Astronics Corp (ATRO) 2015 Q2 法說會逐字稿

Greetings and welcome to the Astronics Corporation second-quarter 2015 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Astronics. Thank you. Please go ahead.

Thank you, Brenda and good morning, everyone. We appreciate your joining us today and your interest in Astronics. On the call with me today is Peter Gundermann, our President and CEO, and Dave Burney, our Chief Financial Officer.

Pete is going to first go through his planned remarks and then we will open the call for questions and answers. You should have the news that was released this morning and is available on our website at www.astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation as well as during 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 on our website or at SEC.gov. So with that let me turn the call over to Pete. Peter?

Thanks, Debbie, and good morning, everybody. And like Debbie said, I'm going to have some prepared comments here on our second-quarter and year-to-date results. We will review the expectations for the rest of the year and then we will open it up for questions.

Our headlines for the quarter, despite kind of the trends of the day, I guess we felt it was actually a pretty good quarter. Our Aerospace segment performed well with pretty strong sales and bookings and a record ending backlog. We felt that our Test segment also performed pretty well with a solid sales rebound from the first quarter especially and very solid bottom-line results.

The other headline is we tightened our 2015 revenue forecast to a range of $680 million to $715 million, there are some moving parts in there that we'll clarify and discuss when we get to in that section of my little monologue here.

But as a review, again, talking about the quarter on a consolidated basis, we thought it was a pretty good quarter. Revenue was strong at $173 million, that happens to be our third best quarter ever. It also happens that our comparator quarter, our second quarter of 2014 was our second best quarter ever. So we are comparing our third best quarter ever to our second best quarter ever. A year ago our sales in the second quarter were $174.5 million.

Aerospace sales were up 8.8% for the quarter; Test sales, compared again to the second quarter of last year, were down 22.7%. That sounds pretty bad, but if you compare it to the first quarter of this year sequentially, in other words, we were up over 100%. So it is a lumpy business, everybody should know that by now. What is important to us is what the prospects are going forward and what the results are currently.

Bottom-line results in the quarter were pretty strong. Net income was $17.7 million, 10.2% of sales, up 35% from net income of $13 million in the second quarter last year. Diluted earnings per share was $0.77, up from $0.58 in the comparator quarter -- second quarter of 2014.

When comparing the quarters of course it is very useful to keep in mind the inventory step-up expense that we faced in the second quarter last year of $8.7 million, that was discussed in detail as we went through 2014.

In the quarter we just closed we had engineering and development expense of $21.3 million, that is 12.3% of sales and continues our recent trends of having our E&D expense hovering in that 12% to 13% range versus our historical average of something higher typically in the 15% to 18% range.

Second-quarter bookings were $146.7 million. Aerospace bookings were $134 million of it, our third highest ever with a positive book to bill. Test bookings were light at $12.2 million, again, nothing to get too nervous about from our perspective, remembering that in the fourth quarter last year we had test bookings of over $100 million. So that is how that business works. Our ending backlog at the end of the second quarter was $352 million.

Year-to-date consolidated revenue at the end of the second quarter is $334.8 million, that is up 6% from 2013. Aerospace sales are up 12.6%, Test sales are down 15.8%.

GAAP net income through six months is $28.4 million, again, up 37% from $20 million through six months of last year, or looked at as 8.5% of sales versus 6.5% or $1.24 per diluted share versus $0.91 per diluted share.

Again, comparing this year to last year, last year we did have some substantial fair market value inventory write-up expenses associated with purchase accounting of $17.4 million through six months. Our bookings through six months are $305 million, 91% of sales, again, heavily weighted by Aerospace so far this year.

So let's look at our segments, Aerospace first and Test second. Aerospace second-quarter revenues were $132 million, up 8.8% from last year and 75% of total. Our Aerospace second-quarter sales were the second highest for the segment in our Company's history, trailing only the first quarter of this year. So we have put back-to-back quarters of our two highest quarters ever in terms of aerospace sales.

Our Armstrong acquisition from earlier this year contributed $7.1 million, so organic growth in the year-to-year quarter comparisons was only 2.2%. But again, remember this quarter we just finished was our third highest revenue quarter ever. The comparator quarter a year ago was the second-highest revenue comparator. So you've got to be a little careful drawing big trends here.

We've had some pretty good performances from some of our biggest product lines including our Electrical Power & Motion product line. Sales for the quarter were just shy of $68 million, up 12% over the comparator quarter of a year ago, or $7.2 million.

Another big positive contributor was Systems Certification, which is one of the Armstrong product lines, at $5.8 million. Those two growing product lines offset some, what would appear to be, weakness in the year-over-year comparison in other product lines.

Operating profit in the second quarter for the Aerospace business was $20.3 million or 15.3%, the comparator period a year ago was 17.1%. I'm sure there will be questions on this, but, as a preview, we view that bouncing around as pretty much standard fare. We are not all that concerned about it.

When you look at the trends over the last -- actually year-to-date trends of this year and year-to-date trends last year, we compare pretty reasonably and pretty positively and we view the fluctuations as kind of in the normal range.

Our revenues in the first half for Aerospace $274.5 million, up $12.6 million over last year. Again Armstrong contributed $13.8 million, so organic growth was 7%. All of our major product lines are up year to date. This year to last year, Electrical Power & Motion up 8.6%, Lighting & Safety up 7%, Avionics up 15%, System Certification -- no comparator last year but up $10.3 million.

And our operating profit, again in the Aerospace segment, through six months this year to last year is up 15.9% this year compared to 50.7% last year.

Our bookings in the second quarter were $134.5 million, slightly ahead of shipments. That gives us an ending backlog for the segment of $236.3 million which is a new record, the highest Aerospace backlog we have ever had going into the second half of this year.

We had two major customers by SEC standards in the quarter. One was at 20% of sales, the other was at 13% of sales.

Moving to our Test Systems segment. As I said earlier, revenues in the second quarter were $41 million, that is down 23% from the second quarter last year, but it is up over 100% from the first quarter this year. So depending on how you want to look at that, the class can be half empty or the glass half full.

Operating profit on the second quarter was $9.9 million or 24.1% of sales. And we feel that is a pretty strong result and shows the level of care and diligence that the crew running that business is demonstrating in terms of managing their cost structure in our current environment.

Our [operation and] profit last year was $4 million compared to $9.9 million this year. We did have inventory step-up costs in the second quarter of last year of $8.7 million. Revenues in the first half year to date for our Test segment are $60.3 million, that is down 16% -- just shy down 16% from first half last year of $71 million. But our operating profit this year is $7.6 million, up more than three times our operating profit from last year of $2.3 million, recognizing we had inventory step-up expense last year of $15 million.

Bookings this year's so far in the second quarter $12.2 million, down from $16.8 million in the first quarter. Obviously those are not booking levels that support the business, but that is the cycle that we are kind of used to at this point. We expect stronger bookings in the third and fourth quarter.

We had one substantial customer in the second quarter which accounted for 18% of consolidated sales. And our Test segment ended the second quarter with a backlog of $116 million which is adequate for our business plan over the remainder of the year.

Balance sheet, we continue to be in pretty healthy condition. Cash of $23.7 million at the end of the second quarter. Total debt of $231 million for a net debt of $207 million. We are ramping for a pretty strong third quarter and second quarter was up over first quarter. So we have seen some cash outflows, but we expect very strong cash performance going forward through the end of the year.

And talking about the end of the year, we are tightening our revenue guidance to a range of $680 million to $715 million, the midpoint would be an increase of 5.6% over 2014. We expect Aerospace to be $545 million to $570 million, Test Systems to be $135 million to $145 million. The midpoints of those range would suggest that we expect Aerospace to be up about 13% for the year, this year over last year, and Test in terms of revenue will be down about 16% this year over last year.

In terms of weighting, we expect the third quarter to be a blockbuster quarter for the Company, we expect to have revenues this quarter, current quarter of around $200 million. Our current record happened to be the third quarter of last year when we had record revenues of $179 million. So we expect to easily eclipse our records in this quarter.

I think that is it for my prepared remarks. So Deborah, if you want to open it up for questions we will take them.

Brenda?

(Operator Instructions). Dick Ryan, Dougherty & Company.

Hey, Pete, I will let you catch your breath and I will try to bring Dave in for the first couple. So, Dave, noticed just in the quarter some of the numbers, tax rates seemed higher than what we were looking for. How should we look at taxes for the remainder of the year?

I will give you a two-pronged answer. First is if we don't see approval of the R&D tax credit we are looking at about a 34% rate.

For the year?

For the year, yes. And that is about where we were running in the first two quarters. If we do see approval of the R&D tax credit before year end we will see a catch-up in the third or fourth quarter depending on whenever the legislation is passed. But that will bring our annual tax rate down to about 32%.

Okay. And looking at E&D expenses, you didn't change your guidance there, which would suggest we should see a step down in E&D for the second half of the year? I think you are still looking for $75 million to $80 million?

Yes, I mean we are still running kind of around that high teens, $20 million per quarter run rate for E&D.

Okay. Any FX impact in the quarter, Dave?

Not significant. It is a bit of a headwind for our PGA business in France as we -- that entire operation is, about 85% of the revenues there are denominated in euros and most of the costs are in euros. And the relative contribution on the bottom line is fairly small. So there wasn't a real big impact on the quarter from the euro.

But one thing that we are watching there, Dick, is we compete in an industry where most international sales are US dollar denominated, which -- but we have competitors who are located elsewhere, especially those in Europe, who all of a sudden get a price increase. And they can opt to stay at those levels or they can maybe offer their products cheaper. So we are seeing some pressure that way. That is not so much something that is affecting us immediately but could affect us in the future.

Okay, great. Say, Pete, you talked about the guide down a little bit or tightening the range. Can you be a little more specific to what you might be seeing on the Aerospace or the Test side that you factored in for that change in guidance?

Yes, I think the way to look at it is that when we start the year we have kind of known business and unknown business or things that we are pursuing. And we weight those and we take them as a range. And we have seen some things slide out and delay a little bit. And we have not been successful in a couple things that we thought we were going to be successful in or hoped we were going to be successful in. And kind of a sum total of that is bringing the top end down a little bit.

But again, I look at it and I think our Aerospace business is continuing to be very well-positioned and performing pretty much as we expected. And our Test business I think is much more subject to short-term customer demand. They are going to order what they want, they are going to want it when they want it and we do our best to respond.

So I think from a performance standpoint we are doing pretty well, it is just some of the -- I guess some of the market timing and market opportunities are leading us to that somewhat lower top end on the range.

Okay, great. One more for me. You talked about the -- or no, maybe you didn't talk about it but I was going to ask on the NC power itself, what you saw in there organically. And how would you describe that? Is it -- can you talk retrofit versus new builds?

I guess we'd just say steady on. It is some combination of retrofits and new builds. That product grouping that we talk about, Electrical Power & Motion, NC power it is probably safe to say is a good 75% of that grouping and is the growth leader in the grouping. So if we did 11.9% for the group over the comparator period a year ago you can safely assume that NC power was above that.

Okay, great. Thanks, I will get back in the queue.

Ken Herbert, Canaccord Genuity.

Pete, I just wanted to follow up on the question around the second quarter. I mean you had, in terms of organic growth, a fairly significant sort of deceleration this quarter. Is there anything you -- within Aerospace in particular, is there anything you would specifically point to?

Were there particular contracts maybe the timing didn't fall this quarter -- catch up in the second half of the year? Was there any maybe inventory issues at a key customer too? Or any other factors that might help sort of explain specifically the 2% to 3% organic growth for Aerospace in the quarter?

I guess I just don't -- there is nothing major that drove it. I guess our feeling is that it was more a function of maybe a little bit of lightness on our side and some -- a real strong comparator quarter from a year ago, the combination of the two. I think we feel that we still have very positive growth year over year.

There were a couple of situations where we ended up with some production snags in terms of supplier components that we ended up with a couple problems with that will be rectified in the current quarter. But I don't think we can think of anything that is easy to shake a stick at and explain that.

I think contrary to the number of 2.2% organic growth, we still feel like we are facing a strong set of market opportunities and we feel like we are executing pretty well on them and we think that it is going to be what it is going to be kind of quarter to quarter.

But we are not feeling any sense of alarm, if that is a way to say it. I'm looking at Dave for any kind of color he wants to add to this. He is shaking his head no, so --. I guess that is how I would answer your question.

Okay. Were the one time sort of I guess manufacturing issues or product shipment issues, were those -- is it possible to quantify that? Were those 1 or 2 points of growth or maybe not that material or --?

You can probably say it was like $5 million in revenue affected, somewhere in that range. Not lost, just moved from one quarter to the next.

Okay, that is helpful. And I guess your guidance still implies -- you are up against obviously still some very tough comps, even harder comps in the third and fourth quarter for Aerospace but the guidance still implies 7% give or take growth -- organic growth in the back half of the year.

Is there, aside from maybe some shipments here that shifted from the second to third quarter, anything else that -- you brought the guidance down a little bit so you must be feeling pretty good about the second half, but again the comps are even tougher than the second quarter?

Anything else you can say to help with confidence on the second half of the year, or anything you can particularly point to that helps give you -- get us to the lower but still the 7% full-year growth number for the year?

Well, the process hasn't really changed. We weight our factors and as we get close to the year you can look at firm backlog which obviously helps. But we do have to fix the problems that I was talking about earlier in terms of restarting production from these component issues, that is one thing that is hanging in the balance.

Another thing that hangs in the balance is short-term orders and we are watching that closely as we go through this time of year because we are still in the timeframe where we can receive orders in some of our product lines and ship them yet this year. So demand over the next two months will certainly influence where we are going to end up at the end of that -- at the end of the day.

But -- and then we have some big customers who we build inventory and we recognize revenue when they pull the inventory or ask us to deliver it. So, we build a forecast, ship to demand and sometimes it is a little difficult to predict exactly how those two are going to sync up.

So there are some variables, but usually historically when we get in this time of the year we get pretty accurate. And so, I think we are pretty confident in that range. There is the potential of being at the low end, there is the potential of being at the high end if the right set of factors kind of all line up. But usually they don't, usually you end up somewhere in the middle.

Yes, okay. And I guess specifically on your short-term or I guess I would call it short cycle sales, are you seeing any -- have you seen any step back by the airlines in their willingness or desire to sign these contracts or to spend on discretionary cabin work over the last few months? Or is that still holding up pretty well?

I would say we think it is holding up pretty well. We don't notice any changes in the climate or we would obviously certainly report it. So we think for our products and our demand it continues to be pretty strong.

Okay, great. And if I could just one final question on the Test side. Obviously you are going to -- you've got the contract with the one customer, I think a lot of that ships in the third quarter. Any update you can provide on initial visibility to bookings this year that might provide more of a foundation for that business heading into fiscal 2016? Any change in the outlook there? Anything you can specifically comment on?

No, there is nothing I can really say. Our experience has been that those expectations get refined obviously as we get towards the end of the current year and we expect that same cycle to hold. So our expectation is we are comfortable, we are positive. It could be higher, it could be lower, but we are thinking that it could be an a similar range to where we are right now. But we will report that more firmly as soon as we know it.

Okay, perfect. Thank you very much.

Kevin Ciabattoni, KeyBanc.

Pete, you did a good job of foreseeing the question on Aerospace margins I guess. And I know they have been kind of volatile historically, but this is the first quarter, at least on an adjusted basis, that they have been kind of below 16% in a couple years, at least looking at my model.

Just wondering, it seems like they have been a bit more consistent lately. Just wondering if there was anything particular in this quarter and kind of what you expect through the back half of the year maybe.

I guess we would expect them to be more at historical norms. We don't see a fundamental changing of our margin profile. If anything the thing I talked about earlier with respect to competitive dynamics and foreign-exchange, if that holds true in the long-term we may face more pressure than we have historically. But I don't think there is anything kind of happening in our business right now that's fundamentally changing our margin profile.

There is the -- I guess to the extent that we did -- I keep coming back to this production problem which isn't something I really expected to dwell on a whole lot in this. But that is definitely one factor that drove our margins down a little bit. Because we are incurring a lot of the cost and we are not shipping a lot of the product. So that is one issue.

But I guess we would look at it and say that there is kind of a normal range of fluctuation. We would say that this quarter wasn't really out of that range. It is not something that we are scratching our heads about or concerned about at this point.

Okay. Kind of following up on the production issue that you mentioned. It looks like inventory was up maybe 10% or so sequentially. Was that one of the factors there? Anything else you can kind of point to?

Well, that was one of the factors. I think the bigger overall factor is our revenue expectation for this quarter. When we are going to up to $200 million in shipments, that's our expectation. That is a substantial increase over where we have ever been before. So there is a cycle that will have to happen in terms of building inventory to execute that sales plan. I think that is the big driver in terms of inventories.

Okay, that makes sense. And then on Test Systems, you did a nice job on the margins there. Obviously it looks like you guys have a pretty good handle on the cost structure at this point. Looking at that big booking you had in 4Q 2014, obviously that didn't start shipping until late first quarter, early second-quarter here.

I mean, any kind of color you can give us on the cadence? 3Q obviously expected to be big. How does that order start to phase out? Just any color you can give us in terms of timing.

Well, we are expecting the majority of the remainder to be Q3. And there could be some leakage into Q4. The way the revenue recognition works there is it is kind of a phased recognition plan where the final chunk of the business is recognized when the hardware is installed and functioning and approved by the customer.

So there are some scheduling issues there that are a little hard for us to predict. But the majority of it will be Q3 and some of it -- historically we have experienced it leaks a little bit into Q4.

Okay, that is helpful. And then last one for me. Looking at the E&D expense line, historically you kind appointed to -- you have been able to point to some big programs that drive that. I mean if you go back a couple years it was the EPDS system on the Lear, the starter generator. I mean any kind of big-ticket items in E&D that you guys are working on right now?

That is a good question. I guess my reaction is that our E&D spend these days is a little bit less big-ticket and a little bit more broad-based as our Company has grown up and as we have got more areas to do development work in. So it is more dispersed.

The big programs that you referenced that we invested in in the past, a lot of those programs have not worked out exactly like we had hoped. But the investments we made led to a maturity of kind of some of the architectures of our systems and gives us kind of a modular library that we can pull from on new programs such that the investment in the new programs is substantially less than the investment in the old programs.

So that is part of why we have less big-ticket programs today. But -- so I guess the short answer is, no, that I can't give you any real big programs that are hitting me off the top of my head here. It is more of a broad-based distribution of activities that we are involved in.

Okay, thanks, Pete.

J.B. Groh, D.A. Davidson.

Thanks, guys, just got a couple left. You called out the SG&A related to Armstrong. So I was curious if there was any consolidation opportunity there or redundancies that can help you improve upon that.

No, we I think we called those out just because that is our standard way of explaining the integration of new acquisitions, not because we view it as a particular issue that we need to address.

Okay, so just better detail. Okay, that is good. And then maybe you could talk about acquisition sort of appetite given what you have done in the past year or so, if you are still active and what you are looking forward to?

Okay. Well, I think we certainly -- we view it as part of our job to stay involved in the acquisition effort. I think as we get bigger we are shown more things by the industry. Our financial profile and the cost of debt these days makes it something we could actively participate in. And our experience with the companies that we bought, there are pressures, but by and large we are really pleased with how it's gone. So, yes, we are definitely active.

On the other hand, I would say that we are not compulsive and we don't anticipate being compulsive. So we look for things that fit, we look for things that are of value and the stars kind of need to line up to make some things happen. And we had a real spurt a year and a half ago and since then it has been a little bit lighter. But we are still -- we've got our radar up and we still are involved in various processes that we are interested in.

And maybe just one last one. On kind of your structures related business, there has been a lot of talk of rate increases, how this capacity utilization -- how is that now and what are your thoughts on these [60] a month rates that (technical difficulty) out there?

We are all for it. The more the better. Yes. Capacity wise -- is that your question, can we handle the foreseeable (multiple speakers)?

Yes. Is there any sort of CapEx attached to getting to that rate? I mean obviously there will be some, but I am curious as to how big it is on an incremental basis.

Yes, I don't think it's major. We have made a lot of investments, as you know looking at our results in the past, particularly out in Portland at our PECO operation. We've got them set up in a brand-new facility and we bought a bunch of new equipment. And they are the ones probably -- they are quite closely tied to production rates in the Commercial Transport market. So we are in good shape there.

We have certainly grown a lot in certain of our other operations, but we have taken on new space either by buying the space or renting the space. I don't think -- I can't really think of an operation where we are really constrained right now in terms of capacity.

Obviously when you win a new program you have got to do a bunch of tooling and things like that, which tend to be capitalized and look like capital goods. But I don't -- it is not a chronic issue that we are very worried about. We think -- we would be happy to see production rates continue to rise.

Okay, great. Thank you.

(Operator Instructions). Dick Ryan, Dougherty & Company.

A few subsidiary specific ones. AeroSat, how is the performance there? I mean your main customer there is talking about moving to different technology in 2016. Can you kind of give a sense of what your view is of that business giving that potential transitional? And are there efforts that you are exploring with that antenna program?

Sure. We are -- we obviously can't speak for other companies, but we are aware of the press. And we understand that and we will do our best to continue to service that account as we do all of our customers. We -- when we bought that business we viewed it as an early inning play, so to speak, on an emerging market. We still feel that way.

There are lots of very good opportunities out there, not only in the Commercial Transport market but in other markets. And it is interesting, this whole connectivity situation is one that we are involved in in a number of our operations, not just AeroSat, but Armstrong is involved and AES is involved and our Ballard Technology is involved.

We are kind of all in at this point. We think there are interesting and meaningful long-term opportunities in that market. And you would obviously like to see everything go right in the short-term. It doesn't always go right in the short-term. But we are keeping our eye on the long-term and we are certainly not in a situation where we are sitting here twiddling our thumbs and regretting decisions of the past.

Those longer-term opportunities, are they you direct going -- taking advantage of those or partnering?

It is kind of the Wild West. There is a bunch of opportunities that we think we can be involved in. Connectivity has in recent times largely revolved around IFE and passenger entertainment. But there is a whole world developing of other ways or other uses for connectivity and other techniques for connectivity. And we find ourselves even unintentionally in some cases being drawn into those kinds of opportunities with other customers.

So it is a little hard to say at this point exactly what the architecture of some of those programs is going to look like. But what is interesting me as you look at the way our Company has evolved and the capabilities that we have and you look at the way the industry is evolving and we think that we can play meaningful roles in a number of different ways going forward. So it is an area of emphasis, it is certainly not an area of de-emphasis.

Okay, great. One last one. PECO, has there been any decision on the 777X or is that -- in that program has any decision been made there?

Not that we know. It is in play and we are certainly -- we have been pursuing it for probably at least a year and a half now. So we are expecting something will be kind of finalized probably by the end of the year. But it is really hard for us to know.

Okay, great. Thanks, Pete.

Josh Goldberg, G2 Investments.

Hey, guys, just a couple quick ones. First, do I have it right that your bookings for Aerospace for the first two quarters of this year are running about 14% higher than your bookings for the first two quarters of last year, is that correct?

It sounds about right. I don't have the last year in front of me.

Okay, let's just call it --.

That sounds about what I would expect it to be, yes.

Okay. Obviously last year you had some acquisitions that helped you in terms of your bookings versus 2013. But now on almost like a like-for-like basis you are showing good growth. I know Armstrong helped a little bit.

But my question is, do you see the Aerospace business, the power opportunity and some of the other opportunities you have with lighting, do see your Company -- it sounds this way because nothing has changed since you last spoke to us -- as a 10% to 15% grower on the Aerospace side? And I have a follow-up.

Yes, that --. We have certainly got some parts of our business that are growing at that rate. We have got some parts that are going up a little bit smaller or lower -- less than that. So probably the weighted average is a little bit less. But we are continuing to feel a lot of momentum with various programs. So we consider ourselves still actively growing in the aerospace world, certainly.

Okay. No worries in terms of slowdown from -- some of the aftermarket companies talked about the slowdown here in the June quarter. You are not seeing any of that whatsoever?

Yeah, no, I have heard the comments, I have seen the press. That has not been our experience. We are a little bit more narrowly focused than some companies that kind of are more focused generally on the aftermarket. But our products that we offer the aftermarket continue to see pretty good demand.

Got it. And on the Test side, obviously you have a nice operating profit based on the revenue on the Test side. I think your profit was almost $9 million on $41 million, is that right?

That is right.

Okay. Do you feel comfortable that you might be able to get the similar amount of margin as you ramp into the September quarter on that part of the business as well?

Well, I think it is the age old situation where volume allows you to absorb overhead and incrementally contribute to the bottom line. And so, to the extent that we expect third-quarter revenues to be higher than second quarter, yes, I would expect we would be okay.

But you go back to the first quarter and it flips around the other way pretty quickly when revenues are low. So over the long-term we are interested in a certain margin profile, in the short-term it can swing quite a bit depending on the top line.

But the point is that the close to $200 million revenue number in September? You are not sacrificing profits but, to the contrary, your margins will probably improve and your earnings will show some nice improvement even versus June?

I would expect the third quarter to be a really impressive and strong quarter, yes, across the Company.

Okay. Last one for me. When I look at your Test business, obviously very focused on one customer. And you talked about how you are now used to this sort of end of the year decision making. I guess at the end of your fiscal 2014 results you talked about your opportunity to expand into other customers or maybe to even expand inside this customer a little more. Can you just talk about what you have done the first six months of this year to really go after the opportunity in Test? Thanks so much.

Yes, that is a good question and thank you for that. You look at the results and you listen to our discussion and we do tend to talk a lot about one customer, who is a very large customer, an important customer to us right now. But there is a whole universe of other potential customers that we are interested in and discussing things with.

We think that -- and we also have a traditional market in our Aerospace & Defense Test which we have seen signs of life after a pretty difficult spell here for the last six, seven years. We've booked some orders, we've seen some backlog, we've had some I think pretty fruitful discussions with other major defense primes on roles we can play in their programs going forward.

So I guess we feel in the short-term we are obviously in the situation we are in and we are going to deliver it to the schedules that our existing customers are giving us. But we are certainly not waiting around for good things to happen without any effort. We are out there beating the bushes and we have a number of prospects.

And I guess I would say that we are encouraged that we have a skill set where we can go to a customer and if they are willing and they are open we can develop very fruitful and meaningful solutions to their problems. And we are also, during this last six, seven years, certainly stayed involved in our traditional Aerospace & Defense Test market and that market is showing signs of life.

And I think we are better positioned today than we ever have been to capitalize on that going forward. So we are hoping that there is some reward for that endurance that we have been through over the last few years.

So again, it is a little early to predict where we are going to be next year. There are some real big questions we need to answer. But we are not sitting here with a big sense of panic. We are working hard and we are actually pretty pleased with the quarter we just put in, we are quite excited about the quarter we've got coming up.

And even though we are executing in the short-term we are actively continuing to kind of peer into the future and see what we can do to position ourselves for whatever opportunities may come up. So long answer to a short question. But thanks for that.

Thanks so much.

Ken Herbert, Canaccord Genuity.

Just one quick one. Does the Aerospace guidance assume any revenues from the SmartTray this year? And can you maybe just give a quick update on where you stand with certification there?

There is not much in there if any for this year. But we are involved in some pretty interesting engineering exercises and certification exercises and we expect that we will have hardware flying on at least one and as many as three or four airplanes by the end of the year.

So we continue to think that is an interesting little add on to our arsenal here. And the reception that we are getting in the market is pretty positive. So we will certainly talk about it when we can.

I am expecting that -- well, it is a little bit of speculation. But I am thinking that we will have an opportunity that we can talk about in the market by the end of the year -- not necessarily affecting our financials real heavily, but one we can announce.

Okay, great, thank you.

Thank you. This concludes our question-and-answer session. I'd like to turn the floor back to Peter Gundermann for additional remarks.

Okay, thanks, Brenda. And thanks, everybody, for your interest. We look forward to the third quarter and talking to you in a few months. Have a good day.

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