Astronics Corp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered near-record sales of $208.5M, strong adjusted profitability (Adjusted EBITDA $31.5M; 15.1%), and record Aerospace revenue of $188.5M, while GAAP EPS was negative due to refinancing costs, litigation accruals, and tax valuation allowance.
• 2025 revenue guidance was maintained at $820M–$860M; Q1 2025 sales guided to $190M–$205M; planned 2025 capex uplift to $35M–$40M to support consolidation and growth.
• Backlog ended at a record $599M; bookings were $196M in Q4 (book-to-bill 0.94x), with demand robust in Commercial Transport and Military Aircraft; Test Systems remains in restructuring ahead of the U.S. Army radio test program ramp in late 2025.
• The UK damages ruling of ~$11.9M in the long-running IP case was materially below worst-case claims; management framed it as favorable and clarified expected payment timing and appeal path, reducing a legal overhang on the stock narrative.
• Liquidity strengthened post convert; net debt fell to ~$157M; annual interest expense expected to decline by ~$5.6M, supporting margin trajectory and optionality (e.g., cash-based settlement of converts, potential buybacks or acquisitions).

What Went Well and What Went Wrong

What Went Well

• Record Aerospace segment revenue ($188.5M, +11.7% YoY) and adjusted operating margin of 16.0%, driven by cabin power and IFEC demand in Commercial Transport and strength in Military Aircraft (FLRAA progress).
• Adjusted profitability expanded: adjusted operating margin rose to 11.4%; adjusted EBITDA reached $31.5M (15.1%), on higher volumes and improved operating efficiencies; cash from operations was $26.4M, the strongest since pre-pandemic.
• Management tone highlighted tailwinds: “supply chain continues to improve… workforce is getting more efficient… pricing adjustments are taking hold… demand continues to be strong”.

What Went Wrong

• GAAP net loss (-$2.8M; -$0.08 diluted EPS) driven by loss on extinguishment of debt ($3.2M), elevated litigation/legal costs (~$6.1M), and a $3.4M tax valuation allowance; Test Systems posted near break-even on GAAP.
• Warranty reserve true-up ($1.7M) and customer bankruptcy charge (~$0.8M) pressured GAAP gross and operating results; Boeing strike and production cadence impacted certain lighting & safety shipments and bookings timing.
• Test Systems revenue declined to $20.0M (-$6.6M YoY); restructuring severance ($1.4M) weighed on segment results; management expects a weak H1 2025 ahead of the Army radio test production ramp in H2 2025/H1 2026.

Transcript

Operator (participant)

Welcome to the Astronics Corporation fourth quarter fiscal year 2024 financial results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Craig Mychajluk of Investor Relations for Astronics. Please go ahead.

Craig Mychajluk (Head of Investor Relations)

Thank you and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call with me here today is Peter Gundermann, our Chairman, President, and CEO, and Nancy Hedges, our Chief Financial Officer. You should have a copy of our fourth quarter and full year 2024 results, which crossed the wires after the markets closed today. If you do not have the release, you can find it on our website at astronics.com. As you are aware, we may make forward-looking statements during the formal discussion and the Q&A session of this conference call. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today.

These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we'll also discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release. With that, let me turn it over to Peter to begin. Pete.

Peter Gundermann (Chairman, President and CEO)

Thank you, Craig, and good afternoon, everybody. Welcome to the call. We feel our fourth quarter was a very strong close to 2024, which was a year of significant progress for the company. I'll talk first about the quarter, then about the year. Nancy will go through some specifics of the financials, and then we'll turn our attention to a preview of 2025. Operationally, the fourth quarter was a very good quarter for Astronics. Sales came in at $208.5 million, the high end of our forecasted range once again. It was just short of our all-time high, which was way back in the third quarter of 2018, and we achieved this in spite of the Boeing strike, which essentially shut down our biggest program at our biggest customer. The volume was made possible by the continued improvement in our supply chain and operating efficiencies in our operations.

Higher volume had a very positive impact on our margins, though progress was masked by some unusual factors or adjustments. I'll come back to them in a minute. Until then, I will speak to adjusted numbers as described in the press release. Headlines were adjusted operating income of 11.4% for the quarter, up from 5.9% last year. Adjusted net income was 8.1%, up from 3.3% last year. Adjusted EBITDA was $31.5 million, or 15.1% of sales. The positive margins led to positive cash from operations of $26.4 million in the quarter. It was our first seriously positive cash quarter since before the pandemic. Our aerospace segment was the driver of the results. Sales of $188.5 million was an all-time high, up 11.7% for the quarter. Commercial aero and military aircraft continued to drive the results.

Adjusted operating margin for our aerospace segment was 16% for the quarter, up from 10.2% last year. Obviously, there were some significant adjustments in the quarter. A couple of them were true-ups of situations that were initially covered in our third quarter release. A Lilium bankruptcy true-up of $1 million and a warranty reserve for a field replacement program of a business jet came in for another $1.7 million. So $2.7 million total for those two. We had another restructuring charge in our test business of $1.4 million. The big adjustments had to do with an important step forward in our patent infringement dispute in the U.K. We had legal expenses of $6.1 million in the quarter, largely for a damages trial that took place in October.

We had refinance expenses of $3.2 million for some steps that we took to protect against the potential of a negative ruling in that damages trial. We increased our legal settlement reserve by $4.8 million, which sounds like a loss, but was actually a significant victory for us. Those who have been following us closely know that there was a range of possible outcomes from that ruling. The actual outcome was very much in favor of our position compared to what it possibly could have been if it had gone the other way. Still, the award was $4.8 million higher than our accruals going into the hearing. That shows up on our income statement in the fourth quarter. The quarter provided a strong close to the year, which, as I said, was a year of significant recovery for the company.

Sales grew to $795 million, up 15.4% over 2023. We've averaged over 20% growth over the last three-year period. Adjusted operating income was 7.7%, up from 2.1% in 2023, and adjusted EBITDA was 12.1% for the year, up from 8.1% in 2023. Finally, demand continues to be strong. Q4 bookings were $196 million, a book-to-bill of 0.94. We figure the Boeing strike hurt our bookings by about $10 million in each of the third quarter and the fourth quarter. Still, we ended the year with a backlog of $599 million. I'm not going to spend a whole lot of time talking on the issues that are driving our results, tailwinds, you might refer to them as, but it's worth mentioning. Our supply chain continues to improve and perform better and better. Our workforce is getting more efficient and more accustomed to their responsibilities.

We talked a while ago about how a significant portion of our workforce has been with us for less than three years, like 45%. Input cost pressures continue to subside. Pricing adjustments are taking hold, and demand continues to be strong. All in all, a lot of tailwinds as we exit 2024 and go into 2025. Now I'll turn it over to Nancy.

Nancy Hedges (VP and CFO)

Thanks, Peter. I'll now touch on some of the drivers behind our operational and financial results on a consolidated basis, followed by some segment-level highlights. We had a very solid quarter of continued growth in the fourth quarter of 2024, as Peter mentioned. Aerospace hit a new record in revenue. The strength of the underlying business and our ability to expand our margins were masked by a few atypical charges we had in the quarter, some of which Peter talked about. Allow me to walk you through those in a little bit more detail. Profitability continues to strengthen, with gross profit up $10 million, or 25%, and gross margin expanded 3.5 percentage points to 24.0% over the prior year quarter, demonstrating three consecutive quarters of margin expansion.

Offsetting the benefits of higher volume and improved operational efficiency was an additional $1.7 million warranty reserve related to a product that requires a field modification, which we talked about last quarter. This was related to a custom electrical power system designed specifically for a business jet aircraft introduced in 2018 that was experiencing less than optimal reliability over time. We have been working closely with our customer on this issue and are implementing a fix that both our customer and our team believe will fully address the issue. In addition, we had a $0.8 million inventory charge related to the Lilium bankruptcy. There had been a glimmer of hope as they appeared to have found new financing back in December, but that did not come through, so they are in bankruptcy again. Adjusting for both, non-GAAP gross margin expanded 470 basis points to 25.2%.

Operating income increased $1.1 million, despite roughly $12 million in atypical SG&A costs, including the additional expense to true-up our reserves for the U.K. damages award that Peter mentioned, elevated legal expenses, and some restructuring charges in our test segment. These included the $4.8 million incremental reserve for the payment of damages for the U.K. litigation award. We also had $6 million in litigation-related legal expenses and $1.4 million in costs for the further restructuring of our test system segment. Adjusting for all the atypical items, non-GAAP adjusted operating margin for the fourth quarter was 11.4%, a significant improvement over the prior year and the trailing third quarter. Adjusted EBITDA margin was 15.1%. Below the operating line was $3 million in costs related to the extinguishment of our previous term loan that was fully paid down in the fourth quarter.

The interest savings resulting from the restructuring of that previous term loan and our ABL debt, which were at a blended rate of roughly 9%, to the convertible debt that's at a rate of 5.5%, results in a $5.6 million annual reduction in interest expense. Net loss for the quarter was $0.08 per diluted share. Non-GAAP adjusted earnings per share was $0.48, compared with non-GAAP adjusted earnings per share in last year's quarter of $0.19, and a non-GAAP earnings per share in the trailing Third Quarter of $0.35 per share. We generated $26.4 million in cash from operations for the quarter, which, as Peter mentioned, is our largest cash-generating quarter since the Third Quarter of 2019. The improved cash flow was driven by improved conversion of profits after non-cash adjustments and lower working capital requirements.

Net debt at the end of the quarter was about $157 million, down $18 million from the prior quarter. We ended the quarter with $18.4 million in cash and roughly $188 million available to draw on our recently amended revolving credit facility. As you know, we issued $165 million of 5.5% convertible senior notes on December 3rd of last year. The conversion price is $22.89 per share, representing a 30% premium over the closing stock price on November 25th, 2024. The notes mature on March 15th, 2030, but are callable and redeemable by us on or after March 28th, 2028. Redemptions require the stock price to be 130% of the conversion price for 20 of the 30 trading days preceding any quarter end, or trading at approximately $30 per share. The notes are classified as a long-term liability on our balance sheet at the end of the year.

The near-term potential dilution impact on EPS is about 7.2 million shares. However, it's important to note that once callable or if redeemed, we do have the flexibility to settle the notes in cash as well as stock, and our intention is to minimize dilution by, at a minimum, affecting a net share settlement with the $165 million principal paid in cash, measurably reducing the dilution effect. In fact, given our outlook on improving profitability and the very favorable ruling in the U.K., we feel we'll be in a strong position to cover the notes with cash. We also plan to use some of our available liquidity to reinvest in the business to be in a position to be able to meet our growth plans.

Capital expenditures are expected to be approximately $35 million-$40 million in 2025, which is a higher level than our last few years while we were managing our liquidity through the pandemic. In addition to catching up on deferred spending, we are also planning a facility consolidation and additional capacity to allow for future growth. We currently have about $216 million in available liquidity and have nothing currently outstanding on our revolver. We expect that given our expectations of improving profitability, that we will be in a position to convert our asset-based revolver to a cash-based revolver that will provide greater financial flexibility at some point in the not-so-distant future. We could use that excess liquidity in other efforts, including acquisitions or to buy back shares, which we believe are trading at a discount, or, as I noted previously, to settle some or all of the convertible bonds in cash.

Moving on to our segment-level results, let me cover some key factors driving profitability within our aerospace segment. Our aerospace segment is roughly 90% of our business. The segment had record sales in the quarter of $188.5 million, which is an 11.7% increase over the fourth quarter in 2023 and 6% up over the trailing quarter. Growth was driven largely by a $16.7 million increase in commercial transport sales, primarily related to increased demand by the airlines for cabin power and in-flight entertainment and connectivity products. This was somewhat offset by lower sales of commercial lighting and safety products resulting from the Boeing strike. Operating profit for aerospace improved $2.5 million year-over-year and was also up $2.5 million, or 18%, over the trailing quarter. Adjusted operating profit was $30.2 million in the quarter compared with $17.2 million in the prior year period and $25.3 million in the third quarter.

On an adjusted basis, aerospace demonstrated 45% operating leverage on the higher volume from the third to the fourth quarter. Adjusted operating margin improved 5.8 percentage points year-over-year to 16.0% and improved 180 basis points sequentially. Turning to the test segment, the test business operating profit was roughly break-even, but modestly improved over the fourth quarter of 2023. The 2024 fourth quarter had $1.4 million in restructuring charges, although litigation expenses were down about $700,000. We expect to begin realizing approximately $4-5 million in annual cost savings beginning in the first quarter of 2025, resulting from the restructuring. However, we are also anticipating a weak first half for this business. Timing on the 4549T Army Radio Test Program will define the profitability profile for the test business this year. Obviously, the sooner production kicks in, the better.

Tests adjusted operating margin was 7.3%, an improvement over the 2.5% of the comparative quarter, demonstrating the benefits from the restructuring initiatives implemented during 2024. With that, let me turn it back to Peter. Peter.

Peter Gundermann (Chairman, President and CEO)

Thank you, Nancy. Most of you are aware that we have been involved in a lengthy patent infringement suit brought by a European plaintiff relevant to our NC POWER product line for many years, since way back in 2010. This situation has gotten more than a little attention over the last few months, so I thought I'd provide a little update as to where we stand today. Legal proceedings over the years have been held or are being held in the U.S., France, Germany, and the U.K. In the U.S. and France, the patent was found to be invalid, though the French decision is being appealed. We expect a decision there in the coming months. Germany dismissed some of the claims of the patent but upheld others and found that Astronics had been infringing.

The company paid $3.5 million in penalties and interest in 2020 and has taken a reserve of $17.3 million to cover remaining estimated damages and associated interest. We expect but do not know that proceedings there may commence in 2026. The U.K. Court, however, found the entire patent to be valid and found Astronics to be infringing. A damages hearing was held in October. We had reserved $7.4 million to cover anticipated damages, but the plaintiff claimed damages of up to approximately $105 million in that hearing. That is a big difference. The decision came down on February 21, requiring Astronics to pay damages of $11.8 million. We consider this a very favorable ruling compared to the range of possible outcomes. The company expects the damages due to be paid in the first half of 2025.

There will be a couple of follow-on hearings in coming months to decide certain other issues peripheral to the ruling, such as the award of possible interest charges and assignment of legal fees. We do not have a basis to estimate what these may be at this time. There is a line of logic that says they could be zero or they could be somewhat substantial, but we do not expect them in any event to be any more than the damages award. An appeal to a higher court is possible in a matter brought by one or both of the parties. Such an appeal would likely be heard in the first half of 2026. It's important to understand that all of the subject patents expired years ago and do not restrict the business of our company today in any way whatsoever.

With that being said, as we look at 2025, we're feeling really good about our position here early in the year. Our balance sheet and liquidity position is the strongest it has been in five years. Our backlog is at a record high for the beginning of any new year. Our supply chain and employee base is increasingly effective, productive, and efficient. Our volume has been ramping, and our margin profile has been improving along with it. We are maintaining our initial 2025 sales guide at this point of $820-$860 million. We are expecting first quarter sales to be in the range of $190-$205 million, so a little bit lighter than the quarter we just experienced. We are expecting sales to ramp as the year progresses, especially in the second half. That concludes our prepared remarks for the call.

We can open up the line now for questions.

Operator (participant)

Ladies and gentlemen, if you would like to ask a question, please press Star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from the line of Jonathan Tanwanteng with CJS Securities. Please proceed.

Jonathan Tanwanteng (Managing Director)

Hey, good afternoon, guys. Thank you for taking my questions, and congrats on the U.K. case coming out a lot less on the upper end there. I guess my first question, Pete, could you talk about the potential, I guess, for the other open-ended cases out there to have damages claimed in or around that neighborhood or to that scale? Is that possible at this point, or do you think you have a good handle on what the damages could be?

Peter Gundermann (Chairman, President and CEO)

It's a bit of an open question, John. In France, I mean, it could be zero if the appeal court maintains the dismissal of the patent. I mean, if that decision comes down that way, then we're done in France, just like we're done in the U.S. If it comes back that they want some further investigation by a lower court to discuss the validity of the patent, it'll kick us back into some kind of litigation cycle that could go on for some time where we have to decide, or the court will have to redecide if the patent is valid, and if it's valid, if we're infringing, and if we're infringing, what the damages could be. It's just, it's hard to predict how that could end up or how long it could take.

I mean, the way things have been going, it realistically could be another couple of years. Germany is relatively advanced, but there they found there's no question about patent validity. There is a question about damages. We had been thinking that both of those will wait until the U.K. issue is resolved. The U.K. issue obviously went in our favor in a very big way. We don't know what the other side's going to do. We expect to figure that out over the next few months. Our guess is that if there's an appeal, the other two will slow roll while that appeal takes shape. I think if you step back and you look at it, we were concerned on the heels of our October hearing that we might face a big loss here. In retrospect, it's a pretty big win.

It is possible that we will have strong wins in the U.S., France, and the U.K. here going forward, and then the question becomes Germany. The other side has been pretty aggressive throughout this ordeal and has been making pretty big claims of the legal system. So far, we're pretty happy with how it's worked out. We're hoping for more of the same.

Jonathan Tanwanteng (Managing Director)

Okay. Great. Could you talk a little bit more about the increased CapEx this year, what you're planning to fund, and maybe the cadence of cash flows? Nancy, if you could touch on that.

Peter Gundermann (Chairman, President and CEO)

Want to talk, Nancy?

Nancy Hedges (VP and CFO)

Yes. The CapEx, I think, will be fairly level loaded throughout the year. We have some facility consolidation that we are planning to do here, which is going to be the primary driver for the increased level of CapEx that you are seeing compared to what are kind of our normal ranges. Our normal range tends to be in the $12-$20 million a year pre-pandemic, depending on what we had going on. That uplift that you are seeing is a combination of the normal deferred maintenance from the last several years that we are catching up on, and then another $15-$18 million net of some tenant improvement allowances to build out a facility to allow for expansion as we grow the business.

Peter Gundermann (Chairman, President and CEO)

I would just add that we've really had the company on a starvation diet for the last four years as our liquidity situation was really tight. As Nancy said, our normal CapEx, capital expenditures, were kind of $10 million to $20 million. We've been living in the $3 million, $5 million, $7 million range, which is not sustainable long term. We feel like we've made it through, and we feel like we're going to be cash positive. I think the fourth quarter was a really good demonstration of that. It is time to kind of turn the corner a little bit and make investments where investments need to happen to execute on the opportunities that are ahead of us in the business.

Jonathan Tanwanteng (Managing Director)

Great. Thank you. Last one, if I could sneak it in, just any thoughts on the various military programs that you have out there and, I guess, the topic du jour with potential defense budget reallocations or changes, if you think any of those programs might be vulnerable?

Peter Gundermann (Chairman, President and CEO)

Not that we're aware of. I would categorize our military programs into three major buckets on the aerospace side in particular. We do a lot of spare parts for aircraft that are flying and have been built over the last 20, 30 years, and those aircraft are critical. They fly every day. Those spare parts sales are going to continue as best we can tell. We do more and more work on small drone-like aircraft, which are increasingly in favor. We would think that that's an area that might get more funding, not less. The big program, though, that has everybody's attention is the FLRAA program, the V-280. That is a big targeted investment for the U.S. Army. It's their biggest aviation program going, and it's important to us.

We think it's got pretty broad support across the Army and across the government, but we'll have to wait and see how that shapes out. Certainly, the actions of the government have been a little unpredictable so far, but we think that program has pretty strong support.

Jonathan Tanwanteng (Managing Director)

Great. Thank you.

Peter Gundermann (Chairman, President and CEO)

Thank you.

Operator (participant)

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press Star 1 on your telephone keypad. The next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed.

Michael Ciarmoli (Senior Research Analyst - Aerospace & Defense)

Hey, evening, guys. Nice results. Thanks for taking the questions. Pete, just on the '25 outlook, any color you can give us on kind of the Arrow test split? I know you said test is going to be weaker in the first half and probably more dependent on the ramp of the Army radio program there. I mean, the margin, I guess even on the guidance to the margins in Arrow, really strong. I think maybe one of the best you guys had on record. Any color on kind of adjusted margins into '25?

Peter Gundermann (Chairman, President and CEO)

We've been playing a long game here, maybe longer than we expected, thinking that the business was coming back and being a little bit wishing it was coming back faster, but it came back pretty steadily and strongly over the last 8, 10 quarters, really. We see that kind of continued split. Kind of 90/10 is probably a reasonable assumption going forward. We expect Arrow to continue to have pretty strong margins and pretty strong results. I guess our feeling is that there's some upside potential to that forecast, largely in the area of commercial transport production rates at Boeing. We built our current forecast on the assumption of 25 737s a month for the first eight months and 30 for the last four. At this point, the indications are that Boeing's going to exceed that.

Obviously, we're not going to limit Boeing to those numbers. If they want to order more, we'll build more, but you got to put something into a forecast, and that's the assumption that we use. I think there's upside potential to that part of our business. On the test side, the real issue is this 4549T radio test program that Nancy was talking about, which we're hoping gets into production in the fourth quarter. That's going to be a significant contributor. You might call it a game changer for our test business. It'll be very obvious in 2025. The question is when it's going to get going or, excuse me, 2026. The question is when it's going to get going in the end of 2025. We're hoping for a full quarter of contributions in that business.

Michael Ciarmoli (Senior Research Analyst - Aerospace & Defense)

Okay. Okay. What should we expect with, I know it's a very fluid environment, but tariffs? I think you kind of back in the, I think it was the 2019 period or so, you kind of called out a $10 million impact. Any thoughts around tariffs and how you might kind of respond to that?

Peter Gundermann (Chairman, President and CEO)

It is a changing picture, as you know, so it is a little premature to say for sure. We feel that our supply chain over the years has kind of fixed itself and minimized its impact or its dependence on China. I mean, we use a lot of electronic components, so ultimately, China is the source of a lot of things that we do. More and more of the value add has been moved out of China into other countries over the years. Mexico is not much of a big deal to us from a supply chain. We do have an operating company in Canada, which will, to a large extent, ship to the U.S. That will be a topic for discussion, but most of those contracts we would think would obligate the buyer or the importer to actually pay those tariffs.

We don't think that's a big deal, but then again, there could be. We do a lot of sales to Europe. We do a lot of sales to Asia and other parts of the world. Depending on how out of control this whole situation gets, it could be quite fluid, as you said.

Michael Ciarmoli (Senior Research Analyst - Aerospace & Defense)

Got it. Okay. Last one for me, just on the retrofit side of the market, Pete, what are you guys seeing there? You're kind of reading and hearing that there's some of the challenges with business-class seats and just a lot of the capacity being used up to support some of the older planes flying is creating some challenges on the retrofit market. Anything you're seeing in terms of supply chains or bottleneck issues there, or are you kind of seeing good demand? If there's any color on growth in that portion of the business in 2025?

Peter Gundermann (Chairman, President and CEO)

It's been strong in part due to the aircraft production problems, both at Boeing and Airbus. Airplanes have been pulled out of the desert and modernized at a pretty strong clip. One of the nice things about our business, as you know, Michael, is the eternal quest for updated consumer electronics, basically, and the things that people want to do in airplanes. As those new seats get developed, there's a continual push for new updated technologies, and we benefit from that. It's a kind of a unique business where we replace a lot of our product, not necessarily because it doesn't work or needs to be fixed, but because the technology changes. It's a nice place to be. As those new seats are developed, they go into both new airplanes and into old airplanes that are being retrofitted.

We find opportunities along with the seat manufacturers for the benefit of the airlines.

Michael Ciarmoli (Senior Research Analyst - Aerospace & Defense)

Got it. Got it. All right. Perfect. Thanks, guys. I'll jump back into queue.

Peter Gundermann (Chairman, President and CEO)

All right.

Operator (participant)

The next question will come again from the line of Jonathan Tanwanteng with CJS Securities. Please proceed.

Jonathan Tanwanteng (Managing Director)

Hi. Thanks for the follow-up. I was just wondering if you saw the order rates from Boeing rebound as it got back into production, or are they still burning off some inventory there? How do you see that order run rate progressing through the year?

Peter Gundermann (Chairman, President and CEO)

Yeah. The orders actually haven't—we haven't got a whole lot of new orders. What we do have is rescheduled old orders. Bookings have been a little bit light in the third and fourth quarter. As I mentioned, if you look back at those results, they look like a drop-off from the beginning of the year. I think a lot of that is Boeing anticipating a strike and rescheduling existing orders. The cadence of deliveries that they're requesting is pretty strong. I mean, it's in line with what they're saying, and they're moving towards that 25 or 30 ships a month, from my perspective, more quickly than we might have expected. It's encouraging. I think they've got some momentum, and that's a good thing. Now, the unknown there that we're going to have to balance out is inventory that's in the system.

We think they've got two or three months of inventory of most of our products for 737 in various places in Seattle. We expect that our turn-on rate will trail their production rate to some extent. That is why we're putting in our forecast, 25 ships a month for most of 2025. In general, we're encouraged by the dialogue. We're encouraged by the discussion. We've had a lot of positive attention from Boeing and our facilities. Make sure we're ready to go. I think we're on a good track. It's potentially going to be a good story for 2025, unlike what it's been for the last couple of years.

Jonathan Tanwanteng (Managing Director)

Got it. Thanks. Could you give us an update on municipal transit markets and what you're seeing out there, especially as you see a lot more of these back-to-work return-to-office type programs?

Peter Gundermann (Chairman, President and CEO)

Yeah. We're hearing a lot of that. I'm looking for data. There's some data that that's beginning that return-to-office is picking up momentum in certain municipalities. It hasn't materially changed the market at this point, as far as we can tell. I think programs in our transit test market are still alive, we think, but they regularly delay to the right. We're hopeful, though. I think it does have some real momentum. It's in places that need it, frankly. We're hopeful. It's a watch item.

Jonathan Tanwanteng (Managing Director)

Got it. Thank you.