Astronics Corp (ATRO) 2014 Q3 法說會逐字稿

Greetings and welcome to the Astronics Corporation third-quarter 2014 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you, you may begin.

Thanks, Stacy and good morning, everyone. We appreciate you joining us today and your interest in Astronics. On the call is Peter Gundermann, our President and CEO and Dave Burney, our Chief Financial Officer. Pete's going to cover the results of the quarter and then we will open up the call for questions and answers. You should have the news release; it went out this morning and it's also available on our website at www.astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation and the Q&A portion of this teleconference. These statements apply to future events that 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. These documents can be found at our website or at SEC.gov. So with that, I will turn the call over to Pete. Peter?

Thank you, Debbie. Good morning, everybody. I thought I'd start off with a brief summary of the headlines of our press release this morning and then go into a more in-depth discussion of our third-quarter results, our year-to-date results, an updated set of expectations for what we think is going to happen for the remainder of this year and then an early glimpse into 2015, which is fairly preliminary at this time, but we know is of increasing interest to people who have an interest in the Company.

Headlines, third quarter was an excellent quarter for the Company. We set records in many very important areas, including sales of $179 million. That's double what we did in the third quarter of 2013. We had record net income of $17.1 million or 9.5% of sales and that's even after a range of unique one-time events, which I'll talk through in some level of detail. We also had record Q3 bookings of $154 million, which is not as high as shipments, but represents a new record nonetheless and sets us up well for the fourth quarter and for the beginning of 2015, we feel.

So going into some details, as I mentioned, we set new revenue for Q3 of $179.4 million. That is up 100% over the third quarter last year when we were at about $90 million. Organic growth was solid at 17.4%, or $15.6 million. Acquisitions added the rest, $74 million of growth. As is usual, when the top line is strong, the bottom line is strong also. Record income of $17.1 million or 9.5% of sales, well above our two-year average of 8%. Our old record was the previous quarter of $13.1 million, so we took $13.1 million record up to $17.1 million. Diluted earnings per share of $0.75, up 32% from the comparator period in Q3 of 2013.

Looking below the headlines, there were a number of things that negatively impacted our results even though they were pretty strong. One is we continued to have a fair market value inventory step-up expense in the quarter of $1.3 million. That's down from the inventory step-up expense of Q1 and Q2, but is still substantial relative to our results. We expect that we will have another quarter in this range of about $1 million, $1.3 million in the fourth quarter and then we will be finished with that inventory step-up expense as it relates to our recent acquisitions.

We also had a substantially higher warranty expense in the period. Usually we run around $200,000 or $300,000 per quarter of expense, but in Q3 we were at $2.4 million. That was largely to address a specific situation and a specific program, which is not done yet, but we estimated the expense to be in this range, so we took that charge and we will be addressing that situation with boots on the ground, so to speak, over the next five or six months.

We also took a restructuring expense of about $1.7 million. This pertains mostly to the integration of our new test systems business in Irvine, California, primarily on the traditional side of the business, which is our aerospace and defense side. And it is basically to make sure that our resources and our skillset lines up with the opportunities that we see in the market. And we felt that this was an important step to prepare us for what's likely to continue to happen in 2015.

We also had an intangible asset amortization expense that exceeded pretty substantially what we normally see. We normally see amortization of intangibles in the $2.5 million to $2.8 million per quarter range. In the third quarter, we were up around $7.7 million. That is an increase over average of about $5.4 million and that's largely a catchup expense relating to our Irvine acquisition as we are about to the point now where we are getting numbers in from the actuaries and we have a year to finalize these things from the acquisition. So we're not exactly done yet, but we are now to the point where we can estimate these intangibles much more accurately than we could have at the end of Q1 or the end of Q2. So that expense of $5.4 million is substantially above where we think the run rate will be when that catchup expense is no longer there. We expect to be at about $2.8 million plus or minus per quarter going forward.

The total of these items was a negative delta to our income statement in Q3 of about $11.1 million. So even with the records that we established and the profitability that we showed underneath the surface, there were $11.1 million of expenses that we do not think are going to be part of our routine cost structure going forward.

On the other hand, again, people who follow our financials closely will note E&D expense, engineering and development, which has traditionally for us been somewhere in the neighborhood of 15% to 18% of sales, came in at about $19.1 million in the third quarter, which is about 10.6% of sales. And this was a trend that we have been noticing and benefiting from in the short term with respect to our financial statements and it's driven by the fact that some of the businesses which we've acquired and some of our base businesses have not needed the level of investment that they have traditionally. So 10.6% in Q3 we feel is lower than what we're going to do on average going forward. We would expect that number to be somewhere up in the 11% to 13% range, but even at 11% to 13%, it's lower than what it's been traditionally, which is going to help our financials in the short term.

The other positive thing about the third quarter were record bookings of $154 million, as I mentioned earlier. Aerospace set a new record of $139 million. That's a trailing four-quarter total of $488 million versus a trailing four-quarter sales level of $469 million. So the dynamics that we see and the growth prospects that we see on the aerospace side we are pretty comfortable and encouraged with as the market continues to evolve here with bookings exceeding shipments on a trailing four-quarter sequence. On the test side for the third quarter, we had bookings of $14.6 million and that gives us a trailing four-quarter total of $60 million versus sales of $130 million. And ending backlog given all those results is about $301 million.

And just a comment, I guess a qualitative comment on our bookings as we go forward. We have talked about how as the business has evolved that we're going to have an increased level of lumpiness, so to speak, on our revenue side largely due to the nature of our test systems business. When you look at bookings, we feel that lumpiness is going to be even more pronounced to the extent that there are big orders that will be delivered over multiple periods. If we expect the periods to be lumpy in terms of revenue, the booking totals will be even lumpier.

So I say that to try to put the performance that we're seeing in terms of actual orders in context and in that context, we feel the third-quarter bookings of $154 million is very positive. It is by far our highest ever and we think combined with the prospects that we see in the market is a very solid total.

Year-to-date through three quarters, largely the same trends, revenue of $495 million, up 111% over where we were after three quarters in 2013 when sales totaled $235 million. Organic growth is in there at about 14.4%. The rest was through acquisitions. Net income through three quarters this year of $37.7 million or 7.6% of sales. Last year, we had $20.9 million, 8.9% of sales. So per GAAP reporting rules, our net income looks like it's a little bit lower, but in those numbers is the fair market value inventory writeup expense year-to-date of about $18.6 million and now incremental warranty expense of about $3.1 million.

Engineering and development, year-to-date $57.1 million, 11.5% of sales. Again, in that range where we're seeing it stabilize at about 11% to 13% of sales. Year-to-date bookings, $439 million. That's below sales, 89% of sales during that period, but again given the lumpy nature of where we expect -- how we expect our bookings to perform going forward, we think that's a pretty comfortable level. And again, backlog at the end of Q3 of $301 million.

Looking at our segments, aerospace revenues of $366 million, up 60% from last year and making up 74% of our total. Of the 74 percentage points of our total, 59 points was in commercial transports, 7 in military, 6 in business jet, 3 in other. So we continue to be largely a commercial transport supplier to the aerospace industry. Our operating profit on the aerospace side is 16.5%, which is down slightly from last year due to stepup expense largely.

Electrical power and motion products came to $188 million year-to-date, up 41% from last year and 38% of our total shipments and lighting and safety are $112 million year-to-date. That is up 66% from last year and makes up 23% of our total shipments. In avionics, $41 million year-to-date, up 200% and 8% of our total shipments.

Some things that I know people are going to be interested in, our Q2 cabin sales -- or Q3 cabin sales, which is largely our in-seat power products, had quarterly sales of about $50 million and Panasonic, one of our largest customers traditionally, was at $31 million and Boeing, another very large customer, was at $24 million.

Turning to our test systems side, revenues year-to-date of $129 million. That's up very substantially from $6.6 million through three quarters last year. Test systems was 26% of our total revenues year-to-date. GAAP accounting shows an operating profit of 6.2%, but the inventory flush that we have talked about repeatedly through these last few calls cost that side of our business somewhere in the neighborhood of about $16 million in expenses. Added to that are some of the special charges we've talked about in terms of restructuring also.

Our balance sheet, we continue to feel that we're very comfortably financed. At the end of Q3, we had cash of $25 million, total debt of about $213 million for a net debt of $188 million. You'd have to track it pretty carefully, but year-to-date we've paid down about $58 million in principal and we've been able to do that because we've had very strong cash from operations. Cash from operations through three quarters is about $68.5 million, almost twice our net income level. That's due to solid profits and good cash management, as well as good timing with respect to some of our acquisitions.

Looking forward, end of Q3, our backlog was about $301 million. We are tightening and slightly increasing or I guess tightening our revenue guidance for 2014 to between $645 million and $655 million. I feel it's reasonable to note that there is room to vary beyond this range both on the low side and on the high side. We've got a number of fairly significant programs winding to conclusion towards the end of this year and we're expecting that some of them will slide into 2015 and some of them will perform in 2014 and on that assumption, we're giving this range, but it's possible it could all happen in 2014. It's possible that a majority of them could slide into 2015 in which case we could exceed this range on either side. That would not materially affect the prospects of the business, but it could affect our fourth-quarter results pretty dramatically obviously.

But if we are at the midpoint of that range for the year, $650 million, we would in the end show 91% growth over 2013 when we recorded total revenues of $340 million. That range is built on the expectation that our aerospace business will sum this year to $485 million to $490 million and test $160 million to $165 million and the midpoint of the range implies fourth-quarter sales of about $155 million, which is down slightly from where we were in Q3 and Q2, but in the history of the Company would be our third highest ever and we think is in the reasonable range given how the Company is structured at this point in time. We expect capital expenditures through the year to be $40 million to $44 million. A major element there is a new building that we're outfitting in Portland, Oregon for $28 million that we expect to occupy early in 2015.

Speaking of 2015, we know that a lot of people are going to have interest in what our predictions and expectations will be for 2015. We are not to the point today where we are able or willing to be very specific about our 2015 plans. We're in the process of pulling those together at this point and obviously, that's based on what we see going on in the market and with discussions with key customers and our knowledge of important programs and our standard practice would be to issue revenue guidance, top-line guidance when we release our Q4 results, which will be early next year. But our expectation or my expectation at this point is that many of the positive trends that we see across our business are going to continue and we think that we're going to have a lot of positive development opportunities. Again, that's how we've historically created value in our business is by investing both in the area of new product development and in the areas of acquisition. We expect those things largely to continue.

There will be some other moving parts, which may be down slightly and we're trying to get our hands on those. But I think net on net next year should be another very strong year for the Company and I expect that net on net we will be within reasonable range of where we are this year. Above it hopefully, possibly a little bit below it depending on how the markets evolve, but we think it's going to be an exciting year and we will talk more specifically about it at the end of Q4 when we release our Q4 numbers. But, at this point, we think it looks like a pretty promising continuation of a lot of things that have been positively affecting us across our business so far this year. So with that glimpse into the future, I guess I'd like to open it up for questions and let's do so at this time.

(Operator Instructions). Tyler Hojo, Sidoti & Company.

Yes, hi, good morning, everyone. So just firstly, just want to go to in-seat power. It looks like, in the quarter, you saw roughly 20%, 21% year-on-year growth in the quarter. I'm hoping that maybe you could just talk a little bit about what the outlook is there. Are you really starting to benefit from some of the narrowbody retrofits that some of these key airline customers have made over the last call it 12 months and what's the pipeline look like going forward?

So we are starting to benefit and we think it's a robust opportunity that's continuing to mature and develop. It's the same set of secular trends that have been driving us for a while, increased personal electronic devices and connectivity and narrowbody airplanes being used more and more for long-haul flights and doing so capably. So we think that those set of circumstances continue to create a favorable environment for our products. So yes, we're definitely seeing continued interest around the world really. It's one of these dynamics that's not unique to North America. It's happening certainly around the world. It's a positive environment.

Okay, thanks for that, Pete and maybe at least from my seat, I'm hearing some increasing concerns from folks about increasing competition. I guess there's a number of entrants or potential entrants into the market. One, I'm just wondering if you've started to see some of that competition creep into the market and impact you guys. And also I'm just curious about the IP side of the equation. I know you've got some pretty powerful patents. Have you looked at any potential infringement on those with some of the new entrants?

Did I say it's a good market? I meant to say it's a really bad market for anybody listening. Just kidding. Yes, it's an interesting discussion point and let me ramble across the range of topics that you bring up. On the one hand, I don't think -- we shouldn't be too surprised. This has been a really good product offering, kind of a niche that we created way back when and we're benefiting tremendously from trends in the world really and our culture that we couldn't have foreseen at the time. And certainly other people have noticed that too. So as our success becomes apparent, it's reasonable to think that there will be other people who will look hungrily at some of the things that we're doing and some of the results that we're posting up.

That being said, while it's a growing market, it's still not that big a market and if you think about, from a competitive standpoint, when somebody looks at our position here, they have to be -- if they are realistic about what their prospects are for competing with us, I don't think it's as tempting as it might appear at first because we're pretty good at it. We have pretty entrenched positions and very good customer relationships and it is certainly not one of those situations where we are sitting on our butts enjoying life and not paying attention. We're innovating, we're coming out very proactively with things that we think address customer needs and it's very much a moving target.

So to the extent that we may have competitors that can't compete with what we've done before, they've got to compete with what we're going to do or are doing for the future and that's a little bit of a challenge. It's not something that's going to be easy for anyone to do.

I might point out along those lines that we have had and do have competitors today and very big competitors. So to the extent that there are maybe new people throwing their hat in the ring, that in and of itself doesn't terrify us. We're used to that. We do it across our business. We compete with big companies across our business, companies that have many times the level of resources that we have.

But I think the final thing, you mentioned patents and IP. We certainly have a collection of IP that we have developed and the vast majority of which is unprotected from a patent standpoint that falls more into the know-how category of things. I guess my perspective is that while our formalized IP protection, our patents are useful in preventing people from doing things exactly the way we do them, there are other ways to do what we do. So I don't think that patent protection in and of itself is absolutely critical to our success and I don't think it necessarily will be in the future. I think what's much more important is how well we do what we do and how well we perform in the eyes of our customers.

We have a tremendous platform evolving here in terms of marketshare and customer intimacy where we're in regular communication and regular conversation with all of our customers, even customers that haven't bought for a long time because they've got relatively stable fleets. We continually keep them up to speed with what we're doing and what's happening in the industry with the eye and intention that when and if they expand their fleets or modify their fleets that we'll be there without skipping a beat.

And so that's a long answer to your question, Tyler. Maybe the bottom line one is do we see any impact in our business and I can't say we do. No, we have a big competitor. We have had competitors. We may have other people throwing their hat in the ring. I don't think it's going to affect how we do what we do. We're just going to continue to do it and we think we have a strategy and a formula that's been pretty successful. It's not obvious to us at this point why that should change.

Thanks for that, Pete. Maybe just a quick follow-on there. Just in regards to some of the retrofit customers that you have, do you have any examples where you've actually lost a follow-on piece of work to somebody else when you've already been supplying the product?

Aaah --.

And the context of that is like recently.

No, nothing recent and nothing major. We have been doing this for quite a while and sometimes fleets go back and forth and sometimes customers take one part of their fleet one way and another part of their fleet another way for whatever reason, but I can't say that the crux of your question is has the competitive landscape changed in such a way that there's something that is noteworthy happening out there. I can't say that there is, no.

Okay, fair enough. And maybe if I can just sneak one more question in, just on tests, I get you don't have the visibility to give us a real sales guidance range for next year and obviously things are quite lumpy there. When do you think your big customer for that new acquired business is going to be able to give you a decent level of order visibility for next year? Do you expect to have it kind of exiting this year and going into 2015 or not necessarily?

Well, in terms of -- it depends what you think of as a decent guidance. I don't know if we're going to have an order by the end of the year. But we obviously are in discussions, have been in discussions, will be in discussions and I'm rolling up the feedback from those discussions in my general comments, which says I think next year looks like a pretty good year. We may have moving parts that some go down and some go up, but I think -- I certainly don't expect next year to be any kind of stepdown from the business' perspective.

This year, we're going to put in a performance of growth near 100%. I'm not sure we're going to do that again. It may be a little bit of a rest from that perspective, but neither do I expect us to go off a cliff and retrench. I don't think it's that kind of situation at all either. So I think given that level of ambiguity, I think that we're performing at a level that's pretty solid. I think the prospects are out there that we can maintain this level or something similar to it. That's what our plan is.

So Pete, if --.

J.B. Groh, DA Davidson.

Hey, thanks for taking my call. Playing off Tyler's question on in-seat power competition, can you remind us what the installed base is and how to think about the replacement cycle within that installed base as that continues to grow?

Okay, well, I think our read on that is that the installed base is best understood by dividing the market into two different markets, the widebody side and the narrowbody site. The widebody market is the more established and more entrenched of the two. We would say that somewhere in the neighborhood of 40% to 50% of the available market in terms of seats has our product or some competitor's version of our product on it.

From a refurbishment standpoint, I guess our best advice is that the system tends to be modified and replaced along with the interiors on the airplane. So older airplanes operated by smaller carriers may not get updated as regularly as the bigger ones, but when an airline goes through a refresh, they are not going to reuse an old system in part because it's pretty expensive to do so, but also because the technology marches on and frankly the systems that we've sold -- built and sold a few years ago are different than the ones that we're building and selling today.

USB is new, different power levels are new. There are different safety requirements and precautions and maybe different power budgets from the airplanes themselves. Certainly there is a trend of going more nose to tail rather than maybe just the premium class seats. So most people in the industry talk about a five to seven-year refurb rate. I'm not sure it's quite that high, but we would say that when an airplane gets refurbed, our product gets refurbed with it usually.

The narrowbody side is much newer. It's relatively recent. It's being sparked along by personal electronic devices that people are carrying along with connectivity and the longer mission profiles that narrowbody airplanes are typically operating. We would say that the penetration rate so to speak on narrowbodies is quite a bit lower than on widebodies. Somewhere probably around 15%, 10% to 15% are spoken for at this point. And that's where a lot of the interest in the industry for us is right now. The widebody operators know us and love us. Most of them have touched our product, have experience with it. The narrowbody operators, it's relatively new. So that's where a lot of the spark is right now.

Got you. So when you say on widebody 40% to 50%, you're talking about of total seats there. So I'm guessing in the front of the cabin that's a much higher rate and in the back of the cabin it's quite a bit lower rate in terms of the penetration on --.

Right. That's correct. But newer airplanes more and more have our product kind of nose to tail.

Right, okay. Do you have a sense in terms of the new 737s and A320s coming off the line what percentage of those include power? I mean is it --?

Next to nothing.

Oh really? Next to nothing.

Pretty much next to nothing, yes. It's the same sequence that happened in the widebody world. It started as a retrofit product and that's where the big opportunity is, so there are a lot more narrowbodies -- as many narrowbodies as Boeing and Airbus are building right now, there are many more of them out operating. So we promote ourselves -- we promote ourselves three ways. We promote ourselves to the airlines, we promote ourselves to the OEMs. We promote ourselves to the other equipment manufacturers, specifically IFE, in-flight entertainment manufacturers.

In the narrowbody world, by far and away, the most important of those three is the airline because if the airline doesn't want it, the OEM is not going to offer it. IFE is a little bit less of a tangible route to market for us in the narrowbody world because narrowbody airplanes typically don't have the traditional mainframe seatback style of in-flight entertainment systems. So that's more of a widebody route to market for us as opposed to the narrowbodies.

Okay and then just one housekeeping one. I think the total inventory step was 1.3, so part of that is in the aerospace?

Very little of it. Almost all of it is in test.

Okay, all right, thank you.

Dick Ryan, Dougherty & Company.

Hi, Pete. This is Ash for Dick. I had a bunch of questions on AeroSat, but I wanted to start off with in-seat power if that's okay. As far as line fed goes and STC goes, how long is the process to convince Boeing or Airbus to have in-seat product line fed and are you guys line fed on every air frame?

Well, that's a little bit -- how long does it take? It is largely a function of customer demand and money. Where there is high demand and willingness to spend money, it can happen pretty quickly. For example if an airline is trying to pick between one airplane or another for a decent sized order and they take a position with the air framers telling them that we want Astronics product offered line fit, those types of STCs tend to happen pretty quickly. If we're doing it at our nickel and we have no customer lined up behind us, it can be a much longer process trying to get the right levels of attention. So it's kind of a non-answer, Ash, but that's how it works.

As far as which airplanes and which products, that's really a much more complex question. We have a number of product families and there are a number of airplane models built obviously by Boeing and Airbus. I think it's -- probably the best way to characterize it is that we are offerable line fit certainly on all the widebodies. We have some products that are offerable on narrowbodies, but not the whole set of our products and at this point, we don't view that in and of itself as a big limiter to market. We think that in time that will come one way or the other. But, at this point, we're certainly much more established from the OEM's perspective in widebodies than we are in narrowbodies.

That's helpful and hopefully you get more narrowbodies going forward. I do have a question, in the press release, it was mentioned that, and I think you kind of addressed it a little bit, that $158 million of the backlog will be shipped in the fourth quarter, but your guidance is for $150 million to $160 million. Is this just conservative or is there some slippage?

Yes, I tried to describe that. We have a number of moving parts. I'd say if I look across the business probably four substantial pieces of business, which individually could happen this year, could happen next year. I mean it's going to be right around the end of the year and those four could be -- I'm just doing this in my head, Dave -- I don't know if you are going to chime in with a different number, but it could be a $15 million grouping. So if all of them move out that obviously hurts Q4 results. If all of the move in that will obviously help Q4 results and collectively, they have the power to swing us beyond our range. But based on experience and our best guessing, we're thinking that not all of them are going to slide and not all of them are going to get pulled in so that's where we came up with the range that we have.

And is this mostly test?

No, no. There is one in test, but three others are scattered around the aerospace side of the business.

Okay. Just one last one for me. I want to talk about AeroSat. I know you guys are waiting on STCs on some air frame and you guys did get some STCs on a couple of the Boeing frames. Would you mind refreshing because I don't think we discussed this in the last six months.

Okay.

On which air frame you have an STC and which air frame you don't and is that like totally dependent on Gogo or is that some of you guys or some of the air frame you guys are driving?

The commercial transport efforts that we have underway are largely driven by Gogo and the range -- long story short, we're essentially done with STCs for the models of aircraft that we've been turned on for. So it is no longer a situation where we're waiting for STCs to be granted. Some of them are actually in process. We've been given verbals even just recently. So it's not all completely tied up and done, but we started the year talking a lot about bird strike. We found a way through that and we've successfully tested not once but twice a couple different architectures that both pass. So we don't consider that a limiting factor anymore and we certainly are involved in other certification efforts more on the VVIP and even some military work, which are ongoing, but from a Gogo commercial transport perspective, we're in pretty good shape.

Okay, perfect. Thank you.

(Operator Instructions). Ken Herbert, Canaccord Genuity.

Good morning, Peter and David. So it's actually Jonathan on for Ken. So as far as test margin goes, what is the expected tailwind in Q4 and how do you view a normal margin for that business?

What's our expected tailwind?

Headwind, headwind, sorry.

Headwind. I don't know if there is a headwind. I think it's more a function of delivery timing than anything else. Again, it's one of these businesses where we're going to be -- as a rule, we run our business where a customer wants it on a certain date, we deliver it on a certain date and we do our best to work very constructively with our clients, even if it makes our financials look a little bit goofy. So in this particular case, this business is going to be more lumpy by nature and we view fluctuations in the fourth quarter as being pretty routine looked at through that lens. So nothing specific to talk about with respect to headwinds other than that.

I guess I would actually offer though that one of the things we've been dealing with in our core or our original test systems business and we continue to deal with with the Irvine acquisition is the somewhat difficult market for the traditional military and aerospace side of test. And it may be a little bit premature, but we seem to be seeing some things loosen up and move forward that I couldn't have said maybe a quarter ago. And we think that's pretty encouraging going forward. We're certainly watching that pretty closely, but we've received a few orders that I wouldn't have been as surprised not to get in the last year and we seem to see some quotation activity, which is a little bit healthier than what we've seen. So we're encouraged by that. But beyond that, I can't really speak specifically to any headwinds that we know of.

Okay. So could the same be said then for 2015? Generally how confident do you feel with bookings and revenue?

I think 2015 may not be the same year as 2014 for our test business, but I think it's going to be a very solid year and a successful year looked at in the scheme of things. It's probably worth reminding that the Irvine business -- let's see -- I'm pulling these numbers from my head, so these may be a little bit off. Dave, jump in if I screw something up. But 2013 that Irvine business probably did about $55 million, $60 million in revenue. It's a little difficult to compare because the seller, EADS, used a different revenue recognition model than we do. This year it's going to be more than double that and we don't necessarily expect that high a level to continue immediately, but we're not going anywhere near down to the bottom where they were when we bought them.

So looked at from a historical sense, this is the best year in Irvine's history and it's got a 20, 30-year history. Next year may not be as good, but it's not going to be anywhere near the bottom either. So we didn't buy it for clockwork improvements and increases. We bought it because we thought there was a good strategic and technical fit and we liked the diversification of customers and products that it would bring us and being in it for -- how long has it been now? Eight months maybe? I'm pretty pleased. I think the integration process has gone well, the market prospects have developed nicely and I think long term, which is what we're in this for, we think we've got a good business. So we're not displeased at all.

All right, great. Thanks, gentlemen. That's all I had.

Kevin Ciabattoni, KeyBanc Capital Markets.

Good morning, Pete and Dave. Nice quarter. Biz jet was down a little bit organically in the quarter. Just kind of wondering if maybe you can give us some color there and then an update on the Lear 85 program as well.

What was down organically?

Business jet revenues.

Oh.

I know it's a tough market typically.

It is a tough market and I'm going to give you two different perspectives on it. The first one is that it seems like each year for the last three or four years the market experts have talked about we finally hit bottom and we're going to rebound and each year, we don't do it. The industry doesn't do it. So the experts say the same thing the next year and we've all seen that dance, you have too. So that's a little bit tired at this point.

On the other hand, I'll tell you I just got back from NBAA and we had a pretty good display there and my observation based on the number of attendees and the number of displays is that there is a growing sense of enthusiasm in the business jet market. So I don't have any real clear succinct major news to tell you what's driving our results up or down marginally over the last quarter, but I think our observation overall is that the industry is moving forward and I think there's been enough time and enough technical development both on the avionics side and on the propulsion side and other systems for the OEMs to begin to sell effectively against their installed base. And you can see that all the OEMs are continuing to introduce new models, which we think bode well for the future. So that's all one thing.

The other part of your question had to do with the Lear 85. That's a program that we have worked on pretty hard and we think we have a pretty good system. We think we've done well with Bombardier. There are all kinds of stories in the press about that airplane. I can't tell you that we know anything more than what you can pick up and read. As far as we know, the airplanes and flight tests and we are continuing to address requested changes and test routines that Bombardier has flown down to us, but beyond that, we don't really know much about it.

Okay, thanks. Just going back to AeroSat quick, I'm just wondering if you can maybe give an update on where the development or potential customer pipeline stands on the commercial transport side there. Is that something you guys are moving away from and focusing entirely on the VVIP and military side or do you still think there's potential big wins there on the commercial transport side?

We think that there are opportunities on the commercial transport side for sure. Certainly on a worldwide basis, there are a lot of airplanes, the vast majority of airplanes that are not outfitted with this technology. So we think that there are opportunities. [Stilgoe] certainly is a company that we have a strong presence with and we think a good relationship with and we are one of the quivers in their arsenal of options. So we continue to work with them on a number of initiatives for them to be successful in their market going forward. We don't intend to do anything to jeopardize that relationship.

We think there are other commercial opportunities around the world. Maybe in some cases in markets that Gogo is not very active in and we are addressing those and we also see potential in the business jet and military world. It's not uncommon for someone who flies a very high-end business jet to get better service on a middle seat of a 737 on a commercial transport than they can get on their airplane right now and we're trying to change that. The whole industry is trying to change that. We think there are some good opportunities there also.

So I think when we first got involved with AeroSat about a year ago now, we felt that it's a technology and a capability that has high demand in the industry and that it was very early in the first inning of a nine inning game and we still feel that way. We think there are technical advances and investments and a lot of very loud claims being made, which need to be shaken out. And once those claims are shaken out, we'll see what we've got. But at this point we're continuing to address all three of those markets, commercial transport, business jet and military.

Okay, thanks. And then just looking -- and I guess this is specific to pico maybe -- starting to see awards trickle out on the 777 next year and I know the interior from what Boeing said is going to be based off the 87 which is the one Boeing platform that they don't have the PSUs on. How are you guys looking at that going forward? You guys have pretty substantial content on the existing version. Is there a chance that that PSU goes away and the content changes a little bit?

I suppose there's always that chance. Pretty much any supplier around the world with a pulse knows the 777 is in play right now, so everybody is trying to line up their product offering and get Boeing's attention and we are too. It's an important pursuit of ours. I think there's usually an advantage in being an incumbent. We're certainly a known quantity at our pico operation for Boeing and we believe that they appreciate the level of service and innovation they get. We intend to put our best foot forward and keep that business. And that's something that will, given the timeframe, will probably play out in 2015. It's a little bit behind some of the other things you might read about or hear about in terms of major systems, but we're definitely tracking it, no doubt about that.

Okay, good. And then last one, just kind of a housekeeping question I guess probably for Dave. Cash rate came in a little bit below where you said you thought it would be in the quarter for the back half. Just kind of wondering how we should be thinking about that for 4Q?

I think for the year we're going to end up being around 32%, 31% to 32%.

Okay, perfect. That's all I had. Thanks.

Jay Weinstein, Highline Wealth Management.

Peter, did you miss me?

Absolutely, Jay.

Yeah.

Well, first ask your question. First ask your question and then I'll tell you.

You shouldn't tell untruths on a public conference call. I hope you guys are well. It's such a different company; it's about the fifth iteration of Astronics I think since I've owned the stock. I've been wondering a couple of things. One is just the sheer scale and the size, you've always been a real profitable company as you pointed out. How much does the sheer scale you think on an ongoing basis increase your margins that's sustainable over time and assuming a normal environment?

I think it's a good question and we are trying to figure that out. I will offer you this. As we get larger and as we have a more complex operation, there are some challenges. The velocity of the business has grown dramatically. I think I remember talking to you when we were maybe $20 million in revenue, so it's a different world.

When I first bought this stock, it was a $7 million of market cap.

I remember those days.

That was 1992.

Well, I've got you beat by about three years, but not by much. So the velocity of the business, it's a different beast and a different animal and that's a challenge, but it's also I think a tremendous opportunity and it's an opportunity in that we have a lot of smart people from a lot of different perspectives all approaching customers and the business, which in reality hasn't got that much bigger. You think about it way back to those early days when we were a lighting company and we did lighting programs for commercial transports and military airplanes and business jets. And we knew those customers and we understood the development plans and we participated and competed as best we could and what's happened as we've gotten bigger is we have many more people following essentially those same markets and those same customers. I think it's an example of how if we do it right we can gain a level of proficiency and efficiency in being effective at what we're trying to do. And I'm using a sales and marketing or a strategic example, but I think the same thing exists operationally, the same thing exists in terms of IT, the same thing exists in terms of engineering priorities and practices and islands of expertise that we have in various places.

So I think it's an exciting picture and obviously when our volume is growing as much as it has, it's very much a moving target quarter to quarter. So I can't tell you exactly where I think everything is going to settle out, but if you look at the margins and you look at the cost lines so far, we've been building and improving on almost everything, especially if you give us the nod of the head to back up some of these one-time acquisition-related expenses, which --.

That's what I'm trying to figure out of course is if there is a normal, what does normal look like.

Yes, I'm not sure we're there yet. But I think it could be that 2015 is more of a normal year and I think your question is the right question. It's one that everybody's asking.

Do you have a defined debt paydown schedule or is it just whatever -- I don't know if you have a target, assuming -- I wasn't sure if you gave a CapEx forecast for next year; I may have missed it, but sort of I'm wondering about --.

We haven't done that yet for next year. We're in the process of rolling up our first set of budgets and expectations with the new Company as it's constructed right now. But, Dave, I don't know if you want to talk about -- we have been borrowing and paying down at the same time. It's a little puzzling to try to figure out.

One of the things we did, Jay, on the last credit amendment is to go to a -- put everything on a revolving credit facility so we don't have any more term debt. The last of the term debt actually is a couple of industrial revenue bonds that are going to be paid off this quarter and after that everything will be on a revolver with no set debt payment schedules. But as we move forward, it gives us the flexibility to pay down and borrow on a much more flexible schedule and that's what we plan to do. As we get excess cash, we will pay down the debt and as we see needs if something arises to be able to draw on that revolver.

But you don't have any current need to like by another facility, which was a big expense this year or -- any acquisitions are unpredictable of course, but --.

No, excluding acquisitions, as in the past, I expect that our cash flow from operations would be sufficient to fund the CapEx. I don't see any need for any building expansion. It seems like the last few years we've had a few of those, but I think we're done with buying buildings for our existing businesses for the time being.

Okay. What is this German lawsuit that's obliquely referred to in the 10-Q? I just was curious as to any details that you can offer.

This is something that's been chugging along for, I don't know, probably two years now, maybe a little bit longer and it has to do with a particular aspect of a design that's used in some of our in-seat power products as far as the electrical outlet is concerned and it's an infringement suit, which we are objecting to. It's only relevant to Germany at this point. We have -- I'm not an expert on the German legal system here, so I'm sure I'll mess it up, but there are a series of steps that you go through and those steps have by and large been very successful for our case of getting a majority of the claims of the applicable patent dismissed, but it hasn't been completely successful.

So that process continues to inch along. We think that it's likely to have some kind of resolution probably the early part of next year, but we're not -- it's not one of those things that we're overly concerned about. We're certainly investing in it and we're certainly taking it seriously, but it's not one of those things that we expect to be a life-changing event.

You got a lot more questions than you used to, so I don't have to ask so many (inaudible) guys are well.

All right. Good to hear from you.

There are no further questions at this time. I would like to turn the floor back over to Mr. Gundermann for closing comments.

Okay. I will give Tyler one more chance to jump online. It sounded like he got cut off or something earlier, but short of that, I thank you all for your interest and we look forward to talking to you at the end of next quarter. Going once, going twice. Okay, thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time.