Astronics Corp (ATRO) 2013 Q2 法說會逐字稿

Greetings and welcome to the Astronics Corporation second quarter 2013 financial results conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Miss Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you, Miss Pawlowski. You may begin.

Thank you, Manny, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics.

On the call I have Peter Gundermann, Astronics President and CEO; Dave Burney, Chief Financial Officer; and Mark Peabody, Executive Vice President.

Pete and Dave will discuss the results of the quarter and the Company's strategy and outlook, and then open the call for Q&A. If you don't have the news that was released this morning, it is available on the Company website at Astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation and the question-and-answer portion of this teleconference. These statements apply to future events and are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the earnings release as well as in documents filed by the Company with the Securities and Exchange Commission, which can be found at our website or at SEC.gov.

So with that, let me turn the call over to Peter. Pete?

Thanks, Debbie. Good morning, everybody. We'll do the normal prepared remarks and then I'll open it up for questions.

Our second quarter results were released this morning. Revenue for the second quarter was $70.8 million. That is up 9% over the comparable quarter from 2012, down slightly from -- or down from our first quarter totals of $74 million but still that $70.8 million was actually our second highest quarterly total ever following the first quarter.

We had 96.9%, 97% Aerospace, 3% Test Systems. That's been our normal split for the last few quarters. On the revenue, we reported net profit of $5.2 million. That's a margin of 7.3% of sales and equates to $0.34 per diluted share, which is roughly equal to what we did in the second quarter last year.

The one somewhat strange item in the quarter was the amount of acquisition-related expenses of $900,000 related to the acquisition and financing of PECO, which we closed on in July. A couple weeks ago, July 18th.

Our bookings for the quarter were $66 million, which we think is reasonable and puts us in a good position to finish the year strong. $66 million actually turns out to be our -- one of our top five quarters ever in terms of bookings.

Our engineering and development expenses were $13.3 million in the quarter. That's an increase of $2.2 million over 2012 and reflects the increasing opportunities that we see in the business. And we'll talk about those a little bit more as we move through the text in this presentation.

Year-to-date through the first half of 2013 our revenues are just shy of $145 million. That's up 11% from $130 million in the first half of last year. And net income is $13.7 million or 9.5% of sales. That compares last year to $11.3 million and 8.7% of sales.

Our earnings per diluted share in 2013 through six months is $0.90, up from $0.75 in 2012. Our engineering and development included in our cost of goods line was $26 million for the first half of 2012, up from 21 -- or 2013, up from $21 million in 2012. And we are issuing a new range of guidance for 2013, which includes PECO, of $53 million to $56 million.

During the quarter, we announced one of the new programs that is making up this increased R&D spend. That is we announced the Electronic Power Distribution System for a new jet being developed by Pilatus. This is something we've been working on for some time and they finally announced or formalized the announcement of the airplane, allowed us to announce also.

Interesting on that one, that we're not only doing the Power Distribution System but also the Starter Generator for that airplane. Some of you know that we've been working on starter generator technology, which is a traditionally problematic element of small aircraft turbine engines.

And this is our first real program where we're going to be putting one on an airplane, getting it certificated and putting it into production.

So we're pretty excited about that. And also, just to keep the record clear, we have two other unannounced EPS programs in work that are helping to make up that R&D spend. I'm hoping that we will be able to describe those programs in more detail as we get towards the end of the year here in 2013.

I think when they're all announced the observers will be impressed with the net that we're casting around the aviation industry in terms of jets and turbo props and rotary wing. It's a very versatile system and it's being well received by the market.

Our year-to-date bookings thus far are $145 million, roughly equal to shipments. And that's up from $121 million in the first half of 2012.

So we're pretty pleased with how the first half has come together. And we think it positions us well for the second half. We'll talk about forecast in a minute.

Looking at our segments, the Aerospace segment year-to-date revenues are $140 million, up almost 13% from 2012 and 97% of our total revenue. Aerospace contributed all the margin.

And our major markets are positive and doing well. We divide the market into Commercial Transport sales where two-thirds of our Aerospace activity goes these days. And our revenue of $97 million is up 14% over the first half of 2012.

We additionally have done $20 million in the first half in the Military Aerospace market. That's up 14 -- or that's 14% of our total and up 8.5% from where we were in the first half last year. And even in the Business Jet market we have sales in the first half of $15.6 million. That's about 11% of our total revenue and up 4.6% over the first half of last year.

Cutting our Aerospace activities differently and looking at products, our Cabin Electronics sales were $77 million in the first half. Cabin Electronics again, for those new to the Company, is our way of describing our in-seat power products. That's power for personal electronic devices like computers or IFE systems that people use, passengers use primarily in the cabin of commercial transport airplanes.

Sales are $77 million. That's a little over half our total and up 16% over the first half of last year. Aircraft Lighting is our next largest product, $37 million in sales in the first half, roughly flat with last year and about 26% of our total.

And then our smaller product lines, Avionics were just shy of $10 million, 7% of total and up a very large percent. But part of that has to do with acquisition timing from last year. That percentage growth will come down as the year moves on here.

Airframe Power, again just under $10 million of sales year-to-date. Down marginally from the first half of last year, 6.6% of our total sales. But Airframe Power is the place where our EPDS and Starter Generator efforts are housed. That's an area where we're making a lot of investment and expect big growth in the coming years.

Airfield Lighting, the last product line we detail, about $7 million, up 30%, 5% of our total revenue. So that's a product line that bounces around a little bit based on airfield projects that are occurring around the -- from time to time around the country.

Some details that people typically ask about with respect to Cabin Electronics, Panasonic, our biggest customer, had sales in the quarter of $20.9 million. That's down from $24.7 million and at a real quick glance may help explain why our revenues were maybe a little bit lower than what people might've been expecting.

On the other hand, a positive development, people typically ask about our 787 sales. And they are climbing nicely. They're $7.9 million year-to-date. And that is -- shows a ramp of about $2.8 million in the first quarter and $5.1 million in the second quarter. So we are finally experiencing some substantial sales to the 787 program.

Switching segments, Test Systems year-to-date revenues $4.5 million. That's about 3% of total and down from $5.7 million last year. We're not profitable at that level. $2.1 million loss year-to-date.

But if you look at the numbers you'll realize that we've cut our rate of loss substantially. We took some pretty big cost-cutting efforts in the first quarter and cut our rate of loss in half, roughly $1.5 million in the first quarter, $600,000 in the second on roughly similar sales levels.

The game there continues to be looking for and needing bookings to generate volume. And in fact this quarter we expect we will be able to announce substantial bookings. We're already well ahead of -- two or three times what we booked last quarter. Already booked so far this quarter.

Our balance sheet discussion probably a little bit outdated at this point given the PECO acquisition. At the end of the second quarter we had cash of $16.5 million and a total debt of $25 million. So a relatively low level of net debt at $8.9 million.

Those who follow our filings know that we've signed up for a $190 million term note due in 2018. That is to finance PECO and some rel -- resolve outstanding debt and leave room for a couple of other things that may come up.

In 2014, we will have principal payments of about $4.8 million. And from this point on, with that level of debt, we will expect the quarterly interest payments of about $1.9 million. So that's what our expectation is starting in the third quarter here going forward.

So looking forward, our backlog at the end of the second quarter was $114 million. With the PECO acquisition, we picked up their backlog of about $40 million. So for purposes of thinking what our backlog is going forward at this point, it's somewhere in the neighborhood of $150 million, $154 million.

For the second half, or through the end of the year we are tightening our revenue guidance for our base business pre-PECO to $290 million to $300 million of revenue. If you take the midpoint of that range, you can see that we're expecting revenue in the third and fourth quarter to average more what we did in the first quarter, rather than what we did in the second quarter.

There are, of course, moving parts. So there's room for that range to move a little bit. But at this point we're saying $290 million to $300 million. We're expecting PECO will add $35 million to $40 million of revenue, which should put us as a company by the end of the year in the $325 million to $340 million range.

Everybody would like to understand more clearly what the impact of PECO will be on our income statement. And we do not do bottom line guidance, as most of you well know. At this point, it's -- that effort, even if we did, would be fairly complicated because we don't have our opening balance sheet purchase accounting completed yet.

That's an activity getting a lot of attention right now. And as such, we don't know what the allocation of intangible assets will be. But I want to repeat the comment that we made on our last conference call with respect to PECO, which is that the fundamental business, when you look at through the related interests and depreciation, we'll have margins comparable to our Aerospace business. Maybe even a little better.

So we expect that that will start to show through next time we do a quarterly release at the end of the third quarter. And I think that ends my prepared comments. So, Manny, I think we'll open up for questions at this point.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions) Tyler Hojo of Sidoti & Company. Please go ahead.

So, Pete, just first question in regards to Panasonic. So if we look at that revenue contribution in the quarter, it looks like it's one of the lowest ones we've seen in maybe the past five, six, seven quarters.

And I guess I'm wondering why? Wide-body production rates are up. Theoretically it would seem like the trajectory -- the sequential trajectory should be up. So the swing factor is inventories. And I'm just wondering what you're hearing from Panasonic on that front.

I think we're -- we don't have a firm, hard answer as to why they're -- maybe down this quarter over where they've been in other quarters. We have no reason to believe that there's anything substantially changing in the market.

Our best understanding is that it's just a change in -- or it's just the way their orders are falling in terms of schedule. As you know, Tyler, we tend to spend a lot of time in terms of operating philosophy making sure that we're doing the right things for the long-term.

And we tend to do in the short-term what our customers tell us to do. And if they order something and tell us to ship it, we do our best to execute and ship it. And if they tell us not to, we don't.

So I think that philosophy maybe opens us up a little bit to short-term fluctuations. But we don't believe that there's anything substantial changing on the horizon or in the market. We think it's just timing and the way their programs are falling with their customers.

Okay. Now, Panasonic and your other Cabin Electronics customers kind of give you a full year view of what your shipments likely are to be. First of all, is that correct?

That is correct, yes. We work through a forecast -- we work -- we kind of build to a forecast with our major customers, including Panasonic, we ship to releases.

So the releases in the short-term don't always tie out to the build rate that we're building to with respect to forecast. But I guess our experience is that they over a longer period tend to tie out pretty well with their -- with the forecast they give us.

Okay. So the follow up question would be, has there been any change to the forecast that they provided?

Not substantially, no.

Okay.

So that's -- and that's why we're able to tighten our revenue guidance a little bit towards the end of the year.

Okay, got it. And then just moving onto something else. Just in regards to this narrow-body retrofit opportunity, just kind of wondering how the product developments on that front are tracking. Namely kind of the USB product that we've spoken so much about.

Well, I have Mark on the phone who runs that operation. Mark, why don't I toss that to you?

Yes. The development of the systems are going pretty well. For those of you who are not familiar with it, we have come out with a high -- what we call a high-power USB system which can power multiple iPad type devices or personal electronic devices.

And we've actually made our first shipment. So we finished the qualification of that.

Okay, great. Thanks, Mark. And just lastly, I know it's difficult for you all to speak about specific customers in terms of narrow-body retrofit. But I was wondering if maybe somebody could just kind of characterize maybe the pace of conversations that you've -- you are having with some of those airline customers?

I think it's safe to characterize those conversations as sincere and accelerating. We actually have a couple of airlines lined up and under contract that are I think excellent examples of how that narrow-body world is turning for us.

And we are waiting for an opportunity to discuss those. As I've explained to you, Tyler, and others, too, the airlines tend to be pretty sensitive about anybody else using their name in a promotional way.

So we often don't get permission until well after the installation happens and the product's in the field. But I think we're encouraged and definitely keeping our eye on the narrow-body opportunity. That's going to be a major propeller for us in the coming years.

Yes, I would certainly agree. Okay, great. Thanks a lot.

Thanks.

Thank you. Kevin Ciabattoni of KeyBanc Capital Markets. Please go ahead.

Pete, on last quarter's call you said something to the effect that looking at the revenue guidance you thought there was some more upside potential to push the upper end of it. Or even exceed it.

So just wondering what happened to the base business between then and now, given that you kind of narrowed the revenue outlook? Was that primarily just based on what you saw from Panasonic in the quarter? Or was there more to it?

No, it was just based on being another quarter down the road and having some of the scheduling issues fall the way that they've fallen.

I would not rule out an upward revision to our range. We had a debate internally as to where we think that range should be. And we collectively decided that we would narrow it a little bit both from the bottom and on the top.

But there is room, in my opinion, for some upside potential there. I don't mean to rule that out at this point. But you know as you get closer to the end of the year and we're already in August, essentially, at this point we have a clearer picture of where things are going to be.

Maybe the question you're asking is it -- is there some real kind of fundamental change in the market? And the answer to that is, no, we don't see anything like that.

Okay. Thanks. And then looking at Commercial Transport in particular, I know the first quarter I think had some pull-through from 4Q '12. But revenues in that business were down close to 10% sequentially.

Just wondering what -- if you could give us any more specific color on what drove that sequential decline? And then outside of the increased E&D expense and the volume being down a little bit, obviously, was there anything in the mix in terms of specific platforms that impacted margins negatively in the quarter?

I wouldn't say anything in mix. I'd say it's mostly volume-driven. The margins, especially if you back in the merger and acquisition expense, held -- the income statement held up pretty well.

It was fairly predictable, given the drop in volume. And again the drop in volume is based on schedule changes and just combination of a lot of customers ordering things or -- now or ordering things later.

So I would say it's less mix and more just the predictable function of volume fluctuation.

Okay. Looking at the Military end market, then, obviously pretty volatile in the first half in terms of growth rates from quarter to the quarter.

Just wondering what specifically drove the strong 2Q. And the -- what should we be looking at from that business kind of for the second half of the year, given kind of the big difference between 1Q and 2Q?

I think we're expecting Military market to kind of remain in that rough 15% of revenue range that it's been operating in for a while. It, too, will have fluctuations up and down a little bit.

We -- a large portion of our revenue there is spares. Spare parts and replacement parts. So we tend to get -- the fluctuations tend to revolve around government ordering patterns with respect to those products.

Was that true in Q2? Is spares kind of what drove the --

Yes, I would say so. Dave, I don't know if you have a different answer.

Yes. We picked up a little bit compared to last year with some TacTom shipments, too.

Okay. So that's a Tactical Tomahawk power conditioning unit that we do for that platform.

Okay, great. That's helpful. I'll jump back in queue. Thanks.

Thank you. Dick Ryan of Dougherty & Company. Please go ahead.

Great, thank you. Say, Pete, on the E&D standing, the $53 million to $56 million, you said that inclusive of PECO?

Yes.

Okay. That was actually a little bit higher than that. What opportunity -- you talked about the opportunities in the core business with the spend. The new customer named and a couple that are in the offing for later this year.

When would those dollar amounts kind of become obvious? Is that a late 2014 timeframe or later than that?

Well, for some of those programs it will be later than that. It depends on the product and the market. The Pilatus program we just talked about is probably -- any substantial revenue there is probably two years out at least.

We're -- the Lear program that we've been working on for a number of years we're hoping is shorter. But that's a program that Bombardier is battling to get to the finish line. And it's a challenge developing new airplanes.

So hopefully their flight testing, which will be happening here soon, will go smoothly. And they'll get into production. So some of our other products, things we do for Cabin Electronics, for example, tend to have a shorter development cycle.

And so -- but even then it can easily be a year or year and a half. So the things that we're investing in today are generally things that we would start to see impact our income statement towards the end of next year at the earliest.

Okay. And on the PECO side for E&D spending, are there large opportunities for them? Or is it just kind of product extension? Or how do you see that spend for PECO?

I think it has to do with ideas that are potential technology adders to products that they already do. And it's one of those situations where sometimes you develop a product that maybe the customer isn't even -- are asking for yet in an effort to try to demonstrate for them what's possible and convince them of a certain path.

And I think the opportunity of PECO from a development side is along those lines. And choosing certain technologies into existing products that will hopefully catch on with the customer base and provide opportunities going forward.

Would that be potentially your in-seat power technology? Or some of your lighting technology? Is that what you're kind of getting at?

Yes, it could be both those things or other things. In terms of -- think of programmable or communication opportunities in the airplane with customers. I'm being a little cryptic because they're a little bit sensitive from our perspective.

But we'll talk about it more as the time comes. But they're not huge market opportunities that we -- that exist today that we're bidding on today. They're more developing a capability and a feature set that we think may be of interest to customers in the future.

Okay. Say, Dave, a couple on the financial side. Will there be any acquisition expenses in Q3?

The bulk of it is behind us now. In the second quarter there might be some small residual, professional type expenses. But nothing near what we saw in the second quarter.

Okay. So how should we look for SG&A and tax rate for kind of Q3, Q4? Can you give us some color on those?

Yes. Yes, the tax rate that we saw in the second quarter of about 33% is within a percent or so of where we expect it to be for the next two quarters.

And the SG&A I expect to -- we'll have the incremental SG&A that'll come with PECO in the next two quarters when we're doing a comparison to last year and to the first two quarters of this year.

But the rate that we saw in the first quarter of this year I think is more of a normalized rate than what we saw in the second quarter.

Okay. Pete, one last one from me. Looking at the Test business, when you acquired that, what was that? Was that $8 million to $10 million in annual sales? Or was it higher than that?

No, it was higher. It was --

Was it?

It was up around $40 million, $50 million.

Oh, really? Okay. Okay. So what are you seeing in the bidding? Is this just with the existing branches? Have you expanded into other branches? Or does this include some international opportunities as well?

There are some international opportunities. But I think it's safe to say that internationally government funding isn't a whole lot greater than it is here for these kinds of things.

So it's turning to be a challenge. And -- but we do see some substantial opportunities that provide a good upside. That business, again, is one that depends on big program wins, which will drive revenue for multiple years.

And the environment has been such that those big program opportunities have just dried up dramatically. So there still are some on the horizon and we're pursuing them.

Our strategy is to kind of batten down the hatches and keep a directed effort at those larger opportunities and execute on those when they come up.

Okay. I guess I did have one more. Mark, you talked about qual -- the USB qualified. Is there any certification that we're looking at? I thought we were anticipating that later this year.

No, the certification is complete on that.

Okay. Great, thank you.

Sure.

Thank you. Scott Lewis of Lewis Capital Management. Please go ahead.

A couple of questions, first with PECO. I know you mentioned previously that on the 787, the most recent Boeing model, PECO did not do the PSU for that.

Did you come across or satisfy yourself with your diligence that that wasn't some issue with Boeing going forward?

Well, let me clarify that a little bit. Actually, from a internal PSU perspective, the 787 is not the most recent model. The most recent model is the 737 Sky, or BSI, Boeing Sky Interior, which was won by PECO.

Okay. Well, that --

So that changes the nature of your question a little bit, I expect.

Yes, it does.

And -- but the longer answer or the other part of the answer is, yes, we went and talked to Boeing. And convinced ourselves that Boeing very much enjoys working with PECO.

And it's too bad the 787 went a different way. But that didn't dampen our enthusiasm for the business.

Okay. Great. And then the second question, Pete, on the Starter Generator motor, I think originally when you started talking about that several years ago you mentioned retrofit opportunities in the business jet world.

So it was kind of interesting the first place you're using it's in a new build. Do you think there's still retrofit opportunities for that product?

Yes, we do. There's a couple challenges. One of them is the certification effort required for retrofits.

We think that the most proper way to vet the technology and to prove its usefulness and air worthiness is to go through the rigors of a new build program. Which will make, we think, the retrofit market a little more addressable, more easily later. And perhaps it'll help generate demand when people see what's offerable on new aircraft.

There is a challenge, though, with respect of fit. The reality is that this unit is bigger than the traditional technologies it replaces. And in some airplanes that larger size will be a limiting factor. It'll be hard to get it into the engine cowling, for example, or into the equipment bay.

So there's that. But there's also the -- when we looked at the array of opportunities ahead of us, we felt that a new OEM program with the formal certification process that goes along with it was the best way for us to get this marketed -- get this product established and get it into the market.

Okay. Just --

Mark, I don't know if you want to clarify that at all.

No, I think that's very accurate. And it's going to take several years for the retrofit market to work itself out. And I think that the people that would be more interested on the refit -- retrofit will be the heavy users. The Net Jet type companies. Or maybe the corporate jets. But not the owner-operators.

And is that, Mark, just because it's the reliability that's the main benefit of this?

It is the reliability. It's more expensive than a standard brush starter generator, for example. And at the end of the day, the return on investment is found by the number of flight hours you fly.

So the heavier users would find a return on investment much quicker than an owner-operator.

Right. A typical private aircraft flies somewhere between 350 and 500 hours a year. And those fractional programs are essentially airlines. And they fly their airplanes typically two to three times that much.

And so for them, the reliability improvement and the performance improvement that our technology allows is relatively important.

Okay. Thanks, guys.

Sure.

Thank you. Kevin Ciabattoni of KeyBanc Capital. Please go ahead.

Thanks, guys. Just a couple quick follow-ups here. First, looking at the E&D stem projections. Can you give us kind of your thoughts on where you expect that to shake out in terms of what percent is maybe going to biz jet versus commercial transport?

I know most of the kind of development work you guys have been talking about is on the smaller side, the EPDS systems. Is that really the -- is that the lion's share of what you project the E&D to be going forward?

It's certainly a big portion. I -- those of you who take careful notes might recall that I promised in the last conference call to present a little bit of an overview of our E&D spending on this conference call. I'm begging for time simply because I didn't get it prepared this time.

But I think the answer to your question, Kevin, is that probably close to half, a third to a half of our total spend is, indeed, focused on the smaller aircraft market.

And the way I would suggest you think about that is that, we, as a company today, we are two-thirds commercial transport and the military and the business jet markets are smaller.

But we kind of got where we got because certain products take off in ways that we didn't always expect. But as a company, our philosophy always has been, we want to identify and develop technologies that we think are novel and unique, that customers will want. And that they'll be willing to pay a fair price for.

And it is true that when you look at our E&D allocation these days, it is -- does not line up with where our business currently is very well. But that's not a problem from my perspective.

I think we have a substantial opportunity in the small aircraft to establish ourselves as a technology leader that will last for many, many years. That's our plan.

That doesn't mean that we short change other markets when we see opportunities or we see products the we think are worth developing. It's the same kind of test, the same kind of anticipation that we -- that -- and it -- and obviously we're willing to spend money to pursue those technologies and develop them successfully.

So that's a long answer to your question. Our allocation is not entirely aligned with where our sales come from today.

Okay. And kind of related and as a follow-up to Scott's question. The Starter Generator, is the market for that purely the -- on the smaller aircraft side? Or are there opportunities outside of that?

It's primarily on the smaller aircraft side. There are a couple different ways to start a jet engine or a turbine engine.

As they get larger you move from, say, a mechanical starter or electrical start to an air start. And so there's a size where the electrical start is possible and preferred. But as you get larger, the physics change so that air start becomes more of a prominent technology.

Okay. Great. Thanks, that's all I have.

Okay.

Thank you. Tyler Hojo of Sidoti & Company. Please go ahead.

Just to follow onto this whole line of questioning on the E&D spend. So just looking back at your guidance, it looks like you've increased your annual E&D spending guidance in nine out of the last ten quarters.

And I'm just trying to get an idea of where you think this tops out, Pete. Do you expect, based on the opportunities that you have and the growth potential that they offer, would you expect kind of the rate of growth on E&D to kind of continue at the same pace that we've seen recently?

That's a very good question. And it's a hard one to answer because we're constantly evaluating what our opportunities in the market are. And, again, that sometimes -- I would say a fair amount of the growth that we're seeing this year is purely driven by market wins.

You have an assumption going into the year of how many programs, say, you're going to be working on. And you know what programs you're bidding. And you assume a certain win way -- win rate. Or maybe more accurately a certain loss rate.

Frankly, we're winning more than we thought we would win. Now, that's a good thing, right? That means that we're winning the things that we're going after. And that the technology is becoming accepted and prized in the market.

So that's what's driving a lot of the growth. So to answer your question, we maybe need to revise our expectations for win rates along with our expectations for which programs we're going to be allowed to pursue by the customers, to give you a more accurate answer.

But, no, we don't expect -- I wouldn't expect that investment to climb at the same rate indefinitely. I think we've been successful in the market. And it could be that there aren't as many program launches.

When you look across the industry, Boeing's done the 787. Now they're going to do a revision of the 777 but there's not really talk of a brand-new airplane at this point. 737 Max I guess is arguably a revision to an existing airplane.

Boeing's got the A350 on the blocks. Embryo's got a new line of regional jets. And I could go through the various business jet companies.

But I guess our expectation is that there's been a wave of new airplane announcements. And that those -- that wave is unlikely to continue at its current rate. There'll be a pause before it picks up again.

Now, we've won a fair amount of business across those platforms. Now we have to execute on that. And that's what's driven our ramp up. But in the long term, our E&D spend is a function of what we're winning, which is a function of what we're allowed to bid on.

And the best we can do is to continue to update you and our investor base as to what we see coming down the pike. If we thought it was going to continue to climb higher and higher, we'd incorporate that into our guidance. At this point we're giving you the numbers we're giving because that's the best we see.

Well, let -- I appreciate the color there. But let me ask one more follow onto that. What kind of capacity do you have right now to kind of take that up? Where would -- where could that max out today based on kind of the footprint of the business today?

Well, our ability is basically limited by people. So in the short term, like today, tomorrow, we're limited by the number of people that we have on staff. And we're certainly tight in some areas. We're always looking for good people in certain areas.

But as a company I think we're much more geared to say let's not restrain ourselves with capacity. That may sound silly. But if there's an opportunity out there and if we think we can address it and if we think it's going to give us a return, we'll create the capacity to go get it.

So in the immediate short term, we're -- capacity can be a challenge. But given a few months or six months, we think we can create capacity as needed to match the opportunities we face. And that's how we've operated for a long time.

Okay, great. Just a couple of other questions. Just in regards to Max-Viz. It looks like that's tracking pretty strongly. I was just curious what your thought was on how that business had been running recently.

Well, our -- I think our avionics efforts in general are doing pretty well. Max-Viz specifically is a product line or a company that's very much geared towards general aviation aircraft. And general aviation aircraft are -- is not in a real sweet spot.

So I don't -- we're not actually getting where we thought we would be as quickly as we thought we would get there, frankly. But the technology we think is good. And we think the application is valid.

And there seems to be increased acceptance on the part of the OEMs in particular about making the product offerable. So our goal, what we're doing, again long-term, is pushing to be offerable on those various OEM aircraft.

And then doing what we can to encourage acceptance by the flying public. And waiting for production rates to increase. You know, production -- at the beginning of this year, the end of last year, most people were expecting there to be more of a steady climb from the GA market.

And that really has not happened yet. It seems to be at best treading water. But we continue to be bullish on the long-term prospects of that technology. I'm actually in the middle of an STC currently to get it on the airplane that I fly.

And I'm -- I've flown the system in demonstrator aircraft but I'm excited to get it in my own.

Interesting. Okay. And just lastly for me, it looked like biz jet sales were down pretty substantially on a sequential basis. I understand it's a lumpy business but anything you could point to in regards to that?

No, I'd say it's just timing again. We do have -- you know, it's a smaller part of our business. And we do have occasional NRE opportunities which can make one quarter look good or make the next one look bad.

But our business jet -- GA business is perhaps more than the Military, more than Commercial Transports, closely linked to production rates. So in the long term, production rates go up, we do better. Production rates go down, we do worse.

Of course, there's the substitution effect where we're replacing much higher ship side contents on new airplanes than we -- or new aircraft models than we had on the older aircraft models that they're replacing. But that's more of a long-term effect.

Okay, great. Thanks so much. I appreciate it.

Sure.

Thank you. John Reilly of ACK Asset Partners. Please go ahead.

Just addressing the narrow-body opportunity. You used the words "sincere" and "accelerating." When can we anticipate kind of an -- the beginning of revenues in this program? And how do you think it looks over the next couple of years?

Well, I think it looks great. And we are shipping already to narrow-bodies. They're -- we've got to distinguish between USB systems, which we have said we believe has more of a home in narrow-bodies. But it is not the only type of acceptable system to go on a narrow-body.

Our existing kind of modular framework for our in-seat power product fits in a narrow-body for operators who want to go in that direction. And many of them are.

So it's -- to some extent it's already happening. One of the things that we're trying to do internally is to develop a system whereby we can track sales to wide-body versus narrow-body aircraft.

Frankly, we don't have that in place at this point. And the reason we don't have it in place is that it's kind of hard for us to know if we send a system, say, to United, we don't always know whether they're putting it on a A320 or a A340.

So -- but we think we can at least provide working estimates there. But short answer to your question, John, is that we think the narrow-body world is a huge opportunity. Especially with the trend towards connectivity and Wi-Fi on board. And we think power is playing a catch-up game in the narrow-body world because the install base is so small.

So -- and because there's so many aircraft out there and so many seats on the aircraft that we think that's a big opportunity for us. And --

Well, let me ask, so for the --

-- nothing's changed our perspective on that.

So when for the USB specifically in the narrow-body? Is it a ramp that we're thinking begins in '14, begins in the back half of this year? When do you think we'll start to see? I know the acceptance and you said the sincere activity, interest in customers. When do you think we'll --

For the USB you're talking about?

Yes, for the USB.

Well, we have to be a little careful. We have a couple airlines that are signed up. And (technical difficulty) this fall. We think that they're going to start doing promotions.

And probably most of our investing public will see the promotions from the airlines before they see them from us. Because they're just reluctant to let us use their example in our promotion.

But we think that is happening. And we think as airlines adopt the technology and do the promotion, every other airline around the world will take notice. And it'll start to be one of those trickling effects where some airlines will work hard to kind of keep up. And some will -- you know, not everybody's going to do it.

Companies are like people, they all have their own personalities and make their own choices. Some will never put this kind of product on. But we think that as surely as people are carrying iPads and computers on the airplanes, they're going to be demanding power.

And some airlines, we think a large number of airlines will choose to satisfy that power by putting our kind of system on.

Yes, we've already found a few. So it'll be interesting.

Yes.

Focusing on the 787 opportunity, this is the first quarter where you saw meaningful ramp in the business. Remind me of what your content is on the 87 right now.

You can think of it in the $200,000 per ship range.

Got it. Okay. So do you think that this was the beginning of reaching what the current production rates is as they've chewed through inventory?

I think we're catching up, yes. And they're still ramping up production but, yes, I think our -- you know, we shipped a large number of ship sets a couple years ago back when -- back before the big delays started hitting the 787 program.

So that product has been sitting in inventory at our customer or at Boeing. And now as Boeing is starting to ramp up, they've eventually been chewing through that inventory and we're getting new orders. So we would expect that to continue.

Great. And then one last one. You spoke about a booking opportunity on the Test side. You obviously had won a contract, I guess it was about a year ago now, that got contested.

Is it something of that magnitude of size? Is it something -- (multiple speakers) I doubt it will been --

No, it's not that big.

Okay.

And it's a different order. But we're hoping it's not one that's going to draw all kinds of protest. It shouldn't because it's not directly to the government. It's a defense order but it's not directly to the government. So it should be more solid.

When would you get a ramp in that? When would that start impacting the P&L?

That's a good question. I don't think I know the answer to that. Dave, do you know? Probably towards the --

That will be, yes, toward the end of this year we'll start. Maybe late in the third -- maybe into the fourth quarter we'll start working on it.

Would that contract alone get you to profitability in Test?

That's too hard for us to say at this point. What it will do is help solidify our base there for next year, which is one step at a time here. That's progress from our perspective.

Okay. Great. Thanks, guys, I really appreciate it.

Okay. Thanks, John.

Thank you. Jay Weinstein of Highline Wealth. Please go ahead.

You will file, I assume, an 8-K at some junction for the PECO deal? Or an amended 8-K (multiple speakers) that'll detail a little bit more about --

Yes, we -- we'll -- Jay, we'll have another 8-K coming out with some financial information in it.

Do you have a rough filing date? I know it's 45 or 60 days from the close of it.

It's -- actually, I think it's about 71 days from the closing of the deal.

Okay. Thank you. And who exactly will PECO report, too? Is it reporting to Peter? Are they reporting to Mark? Or they're reporting to -- how is that fitting in?

Our plan at this point is they will report to me.

Okay. Can you give a little color as best you can of how that process kind of worked and played out? Where they (inaudible) came from. How you guys kind of thought about it?

Sure. It's a pretty standard story, I think. The company was privately owned by a relatively small number of owners who have a long history with the Company. And they got to a point where they wanted to consider different options for it in terms of selling.

And they hired an investment bank. And the investment bank found us along with a general outreach effort, I would say. And through a process -- you know, I only see one side of it. But you comply with the procedures as laid down by the bank. And you put your best foot forward and every once in a while you get selected.

And as we got selected and as we got to know the team involved there, and I think it's an important to recognize that we think that the team, the management team that's come with PECO is a strong management team. And culturally will line up real well with our Company.

One thing led to another and eventually we got a deal done.

How old are the management team? I mean, if the owners were selling, I assume they're not young.

Well, the owners are -- have not been an active part of the management team for some time. So the President of the Company is a guy named Steve Scheidler. He's going to be part of our executive team going forward.

They have some other people. I won't list the whole group. But the -- generally I would say they would age-wise look like us. I mean, they line up with us pretty well. So --

I hope they look better than you.

Well, yes. (laughter) I mean, I said age-wise, Jay.

I had to make Debbie laugh. And how many facilities do they have?

Just one.

Just one. Okay. All right, that's all I had. Thank you.

Okay.

Thank you. And our final question comes from Dick Ryan of Dougherty & Company. Please go ahead.

Thank you. Say, Dave, one last one from me. And it sounds like the review is still underway. But can you give us any sense of how the valuation on the PECO inventory might impact gross margin in the next couple of quarters?

Well, I can't give you a quantitative number because we haven't finished the exercise yet. But I do expect that there will be a fair value right up to inventory.

How much I'm not quite sure but that will certainly have a temporary negative impact on the margins during that inventory turn period, which I expect will be one to two quarters for the most part.

There will also be a fair amount of value placed on the various intangible assets, given the size of the deal and the other assets of the business. And that's still in the process of being determined how that allocation will go between those intangibles and goodwill.

So I can't give you a quantitative number but there certainly will be some inventory fair value write-up when we finish the exercise.

Sure. Sure. Okay, thanks, Dave.

Thank you. We have no further questions in the queue at this time. I'd like to turn the floor back over to management for any additional remarks.

Okay. Thanks, everybody, for tuning in. We're excited about the second half of the year. We look forward to talking to you at the end of the next quarter. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.