do have economic value because you can convert them to common at any time. A couple of important things to understand about our business at a very top level: we report in two segments. We are an aerospace supplier primarily. About 90% of trailing 12-month revenues are in the aerospace industry. A much smaller portion of our business, about 10%, typically is in the test business. So we act and feel like an aerospace company. The pie chart on the right here is important to understand. It looks at sources of revenue by certain markets.
You can see that 2/3 of our revenue in the last 12 months were from the commercial transport industry. Commercial transport are commercial airlines built by Boeing and Airbus, primarily operated by airlines around the world, and that concentration is what I want you to think about. Our company had a real adventure going through the pandemic as the commercial transport industry basically collapsed, so our revenues dropped pretty dramatically, and we've been climbing back with the recovery in commercial aerospace, and at the same time, while that's been happening, we've won a number of new programs, which, while not necessarily affecting our income statement in a positive way right now, we expect will contribute very heavily to our results in short order, so thinking about 66%, 2/3 concentration in commercial aerospace and the collapse of commercial travel during the pandemic, this is what our top line has done.
The bar chart way over on the left looks at what our revenues were in 2019, right before the pandemic hit, $773 million. You can see that we really dropped dramatically to $445 million over two years in 2021. That was not a lot of fun. It's not something I ever want to do again in my life, but since then, demand has bounced back very strongly, and the last three years, I think our average growth has been something like 21% per year, and we have pretty strong growth, we think, in our future coming up, so during this phase, we're not going to talk a whole lot about it, but everybody is aware of supply chain problems that happened during the pandemic. Our products are very heavily dependent on electronics, so that global electronics supply chain mess was something that we wrestled with.
And also the great resignation, labor changeover. We went from 3,000 to 2,000 employees. Climbing back to 3,000 employees where we are about now was a complicated endeavor during the pandemic, and during that time, of course, there was also a little bit of inflation, so input costs were pretty dramatic, both on the material side and the labor side. It's been something that we've been wrestling with in our income statement, but we think we have that largely straightened out as we head into 2025, so to understand our company, if you look at our press release, we have a number of different ways of presenting our company. This pie chart looks at four major strategic thrusts. That's how I think you can best understand our business. Approximately half our sales these days is in the inflight entertainment and connectivity space.
When you ride around in the cabin of a commercial airplane and you watch a movie or you watch a game or you stream content or you plug in your computer or you go online for airplane connectivity, there is a very good chance that you're using some of our hardware. That's a major market for us. It's a very interesting market. One of the interesting things about it is that it evolves very quickly. It's got short life cycles. So the things that you can do with your electronic devices today are different than what you could do four or five years ago. People want to be able to do the same things in airplanes that they do in their offices or in their homes.
That creates a retrofit opportunity for us where we can obsolete ourselves and sell back to the same client upgraded hardware in relatively short order compared to typical aerospace life cycles where braking systems on a 787 today are very similar to a braking system on the 787 when it first flew a decade ago. Our test business is about 10%. Our flight-critical electrical power is about 10%. Aircraft lighting and safety is about 20%. We're actually one of the world's largest lighting companies for aerospace lighting. We'll go through each of these really quickly to describe the business. I'm going to turn it over to Nancy to go through some financials at the end. I already talked about inflight entertainment and connectivity quite a bit. In-seat power systems are a major franchise for us.
Data loaders, file servers, Wireless Access Points, little devices called Modem Managers that steer antennas to connect with satellites. Those are all products that we manufacture and are all increasingly expected when people get on airplanes. Some of you might remember when connectivity was a new thing, and it existed, but it came into existence, but it wasn't very good. Everybody wanted better and better performance, and you're probably still in that camp, and that's that continual evolution that I was talking about just a minute ago. It's an opportunity for us to continually improve performance in the airplane to what people expect and have grown used to on the ground. We have some really high market share. The power side of it, in particular, we describe our business as having 90% market share in in-seat power. This is a big deal.
Every seat in every widebody airplane for the last decade, at least, has had power, and we do like 90% of it or more, and more recently, narrowbody adoption has increased dramatically. There are like 30,000 narrowbody airplanes out there in the world, and no matter what continent you're on, in Asia or in South America or in Europe or in North America, people are increasingly digital, and they want to be able to plug in and use their device for entertainment or work efficiently as they travel, and they want to get off the airplane with a charged device. They don't want to get off the airplane with an empty device. Major product line for us. In terms of lighting and safety, we break the lighting market into three different categories. There's the lighting systems that go on in the cockpit.
There are the lighting systems that go on in the cabin. There are the lighting systems that go on the exterior of the airplane. We're active in all three. Some pictures here to show some of our products. In the upper left is, that's an F-35 Joint Strike Fighter. We do the exterior lighting suite in that. The picture on the right is a business jet cockpit with a Rockwell Collins Avionics Suite. We do a lot of work with Rockwell Collins. They're a major, or Collins Aerospace, I should say. They're a major customer of ours. The lower left is a passenger service unit in a 737 MAX.
If you sit in a 737 MAX and you hit that reading light above you or the oxygen system, you adjust the air gasper, or heaven forbid, you have an explosive decompression device happen while you're flying, an emergency oxygen system comes down and you put it over your nose and breathe normally. That's all ours. And then the lower right, that is a Pilatus PC-12. Yeah, it's a Pilatus PC-12. We do exterior lighting on a lot of business jets and cockpit lighting also on a lot of business jets. A smaller product line, but an important one as we look to our future, flight-critical electrical power. This is moving away from a passenger amenity and to flight-critical systems. So the airplane doesn't fly without this system functioning. And our topologies are pretty unique. They're high reliability, and they're becoming increasingly standard on new aircraft.
They're basically revolves around electronic circuit breakers, which are different from the traditional thermal circuit breakers, the fuses. I'll show you a picture in a second about what that means. Also high reliability generators and starter machines, spinning machines that instead of being based on traditional windings that have an MTBF, a mean time between failure of, say, 600-1,000 hours, we use permanent magnets or induction-based machines, which can run for 30,000 hours. We take technology that's available in larger, higher-end airplanes and bring it down to small aircraft. That's really what our niche is here. To demonstrate the point, here's a picture of an older Lear 45 cockpit on the left and a Pilatus PC-24 cockpit, a modern cockpit on the right.
The thing I want you to observe is all the circuit breakers on the left side and the right side of the Lear cockpit. Those control every single load on the airplane. So every single load on the airplane runs from the generator to the cockpit and out to the final load. A lot of wiring. It's load-rated wire. And in the event of a fault, the pilot or co-pilot is responsible for managing those circuit breakers and resetting them as appropriate based on the problem that's happening in the airplane. You don't see those circuit breakers on the right side. That's because they don't exist in the cockpit. They're electronic circuit breakers remotely located throughout the airplane. And they have a number of advantages to them in terms of reducing wire weight, automating fault recovery, excuse me, and also being flexible and stable.
Those thermal circuit breakers on the left, 10 years into life, are very different from what they were when they came out of the factory, whereas the electronic circuit breakers, which are little computers, basically can be much more stable over time. We've won a number of programs here. This is, again, only 10% of our business, but we think we're building a very valuable franchise. I want to draw your attention to the FLRAA entry, the second from the bottom, the Bell V-280. The FLRAA airplane is the planned replacement for the Sikorsky Black Hawk for the U.S. Army. So FLRAA stands for Future Long-Range Assault Aircraft. And Bell has been awarded that program, and they have awarded us the electrical power generation and distribution system on that airplane. This is going to be a very big deal for us.
It's unclear or unknown at this point how many aircraft the U.S. Army might eventually want. The number that's typically batted around in the industry is about 2,000 aircraft. Our ship set content, which is still in flux a little bit, we think is going to approach or exceed $1 million an airplane. $1 million an airplane for a company our size is very significant. Typically, today, the largest ship set content we would put on an airplane is $400,000 or $500,000. So this promises to be a very significant program over its life. The Sikorsky Black Hawk, for information, was designed in the early 1970s and has been in production since the late 1970s. It's still in production. If this airplane enjoys anything near that kind of life, it'll be, by the time it's over, a significant add-on to our business.
Finally, here's a list of some of the airplanes that we're on and our shipset contents. Some well-known names here. I describe our business sometimes as a small business with really long fingers. I mean, Joint Strike Fighter, 787, 737, the Cessna Citation business jet line, the FLRAA program. It's something that we're proud of, our content on all these airplanes. And finally, our test business. Our test business is primarily involved in two business pursuits. One is transit tests. So think of a municipal train system, a subway system like what exists here in New York City or in many other cities around the country and around the world, and also radio tests.
We have won a program which is going into production later this year from the U.S. Army to provide test equipment and test capability for the 28 sets of radios that they use for communication when they go out and do their mission, so instead of traveling around with 28 different test setups, they can carry around one test setup, which we would provide, and that one tester is going to be designed to handle all 28 families, which is a big savings for them. That's going to be something like a $215 million program that we expect to kick off in the fourth quarter of this year. Transit test has been a little bit of a slow roll for us. Frankly, it's been negatively affected by pandemic and work from home. Municipal transit authorities have struggled for funding because people aren't, ridership's down and so on and so forth.
There's lots of evidence these days. I'm sure everybody reads the papers and knows a lot of this is happening where work from home is on a little bit of a retreat, and people are being brought back into the office. We think that means good things for our transit test business over time. And with that, I'm going to hand it over to Nancy.
Good afternoon, everybody. I want to take you through just a few financial slides here. Starting with our sales, you can see that our sales here, we've been on a steady path of improvement over 2024 with sales increasing sequentially, beginning with the first quarter here. As our productivity continued to improve with a stabilized workforce and more predictable supply chain, we've enjoyed the increasing benefits from that. We're also benefiting from increased pricing.
During the pandemic, as Pete mentioned, we saw escalation, as did many companies, in our input costs. Most of our contracts are fixed-price contracts over a longer-term period of time. So we didn't have the ability to immediately pass those price increases along to our customers. But as those contracts have come up for renewal, we've been able to negotiate more updated pricing, which should also benefit us not only from the top line, but from a margin perspective as well. Moving over to the right side of the slide, bookings were $189 million in the third quarter, $199 million in the fourth quarter, healthy booking level. I do want to point out that both of those quarters were impacted by the Boeing strike.
We estimated in our third quarter release about a $7 million-$8 million impact from the Boeing strike as those orders slowed down earlier in the quarter, we assume in anticipation of the strike, and that impact on bookings did continue into the fourth quarter as well. Our backlog on the bottom part of the slide there is in excess of $600 million currently, which is a very healthy level of backlog for us. The vast majority of that backlog will deliver within the next 12 months. If you look at the similar sales levels in our pre-pandemic period, so say around $200 million a quarter, our backlog was about 30% lower than it is currently. We're generally a book and ship type business.
So that elevated backlog that you're seeing, we've been seeing elevated orders as customers are ordering earlier with the supply chain issues that had occurred during the pandemic. Customers were ordering earlier to secure products that had extended lead times. So we may see a period of time at some point in the future where our bookings may trail our sales for a period of time, but we have not yet experienced that. In any event, at $600 million, our backlog's at a healthy level, and it gives us confidence in our 2025 outlook. Okay. Turning to profit and margins. With that increase in sales, we're also seeing steady improvement in our margins as the headwinds of the past few years have generally resolved. Cost inflation is moderated, and our updated pricing is rolling on. I also point out we've got strong operating leverage of about 40%.
For every $1 of incremental revenue that we see, about $0.40 of that drops to the operating income line. But we've also been intentionally improving the business as well. It was on one of the test slides earlier, but in the past couple of years here, we've closed three of our test facilities. And we've also done a number of restructurings over the last 12-18 months where we've taken out about $5 million worth of annual costs from that test business. And we'll see the benefit of that really fully in 2025, beginning in 2025. I also wanted to point out in the gray box that you see on the slide here, we presented our operating margin and our gross margin on an adjusted basis.
We did have some unusual events that occurred during the third quarter that really aren't indicative of kind of normal run rate operations, and we've adjusted those out to present really a view of what the underlying business looks like, so I would point you to the slides in the back of the deck that lay out what those adjustments were and provide a calculation of the adjusted metrics against the GAAP metrics. Okay. Turning to EBITDA, which is over to the right side of the slide, we achieved 13.3% of sales, adjusted EBITDA as a percentage of sales in the third quarter or $27 million on a consolidated basis. We believe that mid to high teens adjusted EBITDA is within our line of sight currently, especially as we reduce our working capital requirements. We benefit from that improved pricing that I talked about earlier.
We continue our efforts to improve productivity and, of course, as our top line continues to grow. Moving to the balance sheet and cash flows here, we returned to cash flow positive in the third quarter of 2024. A primary focus for our business going forward is to improve our cash flow generation. Our capital spending, as you can see in the chart on the bottom right, has been controlled over the last few years as we've been dealing with the challenges that Pete mentioned earlier during the pandemic. As we drive stronger cash generation, we do plan to reinvest in the business to be in a position to meet our growth plans. As you may have seen in terms of the capital structure, we recently completed the convertible bond offering in early December. This allowed us to do a couple of things.
First of all, and probably most importantly, it puts us in a position to have greater liquidity and financial flexibility to deal with a potential obligation associated with a patent lawsuit in the U.K. We don't have a judgment on that yet. We expect that to hopefully, not hopefully, but we expect that will come about in the first quarter here. And we need to be able to deal with that. We don't know what it's going to be, but the plaintiff's estimate of the damages far exceeded what our specialists, what we and our specialists had estimated. So we felt it was prudent while we're hoping for the best here that we needed to be in a situation where we are prepared for the worst to de-risk that situation. The convertible also allowed us to pay down a $55 million higher interest rate term loan.
And the remainder went to pay down our ABL facility. So we have an asset-based loan facility that's secured by our accounts receivable, our inventory, and our fixed assets. So right now, the balance on our ABL is quite low, and we would draw on the ABL as necessary to fund any potential obligation. Covering a few of the high points here of our convertible bond offering here, we closed a value of $165 million at a coupon of 5.5%. It's a five-year, three-month maturity that is provisionally callable by us beginning in March of 2028. We do have the flexibility. We retain the flexibility to settle the bonds in cash or stock or a combination of both. Our intention at this point is to reduce the dilution impact by paying off the principal value in cash and potentially covering only the premium in stock.
In the meantime, as our trailing EBITDA improves over the next 12-18 months here, we expect to be in a position to restructure our revolving credit facility from that ABL to a traditional cash flow-based revolver. That would give us more flexibility to use that excess liquidity to potentially buy back shares that we believe are trading at a discount, possibly take out the bonds, or do other types of activities, capital spending, M&A, etc. But we could also choose to settle the entire bond in cash if our liquidity was in that situation. Okay. And with that, turn to Q&A
I think we have six minutes.
Can I ask a question? I listened to the Israeli satellite company Gilat the other day, and they've got a new antenna for Wi-Fi connectivity. Do you work with them? Are they a competitor?
They're a little bit of a competitor. The question has to do with Gilat and whether they're a competitor or a customer or a partner. They are more a situation where they would provide an antenna to an aircraft, and we would provide, say, a modem manager, which worked with their antenna to provide connectivity to the airplane. At one time, we were more of a competitor. We've backed away from that antenna market pretty significantly.
Is it a game-changing product? I mean, it's a movable antenna. [audio distortion] You get more bandwidth, but you don't need as many. Israeli satellite company Gilat
That's a really long debate. That's emotionally charged. [audio distortion] There's Ku. There's Ka, there's Air-to-Ground, now there's going to be LEO. There are a number of different architectures in that satellite space and the contestants are very passionate about it, and we're not directly involved, so I don't want to start any fights.
[audio distortion] It seems like a lot of aerospace stocks have had huge recoveries with volumes starting to come back. Your stock hasn't had quite as much recovery. Is it something different in your exposure or some specific issues you're facing?
I would say there are two issues. The question again is our recovery compared to other aerospace stocks. If you look at most aerospace stocks, you will generally not find the same kind of high exposure to commercial aerospace that we had. Even Boeing is somewhere around 40% commercial aerospace. They've got a big defense business. They've got a big space business. We were 70% when the pandemic hit. That's relatively high. That means our bottom was deeper and our climb back was slower, number one. Number two, I think there is some overhang from this pending lawsuit judgment that we're facing. We think we have that covered in a worst-case scenario. One thing I would add to Nancy's comments is that whatever this judgment is that comes down, we expect an appeal later this year.
That means that if the judgment kind of favors us, we expect the other side to appeal. If the judgment favors the other side, we will appeal. The higher court, as we understand it in the U.K., is a relatively sophisticated court with respect to intellectual property law compared to the court that we're in right now. I think those two things are probably weighing on our stock.
[audio distortion] Is the lawsuit some company in the U.K. claims that you used all similar electronic products?
This has been another presentation in and of itself. But yeah, it's something that's been going on since 2010. It's been a really long battle. It's specific to a particular patent, and it's been fought out in four countries: the U.S., France, Germany, and the U.K. In the U.S., we got the patent annulled. It was basically found not to be novel, dismissed, case over. France, we have the same initial conclusion from the court there. The other side is trying to appeal that and reopen the nullity case there, but we're hopeful that we get it dismissed there. In Germany, the patent was partially upheld and partially dismissed. Proceedings there are on hold, waiting for the U.K. to resolve. In the U.K., the patent was found to be fully enforceable. So same patent, three different results, four countries. And so there's a damages.
The patent was found to be valid. We were found to be infringing. And then there's a damages case. And we've got a wide disagreement between what we think is reasonable and what the other side thinks is reasonable. And we're going to have to kind of fight through that. Again, the bond offering that we did, we think protects us, so.
[audio distortion] Pete, what's the legal expense just per quarter?
In 2024, we were basically running about $5 million a quarter.
[audio distortion] So when that's fine, it goes away.
We're looking forward to that day.
[audio distortion] Yeah.
[audio distortion] That was related to legal expenses?
Oh, yes. For the webcast purposes, the question was, what is our legal expense for 2024? It was about $5 million a quarter. There's reason to think that will be quite a bit lighter in 2025 because the appeal that I just got done talking about should be much less expensive than the initial prosecution. France is quiet for now. Germany's quiet, probably till the U.K. is over. And then we have another little thing that we think also is kind of wrapped up at this point. So there's reason to think we could be quite a bit lower in 2025.
[audio distortion] One last question.
Yeah. Can you go back to the presentation, Pete? Can you briefly talk on, I guess, competitive environment? You guys have an impressive roster of planes that you're on, but there are a lot of planes that you're not on or really any material. So I guess.
Name, which one are you thinking about?
[audio distortion] I don't know. Gulfstream, Bombardier, those business jets.
We're actually on them, but that was just a representative list. Gulfstream. So the question is airplanes or the competitive environment for.
[audio distortion] I mean, how hard is it to qualify those overhead lights on a Boeing 737?
That's more of a relationship sale. I would say that's not a technically sophisticated product, but relationships are very important, and what happens is, in this industry, like a lot of industries, if you do a good job for an airplane manufacturer, on one airplane, they tend to drag you along on the second airplane. That FLRAA program I was talking about is a great example. We have an electrical system that Bell chose for something called the Bell 525, which is a, it's been a problematic helicopter for them, but it's one that they developed probably eight years ago, nine years ago, and they fell in love with our capability and our system, then they developed something called the Bell 505, which is a relatively small helicopter, and again, the relationship worked really well.
Then they went into something called FARA, which no longer exists, and FLRAA, which is the one I was talking about. And we were basically put on those airplanes. I hope they're not listening, but I don't think they competitively bid us. I mean, it's just a system. It's just a situation where they liked the program, they trusted our performance. And so there's a lot of ongoing relationships like that that we do well with. There are some that are less mature, and you've hit two of them, for sure. But we have some exciting things going, which we'll talk about this time next year when we get the 2026 version.
[audio distortion] Thank you.
Did you miss Dave?
Dave who? I doubt it.
Helpful.
I doubt it.
I'd lay money on that.
He hasn't woken up yet today. Anyway, thank you for your time.