Astronics Corp (ATRO) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Astronics Corporation Third 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, Deborah Pawlowski, investor relations for Astronics Corporation. Thank you, Ms. Pawlowski. You may begin.

Thank you, Jen, 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, our recent acquisition that we just announced last night, PGA Electronics; the AeroSat acquisition that we announced earlier this month or in October, sorry; and as well as the company strategy and outlook. Then we'll open the call for Q&A.

If you don't have the news release that went out this morning or the one that went out yesterday evening, it is -- they are available on the company's 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. They can be found at our website or sec.gov.

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

Thank you, Deb. Good morning, everybody. As Debbie said, we'll talk about our third quarter first. It was a pretty good quarter and it was the first quarter where we had a pretty prominent impact from our PECO acquisition of July.

We'll then talk about some subsequent events, specifically the acquisitions of AeroSat and PGA, cover those in order. And then we'll turn and talk about what our forward expectations are as the dust settles from all these this acquisition activity through the fourth quarter and into next year.

So, the third quarter from my perspective was a very exciting quarter for the company. We reported revenue, as you know by now, of $89.7 million, which was a new record easily, up 30% over the comparative quarter from 2012 and up 27% over the sequential second quarter of 2013.

We were 97%, 98% aerospace, 2 or 3% (inaudible) systems, and we had pretty good bottom line contribution, a net profit of $7.2 million or 8% of sales. That's 39 cents per diluted share. That income was up 45% over the comparative quarter in 2012.

Buried in those numbers were some purchasing accounting inventory step-up values of approximately $2 million or $1.3 million net, 7 cents per diluted share. So without that inventory step-up, our earnings per diluted share would have been 46 cents. We expect in the fourth quarter to have another $3 million of inventory step-up expense related to PECO. And then we should pretty much be finished with that aspect of the purchase accounting.

Depreciation and amortization for the quarter was $3.1 million, up from $2.1 million in the comparative quarter in 2012. Our engineering and development expenses were $12.4 million, down slightly from $12.8 million in the third quarter of 2012.

A very exciting thing with the quarter had to do with our bookings. We had bookings of $104 million, which was easily a new record. PECO contributed about $16 million to that.

Year to date, revenue through three quarters was $234.5 million, up almost 18% from 2012, when we had revenues for the first three quarters of $199 million. That income through three quarters was $20.9 million or 8.9% of sales. Our 2012 net income through three quarters was $16.2 million or 8.1% of sales. The 2013 earnings per diluted shares, $1.14, up from 89 cents in 2012.

Our engineering and development expense through three quarters was $38.6 million. That's up from $33.9 million in 2012. You saw in the press release we revised down slightly our engineering and development expense expectations for 2013. We now think it's going to be somewhere in the $52 million to $54 million range. That's down slightly from our last guidance of $53 million to $56 million.

That is mostly just kind of the ebbs and flows of day-to-day life in the sense that some programs get moved out, some get accelerated in, and -- and we have been a little bit perhaps more efficient in some of the programs we've taken on than we thought we would be. So, I wouldn't advise anybody to read too much into that downward adjustment, although it is a little bit of a surprise, I'm sure, for you to listen and for me to say here that we're actually revising down our E&D expense. I don't think we've ever done that before.

Our year-to-date bookings are pretty strong at $248.7 million, 6% above sales. And our backlog at the end of the third quarter going into the fourth quarter was a new record at $168 million.

Looking at our segments, aerospace revenues through three quarters are $228 million, up almost 20% from 2012, and again 97%, 98% of our total. Aerospace contributed all the margin.

Our markets and product lines remain strong. And you know, those of you who have been following us know that we have a standard way of displaying our market and product line sales. It's on page eight of our press release.

With the addition of PECO and with the anticipated additions of PGA and AeroSat, we have taken some steps to rearrange slightly how those presentations are made. I wanted to talk through the rearrangements and -- and I guess also to advise that in my view, these tables from a comparative perspective aren't very useful, simply because the company is evolving so quickly that looking at how we look today compared to how we looked a year ago is -- is not going to make a whole lot of sense for a little while.

The market section of those tables on page eight pretty much remains unchanged. We have the two segments, aerospace and test systems, and within aerospace, we break out sales by commercial transport, military and business jet. We do, however, have an "other" category which is quite a bit larger than what it was before.

And the "other" category will involve things like airfield lighting and some of the PECO product lines which are material in terms of revenue and contribution, but are not specifically or easily identified as aerospace products. So, for now, we're showing those as "other" within aerospace. We may move them out of aerospace in future presentations here.

In the product line section of that chart down below, you see some new headings. Electrical power, we're combining what was cabin electronics and airframe power, those are both electrical power product lines.

And instead of breaking it off separately, from now on we're going to -- we intend to combine them. We also intend to present what we call a lighting and safety product line, which consists mostly of the aircraft lighting that we used to display, plus the PECO [PSUs], which are ultimately lighting and safety related in cabins of airplanes. We will maintain the avionics breakout that we did before, which will include for now, Ballard and Max-Viz, but also in the future, AeroSat and some portions of our PGA acquisitions.

And then we'll have what we call structures. And structures is very specifically fuel doors and some -- some environmental control system devices, primarily out of our PECO acquisition.

So that's how we plan to display ourselves going forward. I think what's useful on this chart is to look specifically at the three months we just concluded, because I think it shows you where we're going as a company. The numbers don't jump off the page, but if you run the math, commercial transports in the third quarter were 72% -- 72% of our -- of our total sales. That's higher than we've ever seen before. I expect it to continue to increase.

Military was 14%. Business [jet], 7.5%. I expect Business jet primarily through PGA and -- and AeroSat also to increase.

And down below on the product line section of that chart electrical power was 53% of sales in the third-quarter, lighting and safety 34%. And then, avionics and structures, relatively small at 4% and 3%.

Some specifics that people will probably ask about are what we used to call cabin electronics or passenger power, third quarter sales were $41.2 million, that's 118.3 million year to date, which is up 13.6% from where we were through three-quarters last year, 2012, when we had total sales for cabin electronics of $104.1 million. So it went from $104.1 million to $118.3 million through three quarters.

Our biggest customers, Panasonic, was $25 million in the third-quarter, 27.9% of total. And Boeing, which is now a significant customer as a result of the PECO acquisition was $17.8 million or 19.9% of total.

We talked previously about 787 becoming a more important program for us. We had $8.6 million in shipments in the third quarter, bringing year-to-date shipments of $20.1 million,

And I think I'll switch over to our test systems segment, revenues and test systems year-to-date through three quarters, $6.6 million, 2.8% of total, down from $8.8 million in 2012. We're not profitable at that level as we have not been previously, but the operating loss, we feel, is relatively manageable given the opportunities, which we still believe do exist.

Some of those opportunities are evident in bookings for the quarter. We had bookings in our test systems segment of $8.1 million which is substantially higher than what we've seen in recent quarters. There will be a press release coming, as soon as we get customer approval, explaining some of that increase, that primarily as a sneak preview has to do with a trainer system for F-15 armaments and maintenance.

Our balance sheet -- this is a little bit outdated, given our subsequent events with AeroSat and what we intend to do with PGA. But at the end of the third quarter, we had cash of $68.2 million and totaled that as we discussed before of $199 million, bringing us to a net debt level of $130 million.

That debt was taken out with the intention of going forward with AeroSat and PGA and the cash that was on hand at the end of the third quarter, we believe, will be adequate to fund both AeroSat and PGA and also from a capital expenditure standpoint, we are more and more inclined to make a real estate investment for one of our operations, which could come to about a $15 million expenditure yet this year.

I think there was some mention of that in the press release; $15 million's what we expect to spend to buy a building. And then there will be some build out and relocation costs that will come in 2014.

Looking forward, third quarter bookings, as I said, were really strong at $104 million. We also picked up $40 million of backlog with the PECO acquisition in July, leaving us with a backlog at the end of the third quarter of $168 million, which again, is a record.

For 2013, we are increasing and tightening our revenue guidance to somewhere in the range of $335 million to $345 million for the year. The midpoint of that range would suggest that 27% revenue increased over 2012, and assumes fourth quarter revenue of $105 million. We obviously expect the fourth quarter to be a pretty strong quarter.

There are some moving parts, that's why we still have the range. Some of our AeroSat sales will depend on making progress with certain STC efforts that are under way, and our PGA closing which we are expecting will happen some time in early December. Obviously those things can take on a little bit of a life of their own, as we kind of clean up events or work through the events that we have to work through in order to bring about the closing.

But, assuming we make some progress on AeroSat [STCs] making -- assuming we get the PGA closing in early December as we anticipate, we think we should very comfortably be in that $335 million to $345 million range.

I wanted to talk a little bit about AeroSat, because we did not have a specific conference call on that topic when we announced that acquisition on October 1st, and obviously last night we announced our intent to acquire PGA. So I want to talk about that a little bit.

AeroSat is a company that specializes in antenna systems, primarily in the K.U. range or satellite connectivity, providing connectivity to airplanes primarily for Internet access or maintenance reasons or location purposes or even television purposes.

The company is active primarily in the commercial transport area and VVIP. VVIP is not a term that we use very often at Astronics. For those who don't know, it's very, very important people. There are people who fly business jets, and then there are people who fly customized versions of commercial transports like -- oh, I don't know -- 747s, or 737s.

And the industry tends to fine tune and refer to business jets like those made by Gulfstream and Cessna and (inaudible) has business jets and private aircraft that are customized versions of commercial transports as VVIP aircraft.

The -- the AeroSat initiative is best suited toward the very large business jets and the VVIP market. The company had 2,013 sales -- or expects 2013 sales of $12 million to $14 million. We expect 2014 sales to be somewhere in the $20 million to $40 million range. The variability again, is somewhat based on STC efforts, which are currently under way in the commercial transport area, primarily involving some initiatives that AeroSat has under way with Gogo.

Gogo is a well-known company that provides satellite connectivity or I should say Internet connectivity to passengers [in] public transport airplanes. They have a business model which is well established in North America, and is -- primarily consists of air-to-ground communication. And AeroSat is -- has initiatives underway with Gogo to provide air-to-satellite connectivity, which will be useful to Gogo when ground stations are unavailable like when an airplane's flying over an ocean.

So there are a number of certification efforts underway currently to prove out those systems to get the FAA's blessing and when that happens we expect some pretty substantial sales to Gogo for internationally used, primarily K.U. band connectivity.

PGA -- oh, I should say, that there's a substantial earn out associated with the AeroSat acquisition. We bought the company for $12 million in cash, at closing. There's an earn out potential over the next two years of up to $53 million additional. That sounds like a lot of money. We would love to pay it, because that is based on revenues and assumes the revenue levels over the next couple years that are pretty high. As high as $70 million, $80 million, $90 million a year.

There's a floor on earn out, which basically for 2014, the company's got to exceed $30 million to get into an earn out situation, or $40 million in 2015. So it's a little unpredictable as to where AeroSat revenues are going to go. It's also a little unpredictable as to the bottom line contribution, because we're moving -- we're going to be moving the company into an operating sphere that it hasn't existed in before.

And so we'll just continue to communicate on that as it unfolds, but for the time being we're expecting 2014 sales at $20 million to $40 million.

PGA is a company in France -- we announced intent to acquire PGA last night. We expect closing will happen in early December after we go through some rather routine due diligence items.

We have an agreement to buy the company for about $28.5 million. That price will be paid 60% with cash and 40% with stock.

The company's located in a town called Chateauroux, France. Has 190 employees. Is privately owned currently. And we believe has a management team excited to be part of Astronics and qualified to take the company forward.

The company has 90% of its sales in Europe, and only 5% -- or 4% of its sales in North America. So one of our opportunities here is to help PGA expand their footprint out of Europe and into North America. We also are somewhat excited to have a European footstep -- footprint. We do a lot of work in Europe and around the world, but we do it from afar. We have some sales efforts locally run out of Europe, but this will be the first time we've put stakes in the ground there. And we think it's an exciting step for our company.

PGA is involved in two primary lines of business. The first one is seat motion and lighting for high-end aircraft seating. When you sit in a first-class seat or increasingly in the new types of accoutrements that modern airplanes are being outfitted with, there are a number of complex actuation systems that are used to drive certain surfaces in the seat or in the pod that the seat is located in.

PGA is a primary actor in that area -- again, especially in Europe -- making those actuation systems and lighting systems primarily for seat manufacturers. So they are selling these systems to seat manufacturers. That's about 70% -- 60%, 70% of the business.

The remaining 30% to 40% is essentially in-flight entertainment for VVIP airplanes -- again the -- the -- the customized version of the commercial transports I was talking about earlier. And these are airplanes -- if you're not from the industry -- that -- that look like nothing you've ever seen. They're just amazing machines with the absolutely best of everything.

And what PGA is good at is developing customized IFE solutions for these VVIP airplanes which -- which are not built in really high quantity, but are, when they do hit, worth quite a bit of money. It's not uncommon for a wide body VVIP airplane to be worth $5 million or $6 million or $7 million in revenue to PGA.

So why do we like PGA? I already talked about the geographic expansion. When you think about aircraft seats, we do a lot of work already in seat power. We are pretty good with power, and we've developed power systems they control things like in-seat IFE, in-flight entertainment, and passenger power. It's not too much of a stretch from there to think about incorporating seat motion the same way. So we could potentially bring our power expertise and reliability and industry contacts and drive motion at the same time as we're driving IFE and driving passenger power.

And we think that there's a weight reduction there and a reliability improvement for customers. And the customers in this case will be both airlines and the seat manufacturers.

We like the IFE portion in part because of our recent activities with AeroSat. You may have -- noticed a press release where AeroSat has developed a connectivity solution, teaming up with Harris CapRock to provide it to business jets and VVIP airplanes. PGA does in-flight entertainment for VVIP airplanes.

We think that there is an obvious bridge that needs to be crossed between in-flight entertainment and connectivity for that class of airplanes. And we think that by combining these capabilities, we are uniquely positioned to go out and provide services to this industry in a way that is not easily done or easily achieved today.

So with PECO on board, with AeroSat on board, with PGA we expect to be on board next year, and with the momentum in our organic business -- it's a little premature -- but we're starting to think of 2014 expectations. And -- and at this point it looks to us like we very well could have revenues in 2014 of somewhere in between $450 million and $475 million. That would be, obviously, a big step from where we're going to end up this year, and -- and an even bigger step from where we were last year in 2012.

I should add that these acquisitions that -- that we're going through right now don't really represent a change in strategy or a change in approach as much as it might appear. We have long been a company that is willing to make investments in technologies and market opportunities as we see them. Those have largely been internal traditionally, but we have pretty much continuously kept an eye open.

And it was kind of circumstantial that early in 2012 we came across these three opportunities that we think met very valuable criteria. And we pursued all three, and we've found a way to make all three happen.

We have at the same time, we think, been pretty responsible with our balance sheet. We were, you know, very traditionally and conservatively financed before we started this -- these efforts. We think that we are still pretty conservatively set up, but we think our balance sheet actually -- and these days with low interest rates -- is -- is much more efficient and gives us an appropriate amount of leverage to take advantage of the opportunities that the market is producing for us.

So I think that's all I have to say in terms of prepared comments. While we're talking about records, this is a record stretch of comments, so I apologize for that. We'll get to -- we'll get to questions now, Jen, if you want to open up the line.

Thank you. (Operator Instructions). One moment please while we poll for questions. Our first question comes from the line of Tyler Hojo, with Sidoti & Company. Please proceed with your question.

Hey, everyone. Good morning. So Pete -- just -- first question, I guess -- I mean, you know, we look at these results, and certainly it's hard to complain. But when we look at the top line -- I'm just kind of looking at quarterly progressions here -- and it looks like this is the third consecutive quarter where Panasonic revenues have been down year-on-year.

And, you know, just wondering if you could perhaps comment on that. Is this kind of inventory fluctuations? Or -- you know, how do you -- how do you see things with that customer?

Well, we think our -- Panasonic's obviously an important customer of ours. We fully expect Panasonic to continue to be an important customer of ours. But there're a couple things going on in this -- in this market.

First of all, if we were to break out wide body sales -- and we're still trying to figure out how to do this efficiently; you know, break out wide body and narrow body sales -- we think you would still see good growth in wide bodies because we're picking up shares of other customers that are more than offsetting some of the decline that we have seen with Panasonic.

That being said, we don't think Panasonic sales are in trouble at all or destined for long-term decline. We think it's just the way the market's evolving.

And, you know, we've talked a lot about narrow body growth, and we expect that as we continue to develop this in-seat power marketplace that it'll become more and more weighted toward narrow bodies and less and less toward wide bodies.

So, you know, we don't view this as -- as much of an issue. I mean, it could just be timing and fluctuation and workloads or jobs that they've won versus their competitors. We think we continue to be pretty well-positioned in terms of wide bodies in general. But we expect, you know, narrow bodies to become more and more of the -- of the -- of the market as we go forward.

Yes, I mean -- go ahead, Pete. I'm sorry.

No, no -- I -- go ahead if you were going to expand on that.

Yes, I -- I was actually just wondering, because I know they provide you kind of a full year forecast. Are they still within the range that they've provided you in terms of shipments or (inaudible) kind of come in a little bit?

No, I think they're in the range.

Okay.

They're in the range. I've got -- I've got Mark Peabody on the line.

Mark, I don't know if you want to fill in anything that I've talked about here.

No, I think you're right on. And -- and we get -- we get an annual forecast and -- from Panasonic, and they're right on to where we expected them to be.

Okay, wonderful.

And maybe if I could just follow-on to that. It -- when we -- when we look at the booking strength in the quarter, I'm just trying to look at how to think about that in terms of narrow body. Are you starting to see some of the orders that have been announced kind of hit -- hit in your -- in your bookings number? And namely I'm talking about JetBlue and Alaska.

And I guess the follow-on to that is -- I'm just wondering, since those announcements have been made, if kind of the pace of conversations with -- with narrow body suite [operators] has -- has kind of picked up.

Yes, I'll let Mark answer that again, too, but I want to remind you first that those announcements you're referring to aren't our announcements, and it could just be purely coincident, that those products in the pictures look like ours.

But Mark, do you want to talk about narrow-body development?

Sure, I can talk about that. Yes, we've got a significant interest from the narrow-body market and two or three major operators of over 100 aircraft have announced that they're installing it. And I think Pete's comment's appropriate in that area.

Interesting, though, the installations of those systems are really more in the 2014-15 time frame, so as far as revenues, we're not seeing significant numbers right now. I do expect to see those grow. The backlog for us is more when we get the purchase orders, and those we're just starting to see.

As far as interest from other airlines, it's become significantly competitive. And the general feeling is that now, with the FAA introducing the new I guess legislation might be the word, that they're going to allow use of the personal electronic devices aboard the aircraft earlier, below 10,000 feet, and also later, and the advent of more of the wireless access, as more and more airlines, including the narrow-body operators are putting permanent access on board the aircraft, there is more and more demand on the narrow-body side for having power -- power to these electronic devices.

So, yes, we're getting significant interest. That's (inaudible) of that, yes.

Okay, wonderful. Well, I'll leave it at that and hop back in the queue. Thanks a lot.

We're good.

Thank you. Well, our next question comes from the line of Kevin Ciabattoni -- I'm sorry.

We know who he is. Hi, Kevin. How are you doing?

Good. Looking at the commercial transport organic growth number in the quarter, if my math's right, it looks like it was very -- just about 5% or so, 5.5%. Just, that's the lowest level we've seen in a while.

I'm just wondering if you could give some color on some kind of what -- why the growth was so muted this quarter.

I don't know if there's any real specific reason why.

You mean, if you -- you backed out PECO, and you looked at the --

Right. Exactly.

-- organic business. Yes, I would just say, Kevin, it's just, you know, fluctuations over the course of the business year. A lot of our revenues in commercial transports in particular is kind of after-market oriented. So it can go up and down a little bit. But we don't see anything, you know, substantially changing, to be concerned about.

Okay. And then, on PECO, obviously, you know, last quarter or following the acquisition, and you said you were expecting about $35 million to $40 million from PECO for this year, which, obviously, you know, needs a pretty big fourth quarter number in there.

Is that typical seasonality for that business? And what can we kind of expect going forward, even into next year, in terms of on a quarter-to-quarter basis? How does that PECO business typically shape out?

Yes, I guess we'd say that it's not really a seasonal business. It is primarily related to production rates at Boeing, which don't vary a whole lot from period to period.

We'd expect it to perform kind of in that million and a half dollar range, and we're thinking it's going to come in somewhere in $34 million or so, for the year, which is, you know, in the range of where we thought it would be.

The wild card there is the after market opportunity, which is something the business hasn't fully pursued in the past.

You may remember me talking about those Boeing sky interior, primarily on the triple -- on the 737, and -- and how that interior has been pretty popular, such that operators --737 operators are considering in some cases retrofitting their older airplanes to have this new interior.

And -- and we believe PECO's pretty well positioned to take advantage of that trend. And, also, operators of 757, it turns out the 757 tube diameter is the same as the 737.

So -- so there could be some lumpiness in the PECO production rates, based on after-market opportunities, but -- but for the most part, it should be a pretty, you know, steady production oriented business, moving lockstep with Boeing's production rates.

Okay. And then, just one last one for me and then I'll jump back in queue. It was (inaudible) bookings quarter from the test systems business there, and I know you touched a little bit on it. Is that -- is there more to be expected there? I mean, was it kind of a first trance of a larger order? How should we be looking at that going forward?

And maybe if you could talk a little bit about kind of what the break-even for that business looks like at this point?

Well, the -- we will be issuing a press release on it as soon as we get kind of customer okays. I'm not sure it, by itself, is an order that has tons of follow-on potential. But it is an area of expertise that -- that the company has developed.

And then before, the company has done some F-22 trainers that are kind of unique in nature. And this F-15 order will be -- will be similar to what we've done in the past on the F-22.

And there are, of course, new airplanes being developed and fielded, primarily the Joint Strike Fighter, and there are opportunities that we think we're well-suited for related to that platform. So -- but -- but this order, itself, we don't expect to -- to build into something much bigger right away.

Although, I should say that these specs are moving a little bit, so -- as I understand it, so there may be some adjustment to the value of the contract here as the -- as the specifications get solidified.

I'm going to guess that the break-even on that business is somewhere in the [$5 million], $6 million per year range, and -- and with the things we see on then horizon, you know, we're hoping we can be in that range for 2014, certainly approaching it in the second half of 2014.

But we're -- we're currently going through our formal budgeting process for 2014. I made some comments earlier about our expected shipment rates in 2014. Those are in advance of our formal process. So we'll come back more definitively on that in our next conference call.

Okay. Thanks.

Sure.

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

Great. Thank you. I got disconnected, so I hope we don't repeat a question here, Pete. You got the -- you gave the Panasonic level. Did you give -- and Boeing. Did you give [tallies] at all?

We did not. They were under the threshold, but -- but it's growing nicely. It's doing well.

Okay. And on the E&D level, it looks like you're maybe kind of planing to, you know, a 13.5 to 15.5 range for Q4. Does this alter any -- any expectations for E&D levels in 2014?

We're still working those numbers up, Dick. I would view this more as just kind of an ebb-and-flow kind of issue. Now, there's a minor downward adjustment, but I would expect -- I wouldn't expect, you know -- I'd expect the trajectory to remain unchanged next year.

I don't think it's going to ramp proportionately with revenues. But we have plenty of opportunities to spend money in various places, no doubt.

Okay. And to stay on the -- the kind of gross margin trend here, I mean, if we look at non PECO, it kind of looked like [clogs], one from just under 55% to a little over 57% quarter over quarter.

Now I know when you look in the -- the numbers, PECO had kind of a [clogs] level in the -- the low to mid-60% range.

So where -- where should we kind of think about the clogs, kind of, going forward? Maybe that's one for Dave.

Definitely one for Dave. And going forward is a tricky business these days, Dick, you understand.

There are a lot of moving parts in this. But if you want to normalize the third quarter, costs to goods sold, gross margins, would you add back that $2 million inventory, fair value, light up the flush-through in the quarter from the -- from the opening inventory for PECO?

I expect in the fourth quarter it'll be another $3 million that'll flush through, for the same reason, and then we'll be done with that. So I would look at the third quarter and normalize it, and add $2 million to margins, gross margin, for that.

Okay.

Now, the other two moving parts that are going to kick in there in the [sludge] quarter, are going to be AeroSat and a little bit of PGA.

Yes. Okay. Where do you think the FAA certification sits on the -- on the first [program T], is that still something that can come out by the end of the year?

I hope so. There are complexities.

As you know, the government took a little holiday there, which didn't help things at all.

And -- and one of the things that -- you know, we're not -- we're not driving this [STC] process, we're certainly involved. But the Gogo has a number of STC initiatives under way on various aircraft.

We're involved in all of them. And some of them seem to be moving a little bit more quickly than others. Some of them, assuming that they're going to be able to use information generated by others, it's not clear how that transfer process is going to work with the FAA.

We are still hoping that at least one and maybe two STCs are granted by the end of the year, and the others are kind of done through the first quarter. But we don't have perfect clarity on that at this point, Dick.

How many are in process?

I want to say five.

Okay. And maybe switching over to military, that was a little stronger than I was expecting. What -- what's going on in the corridor and kind of the expectation for Q4 for the military side?

Well, the military picked up some revenue from the PECO acquisition, so there's some of a boost there.

Timing on some of the bigger programs, some -- some engineer -- NRE charges in there to our customers.

It's probably safe to assume that it's going to continue in that level through the fourth quarter, Dick.

Okay. I can get back in queue. Thank you.

Thank you. (Operator Instructions). We have another question from the line of Tyler Hojo with Sidoti and Company. Please proceed.

Yes, I just had a follow-up on the PGA deal. If we look at your commentary in regards to margins, I mean, it would assume that you paid something sub-four times EBITDA. Is that the right way to think about it? And if so, why so cheap?

Yes, I think you got the numbers right. The margins may be a little bit lower than that, but we think it's a pretty good value. You know, I think we've talked about this before. We -- we've known this company for a long time. The primary shareholder is somebody who we have had a relationship with, you know, through trade shows and through the industry for a long time.

And when the current group of shareholders, there are three of them, primarily, came time to sell the business, you know, some sellers looked for nothing but the best bid, the highest bid and wanted to maximize their value in the business. Others take a little bit of a different role, prioritize some other things, including, you know, who would be a good -- a good parent for the company.

And I think in this case, that factored into it. I mean, I can't speak for the sellers exactly. I know that we were -- they reached out to us very early on in the process directly and we were involved in it the whole time. I know that there were other bidders. I know that there other people who wanted to get a hold of this business. But we -- you know, the sellers decided to look to us.

And -- and frankly, from my perspective, that's the kind of business that tends to fit well with us, when you have an ownership that has a, you know, kind of a more character to it than what you might expect from some sellers. So -- but I can't speak for the sellers, you must understand.

No, that's -- that's very helpful. And then maybe just moving on to something else. You guys put out a press release I think a week or two ago in regards to the EPDS product line. I think you're now up to five OEM platforms. I was just hoping that maybe you could just give us an update on where you see that business.

And Pete, I think in the past, you've talked about some after-market or some retrofit opportunities for EPDS. Anything hit on that front?

Well, we do have -- we have three programs actively in development, two of which we're under firm contract for. And I expect we'll be able to publicly announce, you know, maybe even yet this year. We've got efforts underway to get those statements released.

One of them is a little further behind and it may take a little bit longer. But we've remained quite encouraged, you know. We think that the technology that we're bringing to market is gaining reputation and gaining acceptance. And we are creating a market niche that we think will be valuable for a long, long time.

One of the aspects of it, we're -- to tie the loop back to our E&D spending, is that, you know, it's a modular system. And when we get a new aircraft, to the extent possible, we try to use hardware we've already developed various components. And that minimizes what I call the "science costs."

And so, to the extent that our E&D expenditures next year are driven in part by these new programs, you know, we're -- we're assuming a certain level of commonality and efficiency relative to programs from the past. So as -- and so far, I think we're pretty pleased with how these efficiencies, so to speak, are working out.

As far as after-market opportunities, those are specific to starter generator technologies, which we are under contract to do start generators for the Pilatus PC-24. Our primary focus at this point is being successful on that program and getting through the certification process. And we will, you know, as we get towards the other side of that process, start to look at after-market opportunities.

But, you know, as you can imagine, we -- it takes about as much work to certify a starter generator on a single older airplane as it does for the beginning stages of a new airplane. So, we definitely want to prioritize the PC-24 first. But as for the EPDS architecture specifically, it does not really lend itself outside of the starter generator to retrofit opportunities.

Okay.

It's primarily a new aircraft -- new aircraft opportunity.

Yes, sorry. I misspoke on that. And then just lastly for me, and this is a follow-up to, I think, Kevin's question. In regards to PECO, I know the bulk of that is commercial transport, but can you just give us the break between transport and military in terms of PECO revenues?

I'm going to say 95-5, but I don't know that for sure. Dave's looking through spreadsheets. We don't have anybody from PECO on the phone, but I -- I've got to -- if it's different than 95-5, we'll try to bring that up next (inaudible).

Okay. That works. Well, appreciate it. That's all I had.

Okay. Dave's nodding so it must be right. It must be right, 95-5.

Thanks a lot.

Thank you. Our next question, there's a follow-up question from Kevin with KeyBanc Capital Markets. Please proceed with your question.

(inaudible) out there. A kind of clarification, Pete. You talked about that $450 million to $475 million for next year on the top line. I just wanted to clarify. That includes the PGA acquisition?

It does.

Okay. Perfect. Okay. Thanks.

We don't view that -- we don't view that as a -- the diligence items that are remaining are not substantial in nature. We don't view that as a highly risky step.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back to management for any closing comments.

No closing comments. Thanks for your attention. We'll look forward to talking to you all after the next quarter. Have a good day.

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