Astronics Corp (ATRO) 2016 Q3 法說會逐字稿

Greetings, and welcome to Astronics Corporation third-quarter 2016 financial results call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Debbie Pawlowski, with Astronics Corporation. Thank you, Debbie, you may begin.

Thanks, Bob, and good morning, everyone. We appreciate your time today and your interest in Astronics. We have here Peter Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Pete will go through his prepared remarks, and then we'll open it up for questions and answers.

You should have in hand a news release that crossed the wires this morning. If not, it is available on our website at 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 the documents filed by the Company with the Securities and Exchange Commission. You can find those documents both at our website and at SEC.gov.

With that, let me turn it over to Pete to begin. Pete?

Thank you, Debbie, and good morning, everybody. Thanks for tuning in to our call today. I'm going to talk first about our consolidated Q3 results, and (inaudible - audio difficulty) results and then going with the segments. We'll close with a discussion for revised expectations for the rest of this year.

Turn to revenue in headlines. No doubt third quarter was a weak quarter compared to where we thought it would be, especially on the heels of our second quarter, which was a pretty strong quarter. Revenues, margins, and bookings all were pretty light. Understanding that I tell you now and I'm going to tell you as we go through the text of the discussion, you have to look at both of our segments.

Our test segment pretty much gave us what we expected. The press release doesn't play well for our test segment, because our comparative quarter of our third quarter last year 2015 was the high-water mark for our lumpy test business, or our test business, which tends to be lumpy. All year long, we knew that we were going to have somewhat reduced volumes compared to what we had in 2015. No surprise there.

The aerospace quarter was a little bit more of a surprise. What we're going to do is look at the third quarter in the context not of the comparative quarter a year ago but of the second quarter. The second quarter was our best ever aerospace quarter, with record revenues and record profits and record bookings.

The question logically asked would be what changed? How did we go from a record second quarter to a pretty weak third quarter. We have some discussion around that, but the bottom line is it's a combination of a bunch of little things, and nothing major. We'll look at it, but we think it's generally a competitive situation, a market situation. Nothing's really changed from the second quarter to the third quarter.

When we look at our revised expectations for 2016, based on our progress after three quarters and our lower-than-expected bookings in the third quarter, along with some schedule slides, we are reducing our top-line expectations for year-end 2016. We'll talk about that, too.

Again, revenue for the third quarter on a consolidated basis was a little bit weaker than we expected, $155 million. Our comparator quarter of the third quarter of 2015 was $200 million. That would appear that revenues were down 22% third quarter 2015 to third quarter 2016.

When you look back at the third quarter of 2015, you would find that we had pretty strong aerospace results in that quarter of $139 million revenue, and we had, as I just said, a record quarter with respect to test, $61 million in the single tenant. That was the high-water mark of anything we've ever achieved in our test business.

The third quarter was also below our sequential quarter, our second quarter of 2016, where we had revenue of $164 million. There, revenue was down 5.7%. Test was actually up from the second quarter of 2016, and aerospace was significantly down.

For the quarter on the consolidated basis, bottom-line results were light, matching the revenue. Net income was $12.1 million, 7.8% of sales. Diluted earnings per share of $0.41, down from the $0.82 in the third quarter of 2015.

Engineering and development expenses were $22.2 million, 14.3% percent of sales. The percent was a little bit higher than we've been running, due mainly to the lower sales level, but the actual bias spent with pretty consistent will be seen in recent quarters. Bookings were light at $136 million, well below the levels of Q1 and Q2. Aerospace came in at $123 million, and test at $13.7 million, leaving us with a backlog at the end of the quarter of $275 million.

Year to date through three quarters on a consolidated basis, revenue was $479 million, down 10% from 2015. Net income's $38.5 million, or 8% of sales; $1.28 per diluted share versus $1.76 last year. 2016 year-to-date bookings through three quarters were $480 million, about equal to shipments. Then again, backlog at the end of Q3 was $275 million.

Looking at segments and trying to make sense of it, let's turn first to the aerospace segment. I'm going to break convention here a little bit and not talk so much about the comparative quarter in the press release of the third quarter of 2015, but rather, look at the sequential quarters comparing Q3 to Q2 of 2016, our most recent two quarters, basically.

Again, it's a striking comparison. When you look at Q2 and Q3, the drop-off appears to be pretty dramatic, it was dramatic. Q2 revenues were $142 million. Q3 was $125 million, so that's a reduction of 12%. Operating profit in Q2 was $24.8 million. That dropped to $17.5 million in Q3. Bookings were $163 million in Q2, dropping to $123 million in Q3. We went from record revenues, record operating profit, and record bookings to substantially lower revenues, operating profit, and bookings.

We have looked through our business. We talked to our managers. We have considered a number of scenarios. We really are not aware of anything substantial that can explain this sequential change from such a great Q2 to a great Q3. We do not believe that we are experiencing any kind of competitive change in our markets or product line changes or cost changes. It's simply mostly a matter of coincidental timing of various customer requests and orders and deliveries. We've seen some evidence of customers pulling things into Q2 out of Q3, but that doesn't explain the whole thing.

Our perspective on the market isn't really a whole lot different now than it was at the end of Q2. We're obviously not really happy with the quarter's results, but when we take a step back and we look at how our business stands, we feel it stands largely today the same way it stood at the end of Q2, which again was a record quarter. Our perspective is that the best way to look at Q2 and Q3, and maybe Q1 at this point, is to blend them together more than look for sequential changes one quarter to the next.

Looking at our aerospace segment year to date comparing 2016 through three quarters with 2015 through three quarters, revenues this year are $406 million, down 1.8%, from $413 million in 2015. Operating profit of $61 million, down from $66.7 million last year.

When you look at our product line chart, which is on page 8 of our nine-page press release, the second to the last page, looking at our major product lines, year-to-date change helps explain some of the story here. Our electrical power and motion product line through three quarters is $219 million, 45.8% of our total, and up 5.1% over the first three quarters of last year. Our next-largest aerospace product line, our lighting and safety product line, recorded revenues of $121.5 million, 25.4% of our total, up 1.3% over last year.

Probably the biggest single product line change that's evident on this chart is in our avionics product line. You can see there that this year we have revenues through three quarters of $22.7 million, and that's down 47%, about half of where it was last year.

Now our avionics product line's made up of a few products, but the major one that we've talked about, which continues to haunt us a little bit, is our antenna product line, where we have been working on new products and new opportunities, where we think we can fill this gap. Our expectation has been that we would begin to do so through the end of this year.

Good news, bad news on this front, just to bring up to speed. We are pushing really hard here, and we're very encouraged with the prospects that are ahead of us. I'll come back to that. The bad news is that we don't have it done yet. We're just starting to get through the certification, the first certification process, which we expect to complete by the end of this month, which will pave the way for sales to certain sectors of the market. But we're not as far along as we wanted to be. That's the bad news to what we -- a hole that we felt we were going to fill towards the end of this year is going to stretch a little bit into next year.

The good news is that we think we've got a winner, a pretty strong winner. This is a product that's geared primarily towards the large business jet market. Last week happens to have been the NBAA show, for those of you in the industry, the National Business Aircraft Association show, kind of the big business jet show. I was there all week, and was very impressed with the enthusiasm that exists in the market for this product. We believe that it's going to be a real winner when the time comes, and we believe the time's going to be next year, when we get through a number of these certification processes that are ahead of us.

We're pretty excited about it, but it certainly didn't help us in our third quarter and year to date, and it's not going to help us much in our fourth quarter. We're going to continue to struggle with this drop-off until we get into 2017.

In terms of significant customers, Panasonic as usual is our biggest customer, 21% of our total year to date, at $102 million; and Boeing a close second at 15%, $74 million in revenue through three quarters.

Changing over to the test business in Q2, revenues were $30 million. Again, if you look at the press release, it looks like our test business has gone off a cliff. It has if you're going to limit the comparison to the third quarter of last year, when we had revenues of $61 million. But we knew heading into this year that was going to be a lean year for our test business. That comparison does not surprise us, and shouldn't surprise anybody following the business at this point.

I think the good news is that business continues to perform pretty well on a financial basis, given the volume reductions it's had. Most businesses that see 51% volume reductions don't still manage to make operating income of 10% or 11%, like our test business has in this last quarter. We're reasonably pleased with that.

Revenue year to date $73 million, again down 40% from last year. Bookings year to date are $53 million, so we're booking at a lighter rate than we are shipping this year. But we still maintain that we believe this is a trough year for our test business. We are expecting bigger and better things next year.

Our aerospace and defense business is up approximately 10% over where it was last year. We expect that rate of growth to continue on into the new year. The semiconductor business we feel is premature to bracket at this point, but we do believe that this is going to be a trough year on the bottom. We're expecting good news from that part of our business in 2017.

Our balance sheet remains healthy, and as usual, cash of $13.3 million at the end of the third quarter; total debt of $164 million, so net debt of $151 million. We're expecting our capital expenditures by the end of the year to be in the range of $15 million to $17 million.

We did buy back some shares in the third quarter. You'll remember we had a $50 million authorization that we initiated in February. We bought 157,000 shares for $5.3 million in Q3. That brings our purchases year to date to $17.5 million, 517,000 shares.

Looking forward, we are dropping our revenue guidance for 2016 to $635 million to $645 million. That drop is almost exclusively on the aerospace side, a function of our lower-than-expected revenues in Q3, and certain program delays like the antenna system I just talked about, which we originally thought might help in Q4. Our test business pretty much stays unchanged from previous forecasts.

We're not going into any detail on 2017 yet. We hope to do that by the end of the year. We believe again that our business across the board is pretty well positioned. We believe pretty strongly that the third quarter is a setback, certainly. I don't want to make light of it, but it's not as though it's causing us to re-evaluate where we stand in the market or what we need to do to be successful. It's more than anything just a result of timing of various customer demands, and various development programs that we have underway.

With that being said, Bob, I think we're ready to take some questions.

Thank you.

(Operator Instructions)

Dick Ryan, Dougherty & Company.

Hi, Pete. Trying to maybe dissect a little more into the in-seat power theme. It sounds like you hit on a couple puts and takes there. Can you talk a little bit what you're seeing as far as the opportunity still ahead to be fielded for aircraft, and how the new build and retrofit market mix looks right now?

Sure, Dick. We don't really feel like it's changed a whole lot. In fact, we don't really feel like it's changed at all. We continue to think that approximately half of our revenues go to retrofit, half to new build. That can fluctuate 60%, 40% over any particular time period. We don't feel like there's been a substantial change there.

Your next question might be competitive status. We'd say nothing much has changed there, either. We think our market share continues to be well north of 90%. There certainly are people who are nibbling around the edges, I would say. There may be certain parts of the market that are more susceptible to competitive pressure, but we feel the crux of the market, the core of the market, continues to be our strong suit. We continue to make a lot of progress with customers. Bidding activity is healthy.

We're not feeling deflated or put out really, at all. We just are hitting this apparent soft spot in terms of orders and deliveries at the moment. But we don't see any reason why that should be expected to continue.

Air Asia went a different direction, and I can't recall the company they awarded for in-seat power. Is that a lower-end solution, or was that a competitive win?

We didn't bid that. We didn't pursue that program. One of the -- it's a USB only. A couple things to think about here. Power started out being 110 volts, and it -- the wattage went up over time. Actually, it started out DC, and then it went AC-110. Then USB became a feature.

We certainly are active in the USB market; but USB is not USB is not USB. There are low-level, lighter, cheaper, lower-power USB systems. Most airlines that we work with eventually come to prefer the full-fledged 110-USB combination.

The reason they do that is that these systems and the installations aren't exactly cheap. They want to put something in that is likely to last for a long period of time. If an airline actually chooses to go with simple USB and really light, entry-level USB, that's a -- I wouldn't call it a commodity, but there definitely are more companies out there that can do that. That's apparently what that program was that you referenced.

Our perspective is that most airlines who are serious about putting power in their airplanes will investigate it as part of their diligent effort to investigate various products. They'll investigate a lower capability USB system; but eventually, they'll usually decide to spend a little bit more and get a higher-quality -- future-proof their installation, by going with a 110-volt system. That's where we tend to shine.

Okay. Some of the major carriers get working through the bulk of their aircraft fleet already installing in-seat power. Is that a concern, or something from a timing issue that we need to pay attention to?

Some airlines are certainly ahead of others. I guess, though, that we would say that there are enough major programs at major airlines where we're not particularly concerned about running out of market at this point. We've talked on record plenty of times. We tend to divide the market into wide-body airplanes and narrow-body airplanes. We think the wide-body seat market -- not airplanes, but seats -- is across the globe somewhere around 60% plus or minus penetrated at this point, or saturated. That leaves 40% to go.

Of course, they're building new wide-body airplanes all the time. With A350 coming on line and 777 in a couple years, we expect that to continue to be a pretty healthy market on the new build side, as well as on the retrofit side.

In the narrow-body side, we say that we think somewhere in the neighborhood of 10% to 20% of the worldwide seat market is spoken for at this point. That's a relatively small percentage. Some people in our -- on our team definitely go to the lower end of that estimate, or even to the bottom of it, which suggests to us that there's a lot of room to run on the narrow-body side, too.

No, we don't feel like we're running out of market. We feel like we feel the same way today that we felt six months ago. We're not particularly deterred by the third quarter.

Do you look at ISP to be a -- can it get back into this low-double-digit growth profile, or is it -- new norm is maybe mid-single-digit growth for in-seat power?

That's a good question. We've been strong double digits forever, really; but we're also at a much higher level revenue wise than we've ever been before. It could be that the growth profile at this level is going to moderate a little bit.

I don't know if we're ready to declare that today, but we are actively running a bunch of different scenarios for where we expect next year to run out. We'll address that more directly when we get to that point. But I think from our perspective, this product line has been obviously very good to us. It's been one that's been driving our growth. We expect it to continue to drive growth across the Company. Will it be 20% again? Maybe not, but we think it could be double digits, and likely -- very likely could be. We'll talk about that more specifically when we are able to get into our 2017 forecast. Okay, great. I've got a couple more, but I'll get back in queue and circle back. Thanks, Pete.

Jon Tanwanteng, CJS Securities.

Hi, guys. Thank you for taking my questions. Any specific color on the state of the in-seat power market compared to where you thought it would have been three months ago, and what you delivered in the quarter?

Well, not really, Jon. We wish that it was another record quarter like the second quarter was, but it wasn't. Again, I don't -- we don't really feel like anything's really changed. There are a number of major programs. We feel our quoting activity's really good. We feel like our customer receptivity is really good. I don't really know of anything more to add to that story.

Okay. Then in your prepared remarks, you said that you mostly had the test quarter that you expected; but you still reduced the top end of the range a little bit. Any color on what went into that?

I think it's just fine-tuning the forecast, given that we're halfway through November, practically speaking. It's getting easier and easier to predict where we're going to be at the end of the year. There's a little bit of room for noise there, but we're getting pretty locked in.

Okay. You had a nice press release the other day talking about the new system-level tester platform. Any update on signing new customers up for that business? We've seen some high-level device failures. Is that something your tester could have prevented? Any more color on that,?

Well, yes. We did do -- put a press release out. I don't have any specific program or customer updates to share at this point. But I can say that we continue to believe this is pretty fertile ground for us. It's an evolving need that the industry is more and more recognizing. We feel like we're ideally situated to pursue it, and we're actively investing.

We have a number of programs under way. We would like to be in a position at this point to give better color for where we think 2017 will be. You might remember at the beginning of this year, we got a little sideways with our forecast. We want to be a little bit cautious and not be in that situation again. I think the best thing I can say is that we do -- we continue to be pretty optimistic on the business, and we think we've been well received by the market. We think that 2016 will, in retrospect, look like quite a trough year when we look back at it in the future.

Great. Thanks for the color, Pete

Sure.

Ken Herbert, Canaccord.

Hi. Good morning, Pete and Dave.

Good morning.

Pete, just wanted to start out, the guidance implies you took it -- for the aerospace you took the full-year number down about $30 million. It implies about a $10 million step-up sequentially from third to the fourth quarter for the aerospace business and sort of flat with last year.

My question would be, you've had a fairly material drop here for two quarters. Can you talk about confidence and visibility in this business, and has anything changed? I know there's no -- it sounds like -- one item you'd really point to; but clearly the business seems to be weakening faster than maybe you anticipated, or at least not seeing things come through to drive the growth. Can you maybe talk about anything's changed in your process or visibility or how you're thinking about this business now as you look out for the rest of this year and into next year?

Well, sure. We're definitely trying to look at things a little bit more closely, and try to figure out where we're missing things. I talked about the avionics or the antenna system change through three quarters last year, or the avionics product line, which includes a few other things, was $42 million, just shy, and this year we're at $23 million. I can tell you that's one -- that's a hole that we did not think would be so large, and we thought we would be able to fill a little bit more quickly.

Looking forward, I guess to recap or to repeat what I said about it last week, we have I think a stronger and stronger team working that business. We had a number of customer interactions and a number of demonstrations. It was pretty impressive. I think that there's certainly light at the end of that tunnel -- and not just filling the hole, but building the business to a much more critical and sustainable level.

The other thing I would point to, if you look at bookings, it's been a little bit of a wild ride, especially on the aerospace side. The last page of our press release, from the fourth quarter of 2015, we went from $122 million in Q4 to $140 million to $163 million, and then back to $122 million. It was a little bit of a surprise for us to see that big a drop from $163 million in one quarter to $123 million the next. That hurts our near-term shipping prospects.

Again, the real question is when we look back and we query our people and we say what are you guys seeing in the market? What's changing that could cause this? We're struck by a couple things. One is that it was across the board. It wasn't really any one product line. We still had drops in bookings from a number of places, but we also consistently heard that our guys were still comfortable. It's not as though we are losing business to competitive threats. It's not as though customers are going away. It happened to be the way things lined up.

I would tend to look at Q2 and Q3 and average them together. Maybe Q2 wasn't as good at the time as we thought it was. Maybe Q3 isn't as bad as it feels. But it just so happened that customers lumped their activity in the second quarter and were lighter in the first quarter. That's our read, and that's the color I can offer.

Okay. A follow-up question to that would be as you look at the revised guidance now, have you taken perhaps a greater haircut than you normally would have had to some of the assumptions you're getting from the operating companies? How is your approach that all changed after some of the more recent volatility in what you have seen relative to expectations?

Well, I think we're close enough to the end of the year now where if we don't have it in backlog, it takes a lot of the guesswork out. In other words, usually we have to guess what orders are going to come in and how well are we going to be able to execute. As you get close to the end of the year, the order element dries up, and the execution element becomes more of the source of variation, with a couple of exceptions.

You may remember that we have some customers where we hold some significant inventory. We never know one week to the next what's going to happen. There's room in terms of what they want us to do with that inventory. This was a build it and hold arrangement. We end up not calling it revenue until we ship it, even though it's built and it's completely in place and ready to go in stock rooms that we maintain for our -- for certain customers. There is some room for those levels to vary. That's also a little bit of a source of the range. I think we're pretty comfortable with the range we put out there.

Okay. Finally, it looks like Armstrong has been certainly weaker this year than last year. Anything in particular at that business, or anything you could point to there that you're seeing that maybe was unexpected, or that's changed?

It is a little light in the way you can see it. You're probably looking at our -- you're looking at that table on page 8, right?

Yes, exactly.

Systems certification. Yes, the only thing I would caution a little bit is that that is all Armstrong, but it's not all of Armstrong. Armstrong also feeds into some of our other product groups, specifically in the electrical power and motion side. Yes, it's a little concern. It's a smaller product line, so a small change in revenue tends to have a big percentage difference. I'm not sure that scenario that we feel is a major concern in terms of driving where the business is going at the moment.

All right. Thank you very much.

Sure thing.

George Godfrey, CL King.

Thank you, and thank you for taking my question. Peter, I just wanted to focus in a little bit on really the magnitude of the guidance change. If I look at the mid-point, the $30 million revenue reduction at the mid-point, but we're already halfway through the year when that guidance was provided. That $30 million, all concentrated in aerospace, implies about an 11% variation on the second-half revenue of this year. My question is, is that the new norm on how much revenue could vary, that a double-digit magnitude in just such a short space of time is something 2017 or 2018 could repeat?

I sure hope not, George. We've typically experienced relatively steady aerospace business. We're seeing a little bit more noise specifically this quarter; but also towards the end of last year. We've always thought our test business is lumpy, and it is. I expect it will continue to be, though hopefully with a general upwards trajectory.

I think it's too early to talk about a new normal in the aerospace. I guess we would prefer to think of this quarter as being a fluky light quarter. We would expect to get our normal consistency together.

Again, I would point out on the booking side in particular -- which is what drives our business, obviously, eventually -- if you lump -- if you average out Q2 and Q3, it's in that range. We'll be watching it, and we'll be looking for trends and clues that we can share in terms of helping to understand our business. But at this point, I don't really see a reason why we should think the business is going to be more lumpy in the future than it has been in the past. We don't see that at this point.

Okay, so in reading from the press release, your statement that early indications aerospace revenue will grow in the mid-single-digit range. Then sitting here today, you don't see the need for any extra heavy lifting on the bookings number doing something more unusual than years past to hit that mid-point of projection in 2017, as it relates to bookings?

I'm not sure I -- heavy lifting, we have to have a continual introduction of successful new products. We've got to fix some of the holes in our business, and we do have some. But I guess we look across the business, and we are used to having a certain perspective that says we're going to be successful, and we think this is a -- these programs are programs that are worth pursuing and they're going to pay off.

Nothing's really changed there. It's always been a scenario where we have to execute technically. We have to execute in terms of the margins, and we have to execute in terms of performance.

Is it heavier lifting than normal? No, I wouldn't say so. I think we think it's a -- there's a robust set of opportunities out there. I'm actually pretty excited about where we sit and what's in front of us, and some of the things that we're in the middle of. It's frustrating to have short-term results deviate from where we thought they would be; but it's certainly not a situation where we're sitting here thinking we need to re-group strategically and figure out how we're going to save ourselves. I think we're going to continue to do what we've been doing. I'm of the opinion that the market's going to cooperate, and we'll be fine.

Okay, understood. That's what I was trying to get at, the amount of work necessary from here to move into 2017 to hit that mid-single-digit range, is what I was trying to get at. Then related to the press release you put out yesterday on the test equipment, that device that you showed in the picture, what is the list price ASP, or where the starting point is for a piece of equipment like that?

Well, that's not exactly an off-the-shelf piece of equipment. Let me ask you this, did it look expensive?

It did. It looked very expensive

We have an increasing length of our -- or width in our toolbox. I would tell you that pieces of equipment that look like that can go anywhere from say a low of $1 million to a high of $6 million. It's a wide range. It depends what the customers want. It depends how many of them they want to order. It depends what kind of throughput and characteristics they want, performance parameters. It's widely varying at selling price.

Understood, great. Thank you for taking my questions.

Sure thing.

Thank you.

(Operator Instructions)

Ken Herbert, Canaccord.

Hi, Pete. You've done a very good job of taking costs out of the test business to maintain margins as you've seen fairly significant contraction in volume over the last few years. Are you starting to do anything at all on the aerospace side of the business, in terms of your cost structure, to maybe look at protecting or driving a little margin expansion with a little [silver] top-line growth?

First of all, I would agree with your observation on the test side. The crew there has done a really good job, not only managing cost, but building competency. They're two different thrusts that they been able to do simultaneously, so pretty impressed by that.

I think on the aerospace side, we haven't been as aggressive. I would tell you that I think in general we do a pretty good job watching our costs and managing our costs. What we haven't done, and maybe this is what you're asking about, we haven't gone to low-cost manufacturing countries, for example. We haven't exported a lot of our manufacturing. We don't have a short-term ambition to do so, frankly.

I think part of our secret sauce has been to lead by innovation and lead by performance. Our general bias is that there's real value in being able to control our processes vertically right now by having closely integrated teams from the technical side working with manufacturing and sales, all in cohesive units.

I don't think we really have ambitions to change that at this point. I will say that we're continually doing things that could be considered active cost management. We put a huge facility in in Portland last year. That's not something we talked a whole lot about. The team out there -- I've been really pleased with how the integration into that facility has worked, and the performance of the Company.

It's funny, building can make a big difference, basically. That's an example where we are getting some efficiencies. Of course, it's a pretty expensive building, so it's a long-term commitment and a long-term investment. I think we're alert to those initiatives, and we're actively doing them; but we're not going to restructure our business in the short term from how we've been doing it.

Okay, that's helpful. Then second, just as a follow-up, is any of the top-line weakness across aerospace due to any incremental pressure you're getting or changes in contracts from customers on pricing? I'm specifically thinking about sales to Boeing or into the forward-fit channel relative to the retrofit channel?

Yes, I wouldn't say so, Ken. We certainly have been subject to some active pricing negotiations, but we've also generally been able to bring forward cost savings that protect our margins so that we survive and Boeing's happy too, in that case. I don't think we look at that as a game-changing situation at all.

Okay. All right, thank you.

I guess I'd even take it one step further and say that we've been able to benefit from that relationship with Boeing. I think they look at us as a supplier they can grow and work with. It's not always easy. It's not always necessarily the way we would write up the script. But when I look back at it, I think we've done a pretty good job with it. I think Boeing's pretty happy with us.

Would you say just finally you've got a similar dynamic with Panasonic, or is anything structurally different there?

Nothing structurally different. Panasonic has been a long-term customer partner of ours. We do everything we can to promote that relationship, as we do with any of our major customers. We do have -- I was talking about our antenna business. We've got an initiative going with Panasonic right now. We had a common booth at NBAA last week, for that part of our business. It was a very positive vibe going on in that part of our business.

There's a lot that we do with Panasonic. We touch Panasonic, or they touch us, depending on your perspective, in a number of different places -- not only in our AES business but in our PECO business, our Armstrong business, our AeroSat business. They're a major part of what we do, and I think we do a good job for them.

Okay, thank you for the color.

Scott Lewis, Lewis Capital Management.

Hi, good morning, Pete.

Hi, Scott.

I've got a question on that small form factor antenna that you're working on with Panasonic for the business jet world. Would that be something that there's an opportunity in the regional jet space?

It could be. Your -- that product is specifically designed for a tail-mount application. Very simplistically, we make bigger antenna systems that can fit on fuselages of bigger aircraft, down to a narrow-body application. This one is designed to go up in the top of a T-tail under a radome. I'm just thinking out loud, because you're catching me flat-footed.

If a regional jet has that kind of tail structure, it might work. Our fuselage mount system's bigger than what a typical regional jet would want to carry. But the other realistic situation is that most regional jets do shorter distances, don't fly over water. They have air-to-ground opportunities. I can tell you that the way we think about it today is the tail mount is primarily a business jet private aircraft application, and fuselage would be more for the commercial transports, and the regional jets are in between. It's not a market that we're aggressively going after at this point.

Okay, thanks for that. Then I just want to ask one question on electric power distribution systems. I guess you're having a few programs come on in the next year or two. When you have a low-cost, high-volume type of program like say the Bell 505, just curious if that's a better program for you or is the ship set that much higher on a more expensive type of aircraft, that you're better off on, just take the Bell 525, something like that?

We like them both. That's an interesting part of our business. We are pursuing -- well, you look at the programs we've announced, and we're on lighter turboprop -- talking about fixed wing for the moment. We're on lighter turboprop aircraft. We've announced and won a few light-medium jets.

I think our capability can go from the light turboprop single-engine even, all the way up to the medium-sized business jets. I think when you get into the large business jets, we've got a lot of technical competition in the large established players. But in the smaller aircraft, we're putting together a package and a capability that's pretty unique.

You asked me which one we prefer? I'm not sure -- we don't really differentiate. We are definitely pursuing the full range of aircraft, and it's been a pretty active area. It's taken a little bit of a slower take-off than what we envisioned a few years ago, but we're making progress.

I can pretty safely tell you that it really doesn't matter who it is any more in the industry, or where they are. They know about us and they know about our system. We're getting a really good look, and doing a lot of development work. I think our original vision where someday this becomes the standard, the de facto standard for electrical distribution in small aircraft, I think that's very much an alive dream. It's taken longer to get there, but we're definitely making progress.

We're continuing to innovate, too. I guess that's the other thing I'd throw in. We have proven architectures, but we're seeing opportunities to improve and innovate, which we think are going to be important not only to continuing to establish ourselves, but also to make the after-market opportunities maybe a little bit more enticing. That's kind of a teaser, I realize; but there's a lot of IT development that we're continuing to pursue in those areas.

Great. Thanks a lot, Pete.

Sure.

Thank you. That's all the time we have today for questions. I'd like to turn the floor back to Management for closing comments.

Thanks for your interest in the Company, everybody. We look forward to talking to you at the end of Q4, if not before. We look forward to a better future than we had in Q3. Thanks, have a good day.

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