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Astronics (ATRO) Q4 2019 Earnings Call Transcript

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Astronics (NASDAQ: ATRO)
Q4 2019 Earnings Call
Feb 26, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Astronics fourth-quarter 2019 financial results conference call. [Operator instructions] 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.

Deborah Pawlowski -- Investor Relations

Thanks, Christine, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are Pete Gundermann, our chairman, president, and CEO; and Dave Burney, our chief financial officer. You should have a copy of the 2019 fourth-quarter and full-year financial results, which were released earlier this morning.

And if you've not, you can find them on our website at astronics.com. 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&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 the Securities and Exchange Commission.

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These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these would be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results per in accordance with GAAP.

We've 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?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

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 fourth quarter, but looking a little bit backward and look a little bit forward, there are a number of them, three on the aerospace side and two 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; and 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 third-quarter results in the first week of November, we, at that time, issued preliminary revenue guidance for 2020. And there were some assumptions stated as part of our revenue guidance, specifically, we assumed 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 off based, instead, 42 aircrafts a month have gone to zero and 800 airplanes plus remained grounded.

The 42 airplanes a month going to zero affects us because we put about just shy of $100,000 of product on each airplane as it's built. That's about $4 million a month in revenue. That's a 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 a shortage of capacity, we have seen starting late last year, a tendency toward deferral, where programs that were in process, have been kind of pushing out to too late.

This is evidenced in our Q4 bookings, which you see, our aerospace bookings were $140 million, that's the last page of our press release, that is well off the pace of recent history. You've 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, 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 three 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 fourth-quarter operating loss, where the three combined is $5.1 million. That's a lot, but it's down from the average of the first three quarters, which was $9 million. So a brief summary of the three, we've talked in the past about Armstrong. Armstrong in the fourth quarter was within shouting distance of breakeven, $200,000 loss, down from an average of $800,000 over the first three quarters.

We've talked in the past about how we feel Armstrong is basically out of the woods and OK. It's not probably sustainably profitable at this point, but we have integrated it into our CSC operation in Chicago. We've taken three Chicago locations down to two, and we expect it to be basically at or near breakeven throughout 2020. We think, basically, Armstrong is out of the woods.

The CCC, similarly, had some challenge, had a relatively good fourth quarter. The big highlight here is that CCC, in the fourth 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 fourth quarter, ended up with a $700,000 loss, which again is a lot, but it's way down, compared to its average over the first three quarters of a $3.3 million loss. So going forward, we expect that drop in development expense basically, combined with the revenue increase, to bring CCC at or near breakeven 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 four business initiatives to one.

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 a $40 million level to $10 million 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 million for the quarter.

AeroSat had about a $4 million operating loss in Q4. We expect that to drop to a level that's approximately half of that going forward and getting down toward breakeven at the end of the year. So when you look at the three problem kids and cumulatively, the operating loss, excluding impairments and restructuring charges for 2019 was about $32.7 million. We are quite confident today that that's going to be, as we get to 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 been in the past. The third 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 fourth and third-quarter call also. The charge is more than we expected, and we are appealing it.

We think the court's decision is deficient, and we disagree. And the appeal process, we expect, will last well into 2021. The longer story is that this is a process 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 and question, frankly, is not critical.

It is not important. And in fact, we designed it out about five years ago, in 2013, 2014, when we first figured out that we were going to have an issue here. In the U.S., over the last couple of years, the feed of 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 $17.9 million additional, bringing the total for Germany to $20.6 million. 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 U.K. are just getting started. The U.K.

first, France will be second. 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 million. The net gain on the sale was about $79 million. That shows up in our 2019 income statements as a gain on sale.

The revenue from our semiconductor test product line in 2018 was substantial. It was $84 million total for the year, $9.7 million in 2019, so a big drop off. So year-over-year comparisons for GAAP revenue recognition purposes are quite a bit misleading. And the revenue shows a lot stronger in '18.

The gain on sale shows in '19. This is a big part of the reason why we've gone to an adjusted presentation over the four quarters of 2019. In the second half of 2019, we added a couple of smaller acquisitions to reshape and refocus our test business, Freedom Technologies in July and Diagnosys in October. Freedom is a radio test company, it complements our military focus with a product line geared more at municipal users like police forces or first responders or border patrol.

Diagnosys is a complementary fit in the transit area for train test. 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%, two thirds organic, one 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 the 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.

Dave Burney -- Chief Financial Officer

Thanks, Pete. As Pete touched on, there was a lot of noise in the fourth quarter 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 moved the impact of the restructuring and impairment charges for our 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 fourth-quarter operating results. Fourth-quarter consolidated sales were down $4.5 million to $198.4 million. This reflects a $10.3 million decline due to the divested semiconductor test business, partially offset by added sales from the Diagnosys and Freedom Communications acquisitions that were also in our test segment. Those added $9.9 million of sales.

Aerospace segment sales decreased by 1.8% to $172.1 million. This is a point where I would like you to follow with me on Page 11 of the press release where we have the reconciliation of GAAP to non-GAAP information. We had GAAP loss from operations of $36.9 million in the fourth quarter of 2019, which reflects $46.7 million of restructuring and impairment charges and an increased reserve for the ongoing lawsuit. More specifically, in our antenna business, we took charges totaling $28.8 million relating to the restructuring and refocusing of that business.

And additionally, we increased the legal reserve by $17.9 million, both of those are in the aerospace segment. Additionally, to aid in comparing this year to last year, we removed the direct profit generated by the semiconductor test business in each period. Making these adjustments, we end up with an adjusted operating income of $8.1 million or 4.1% on adjusted sales of $196.5 million, compared with adjusted operating margin of 8.1% in the prior year. The 2019 fourth-quarter operating margin was affected by higher legal and warranty costs, both primarily in the aerospace segment.

Additionally affecting operating margins was $6 million of sales of the acquired test businesses that yielded very little margin due to the stepped-up basis to the related inventory required by accounting for acquisitions. We would typically expect contribution margins 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 fourth quarter decreased by $3.1 million or 1.8% to $172.1 million. The drop was mainly in the Avionics product line, which declined $4.1 million or 13.1% relating to soft in-flight entertainment and communication hardware sales in the quarter.

The aerospace segment GAAP loss from operations was $32.3 million. Adjusting for the restructuring of the antenna business and the legal reserve, the adjusted operating income was $14.5 million or 8.4% of sales, compared with 12.7% last year. The 2019 fourth quarter was negatively impacted by the previously mentioned increased legal and warranty expenses. The three struggling businesses had fourth-quarter losses of $5.1 million excluding the impairment charges, and we have a path forward to get these businesses, as Pete mentioned, to run near breakeven by the end of 2020.

And had they been breakeven in the fourth quarter this year, aerospace margins would have been closer to 11% to 12%. Going to the test segment sales in the quarter. Sales were $26.3 million, compared with $27.7 million in the 2018 fourth quarter. Adjusting out sales of the semiconductor business from both periods, test systems segment sales rose from $15.5 million in the 2018 fourth quarter to $24.4 million this year.

The increase was driven by the Acquired Businesses, which contributed $9.9 million in sales in the quarter. Test segment had adjusted operating loss of $1.5 million this year, compared with an adjusted operating loss of $2.3 million in the prior year. Operating margin was impacted by approximately 6 million of sales that had little or no margin, as I previously discussed. For the full year, consolidated sales were $772.7 million, a decrease of $30.6 million from 2018.

Again, for comparability, we need to exclude sales from the divested semiconductor test business from each period. This gives us adjusted sales of $763 million, which was an increase of $44 million or 6.1% for the ongoing business. Aerospace sales increased by $17 million and test sales increased by $27 million. GAAP consolidated income from operations was $1.7 million in 2019, compared with $63.7 million in 2018, applying the same adjustments previously discussed to remove the impairment and restructuring charges of $28.8 million, a legal reserve of $19.6 million and the direct margins from the semiconductor business of $6.8 million.

Adjusted full-year operating income was $43.4 million or 5.7%, compared with adjusted income from operations of $40.6 million or 5.6% in 2018. Full-year aerospace segment sales increased by $17 million to $692.6 million or 2.5% compared with the prior year. Electrical Power & Motion sales increased $35.1 million, Lighting & Safety increased $11.1 million and Avionics sales decreased by $25.1 million. Aerospace GAAP operating profit for the year was $16.7 million.

Adjusted operating income was $65.1 million or 9.4% of sales after adjusting for the impairment and restructuring charges and the legal accrual, compared with 10.5% in the prior year. Aerospace operating profit was negatively impacted in the 2019 by increased tariff costs, which increased $5.9 million compared with the prior year, as well as increased legal fees and warranty costs. Full-year test segment. 2019 test segment sales were $80.1 million, compared with $127.6 million in 2018.

The decline was entirely due to the divestment of the semiconductor test business in February 2019. Removing sales of the divested business from each period, adjusted test segment sales were $70.4 million in 2019, up 62.3% from adjusted 2018 sales of $43.4 million. Organic sales increased $14.1 million and acquisitions added $12.9 million. GAAP operating profit for the segment was $4.5 million, compared with $10.7 million in 2018.

Adjusting out the direct profit margin from the divested business, adjusted operating loss was $10.3 million in 2019 and $13.4 million in 2018. Most of the loss in 2019 was a result of the $2 million of restructuring charges that we recorded in the second quarter. Over to the balance sheet. Our balance sheet continues to be in good shape.

Net debt was $156 million. And the trailing fourth-quarter leverage ratio is defined by our borrowing agreement, was 0.9 times adjusted EBITDA as defined by the agreement. This reflects the $80 million gain that we recognized on the sale of the semiconductor business in the first quarter. Excluding that gain, the leverage ratio would have still been very low at 1.7 times EBITDA.

Our maximum leverage is 3.75 times for our revolver borrowing capacity. Regarding capital deployment, on February 3, we issued a press release announcing the pausing of a share buyback. Given the uncertainty surrounding the timing of the 737 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, we're paying down debt until the picture becomes clearer for us.

In the fourth quarter, we did buy back 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 $7.7 million. Pete?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

OK. So looking forward for the rest of 2020, again, on February 3, we issued a release then. We were pulling our revenue guidance for the year until the situation got clear. Unfortunately, today, the situation is still not clear.

We need a little bit of a firmer estimate as to a return to production for the 737 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 first quarter. We're expecting first-quarter revenue to be light, $155 million to $165 million is what we're predicting. 90% of it will be aerospace. We are expecting that we will strengthen significantly as the year progresses.

Again, that depends, obviously, on the return to production and some reasonable return to service. But even apart from 737 MAX activity, we have kind of a schedule that's biased toward 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 as 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.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning, gentlemen. Thank you for taking my question.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Good morning.

Jon Tanwanteng -- CJS Securities -- Analyst

Pete, maybe to start with, you were down 50 people, I think you referred 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 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?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

There wasn't much of a restructuring charge associated with those reductions, and they were late Q4, so you wouldn't see it 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 proportionately 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 737.

Dave, you want to add anything to that?

Dave Burney -- Chief Financial Officer

No, I think that's accurate.

Jon Tanwanteng -- CJS Securities -- Analyst

OK. And assuming we get to production, if you're starting by midyear, I don't know what Boeing actually end up doing or the FAA, but 40 planes maybe kind of aggressive in the beginning, but assume we get to 40, somewhere between 40 and 57 by 2021, when does the aftermarket actually come back for your business, particularly given all the planes that are being run overcapacity right now?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

It's a very good question, Jon. To be honest, we are asking the same question of ourselves. The 737 affects us those two 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 at 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 airlines back in the 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 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 resumed 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 fleets. 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.

Jon Tanwanteng -- CJS Securities -- Analyst

OK, that's fair. Maybe a bit more color on the, 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 will be the quickest to come back into service, I would assume.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Very few of them have our aftermarket product on it, very few. Half of them are new builds, 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, a year and a half in service, I mean.

Jon Tanwanteng -- CJS Securities -- Analyst

With them sitting on a lot be an opportunity for them to be upgraded to in-seat power and then connectivity and all while sitting there?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Well, I can tell you, nobody's doing that. Nobody's touching those airplanes.

Jon Tanwanteng -- CJS Securities -- Analyst

OK. 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?

Dave Burney -- Chief Financial Officer

Well, I don't expect the warranty expense overall into 2020. Combined, it was about $4 million in the quarter.

Jon Tanwanteng -- CJS Securities -- Analyst

And was the legal side bigger than the warranty side or were they about the same?

Dave Burney -- Chief Financial Officer

No, the warranty was about two thirds of it.

Jon Tanwanteng -- CJS Securities -- Analyst

OK, got it. Are there any other charges that we should be aware of that may impact you in Q2 or anymore going forward?

Dave Burney -- Chief Financial Officer

No. No.

Jon Tanwanteng -- CJS Securities -- Analyst

OK, great. Thank you.

Dave Burney -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.

Ken Herbert -- Canaccord Genuity -- Analyst

Hi, good morning, Pete and Dave.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Good morning.

Ken Herbert -- Canaccord Genuity -- Analyst

I just wanted to ask on the MAX. 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 time frame, obviously, at sort of lower rate. 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?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Sure. We do have ongoing discussions, but they're not firm at this point. So 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 stood up at the March, April time frame in that going for quite some period of time, so 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.

Ken Herbert -- Canaccord Genuity -- Analyst

OK, that's reasonable. And 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, you're may be at sort of segment margins? Or how do we think about the margin progression on that?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

It's a good question. I think if we can get back in the 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, so if we could get the half back, 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 737, 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.

Ken Herbert -- Canaccord Genuity -- Analyst

OK, that's helpful. And just finally, you, obviously, did two small acquisitions on the test side in the second half of '19. As we think about capital allocation, how should we think about M&A activity this year? And is it still something you're looking at? Or should we -- is that maybe getting sidelined a little bit here just until you get better certainty on the business?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Yeah. I 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.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. 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.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Yeah. 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 three potential impacts for us. One is, obviously, it is hurting airlines right now, and anything that hurts airlines risk hurting us. But we've not seen or had 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 slowly getting back to where factories are slowly 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, 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 two or three 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 three areas where we're watching it, kind of airline traffic, our development programs and sources of supply, but nothing major to say today.

Ken Herbert -- Canaccord Genuity -- Analyst

All right. Thanks for the color.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Sure.

Operator

Our next question comes from the line of George Godfrey with CL King. Please proceed with your question.

George Godfrey -- C.L. King and Associates -- Analyst

Thank you. Good morning and thank you taking the question. The first one is, I wanted to follow-up, Pete, on your comments around acquisitions and thinking about the last five years and the challenges you faced in the semiconductor business 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 toward share buyback? And anticipating you saying no, we can do more acquisitions, so 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 company 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.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Well, I will grant your charge there. And certainly, acquisitions bring complexities, 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 we can 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 737 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.

George Godfrey -- C.L. King and Associates -- Analyst

OK. And then my second question is if I look at the three-month period just ended versus last year, and I'm looking specifically at the aerospace segment, $172 million this year versus $175 million. And, if I look at the margin and add back the $5.1 million you talked about to the adjusted aerospace operations, we're still below what the margin was a year ago. And I'm guessing those three 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 on revenue stream as we move forward? And if that didn't come through clearly, I'll restate it.

Dave Burney -- Chief Financial Officer

Yeah, I think, George, we also have the increase in the legal and warranty costs that were primarily in the aerospace segment. And we had an increase of tariffs compared to the year before, for the year anyways.

George Godfrey -- C.L. King and Associates -- Analyst

OK. So the estimate, just very simple, so $100 of aerospace revenue today and going forward, even if revenue mix shift with customer demand or specific product changes, the net result is that $100 should be every bit as profitable as it was today or five years ago?

Dave Burney -- Chief Financial Officer

Yeah. 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.

George Godfrey -- C.L. King and Associates -- Analyst

OK, thank you for taking my questions.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with your question.

Dick Ryan -- Dougherty & Company LLC -- Analyst

Thank you. Say, Pete, at the Q1 guided level, are you guys anticipating profitability?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

We are, Dick. It will be close, but we should be profitable at that level.

Dick Ryan -- Dougherty & Company LLC -- Analyst

OK. When you look at the --

Dave Burney -- Chief Financial Officer

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 million to $165 million quarterly revenue level, we would make some changes, more changes than what we've seen over the last six months. We don't expect, while we're not providing some detailed guidance, the business is not currently staffed to run at $163 million rate. We're staffed to run up to a $200 million plus quarterly rate, and that's -- if we didn't expect that, at some point, we would be making some significant adjustments, I think.

Dick Ryan -- Dougherty & Company LLC -- Analyst

Sure, OK. On the legal side, is there any historical precedent that would suggest the U.K. or France goes more toward a U.S. ruling or toward a German growing?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

That's a very good question. The rules, it turns out, vary pretty dramatically from country to country. So there is a set process that you go through, and you kind of started at the beginning over and over in each country. Different lawyers, same material.

So from a cost standpoint, one of the good things, I guess, is that we've kind of been over 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 some other rules, like one of the things -- well, the way the product gets to the country, the applicability toward 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, but 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 a 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.

Dick Ryan -- Dougherty & Company LLC -- Analyst

OK, thank you. Say, now that AeroSat's more focused on the business connectivity front, can you kind of handicap where do you think the competitive landscape is today, Pete? I mean, you've got satellite options, obviously, with 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?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Well, our main partner there is Collins Aerospace, and they are 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 would 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 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, if -- for a plane that flies primarily domestically over North America and air to ground installation is relatively cheap and effective, it may work better in many circumstances. But for bigger airplanes that go across the water, those options don't work. So that's where our market really is.

And I guess, we feel we're a little bit cautious, obviously, based on our experience, but we're giving 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.

Dick Ryan -- Dougherty & Company LLC -- Analyst

OK, great. Thank you.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Sure. Thank you.

Operator

Our next question is a follow-up question from George Godfrey with CL King. Please proceed with your question.

Deborah Pawlowski -- Investor Relations

George, you there?

Pete Gundermann -- Chairman, President, and Chief Executive Officer

George?

Operator

Mr. Godfrey, your line is alive. Perhaps you have your line on mute. Mr.

Godfrey, your line is live.

George Godfrey -- C.L. King and Associates -- Analyst

Oh, 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 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, 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 bite the bullet and just say, "Yeah, we're right, but we need to move on." Thanks

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Well, in this case, just for a little more background, the history stems from activities that happened 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'd prefer not to deal with 737 guys 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.

George Godfrey -- C.L. King and Associates -- Analyst

Understood. Thanks for taking the follow-up.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Sure.

Operator

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.

Pete Gundermann -- Chairman, President, and Chief Executive Officer

No closing comments. Thank you for your attention. We'll look forward to talking with you at the end of the first quarter. Have a good day.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Deborah Pawlowski -- Investor Relations

Pete Gundermann -- Chairman, President, and Chief Executive Officer

Dave Burney -- Chief Financial Officer

Jon Tanwanteng -- CJS Securities -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

George Godfrey -- C.L. King and Associates -- Analyst

Dick Ryan -- Dougherty & Company LLC -- Analyst

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