ATRO 11.20.25
Analyst 1
One pushback and concern I had about this company was the combination of the in-seat power and the test business. As long as these trade together, they're not going to get a real aerospace multiple. That was one of my main concerns, and it was why I moved to the sidelines.
Analyst 2
Yeah, that's a perfectly valid concern. When you see companies like Textron, which is an aerospace company, they really trade on their core industrial business. In this case, we're comfortable because test profitability never exceeds about 5% of the business, even in the out years. So if 95% of the company's profit comes from aerospace and defense, it's reasonable to value it using an A&D multiple.
Analyst 1
Yeah, I don't disagree with that conceptually. I've just had these in the past, where multiple businesses muddy the story. I thought they should trade at 20, but they traded at 15. I get the impression these guys would be open to selling the test business as they continue to get it back on track to try and get a more pure-play A&D multiple, but that's just one of the concerns I had about the overhang there.
Analyst 2
Yeah, that's completely a fair concern. Given that it's such a small piece of the business here, I'm not sure it comes up on people's radars. When I've talked to analysts or anyone else I've ever met that actually owns this, it never came up.
Analyst 1
That's fair. A second concern, which came up about a year ago, was some of their patent infringement lawsuits with Lufthansa. Initially, a lot of those had been dismissed, and then they lost the judgment about a year ago. They went out and did an emergency capital raise to ensure they could deal with whatever judgment was issued. They still have some ongoing litigation. How are you discounting that risk? I understand it was mostly an issue after the surprise judgment a year ago. As an ongoing concern, how much do you discount that in your model?
Analyst 2
Yeah, that's a fair question, and I should've been upfront in my opening that this is probably the largest risk with the company. Even though I've talked to the management team about it, they've been upfront that it's an uncapped legal liability, which isn't great. I've done the work to try and figure out where this could go. Last year, when management freaked out and did that convert raise, they were expecting the maximum damage to be up to about $150 million. Thus, they were essentially raising enough money to cover the full liability in case it played out. Management did a second convertible raise in August, though, because they realized they'd over-raised before; they did this raise now to buy back the old converts and reduce equity dilution.
What that tells you is that from management's perspective, the chance for large losses in the future has diminished. It's entirely fair that Lufthansa is appealing this to try to get more money, but again, we talked about the worst-case scenario: they might have to pay another $30 million. The next appeal court case starts on March 17, 2026. Frankly, that's something I've been planning to do more work on as we get closer to that court case.
The way I understand it, in the other jurisdictions where it's open, specifically in Germany, they're waiting for how it's going to resolve in the UK before it plays out. In France, they haven't even started the process yet; the court case begins on October 28, 2026. Long story short, yes, this is a real risk. The next catalyst would be March 17, 2026. I felt comfortable entering here, planning to do more work as we get closer to that date, but I think what you can read from management doing the refinancing of the convert is that they feel more confident they won't see a $100 million-plus liability in the future.
Analyst 1
Right, and I agree. It was also more concerning when the stock was at $15, and their ability to go into the market and actually do a raise was more in question than right now, when it's close to $50. You have a lot more weapons at your disposal here, so in some ways, the problem has been self-healing.
Analyst 2
From next year, they're going to be making a good amount of free cash flow too, something they haven't done in five years.
Analyst 1
Yeah, for all the earnings or EBITDA they've been generating, there hasn't been a lot of cash conversion. It seems like that's one of the potential good catalysts here, that it's going to start being real cash generation at this scale with the growth they've shown.
One more thing on the litigation. My understanding is that all of the issues being litigated relate entirely to the past. So even if they were to lose every outstanding case, there wouldn't be any ongoing costs, royalty payments to Lufthansa, or loss of future business. Is that your understanding as well?