Astronics Corp (ATRO) 2017 Q3 法說會逐字稿

Greetings and welcome to the Astronics Corporation third quarter 2017 results. (Operator Instructions.] As a reminder, this conference is being recorded. I would now like to turn the conference over to Deborah Pawlowski, IR for Astronics Corporation. Thank you. You may begin.

Thanks, LaTonya, and good morning, everyone. We appreciate your time today and your interest in Astronics. On the call with me today are Peter Gundermann, our President and CEO, and Dave Burney, our Chief Financial Officer. Pete is going to go through his prepared remarks, and then we'll open it up to take your questions. You should have in hand the news release across the wires this morning, which is available also 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 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 these documents both at our website and at sec.gov.

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

Thanks, Debbie, and good morning, everybody. My comments will follow the usual format. We will talk about the third quarter in some level of detail, which was not a positive quarter for us on the surface. We'll talk about year-to-date results, which is a continuation of the trends we've been seeing all year. And we'll then turn the table and talk about a more positive set of topics, from my opinion, which is our expectations for the near future, not only in Q4, which we expect to be a very strong quarter for our company, but also look at our preliminary look at 2018 expectations. A number of things are changing for our business, and most of the headwinds we've been fighting recently, we believe are about to turn to tailwinds for next year. It's going to be a fundamentally different year. So we'll spend a little bit of time talking about our initial look at that -- at those set of expectations.

So for Q3, revenue was $149.7 million. That's lower than we expected and below our comparator quarter of a year ago by 3.5%. Aero sales were $129 million, up slightly from the comparator period and kind of in the middle of the range of the recent 4 quarters. Test sales were $21 million, down 30% over the third quarter of 2016, but pretty consistent with what we've seen overall in 2016 and 2017. Our third quarter, our comparator quarter for tests, was pretty strong with lots of semiconductor sales a year ago.

Given the lighter volume, our bottom line results were also light. Net income was $6.1 million or 4% of sales, down substantially from $12.1 million a year ago, or 7.8% of sales in the third quarter of last year. Our diluted earnings per share in the most recent quarter was $0.21. We were dealing with an effective tax rate of 29.9%, up slightly from 26.5% in the third quarter of last year.

Engineering and development expenses totaled $23.7 million. That's 15.8% of sales and includes our most recent acquisition of CCC earlier in the year. 15.8% is higher than we anticipated it would be this year. It's mostly a function of lighter sales, not higher expenses, and we would expect in the coming quarters as revenue increases, that our percentage will decrease somewhat down to the 12% to 13% range, even though the actual spend will remain pretty consistent. Our early indication is that next year will be somewhere in the $100 million to $105 million range.

The bright spot for the third quarter was our bookings. We had bookings of $186 million, up about $28 million from our second quarter and our highest in the last 4 quarters. In the last 4 quarters, dating back to the fourth quarter of last year, our totals have been in succession $137 million, $147 million, $159 million and now, $186 million.

In the most recent quarter, or book to bill was 1.25, so bookings were 25% higher than shipments, leaving us with a backlog at the engine of the third quarter of $302 million.

Trying to make sense of some of these numbers, sales were down mostly because we have a number of, I guess I'd call them chunky pieces of business that we thought would partially be realized in Q3, all of which slid into the future, into Q4 and perhaps a little bit later. To give you a flavor of some of these, one of them was a military program for a foreign military, which is about a % million piece of business, none of which can be booked until some flight trials are completed, and those flight trials were delayed in the third quarter. We have another award that will be a percentage of completion award that we are waiting to get through the government also. This also has a foreign nature to it, and we were expecting this award initially in the second quarter, then the third quarter. Now we're promised in the fourth quarter. And we have some other customer acceptances for another piece of business which is fairly substantial that also slid from the third quarter to the fourth quarter. Each of these is about a $5 million piece of business, so collectively, $20 million. And that would, for a company our size, have a pretty background impact on any particular quarter and helps explain why our third quarter was light and our fourth quarter, we expect, will be quite strong.

Margin profile's also down a little bit, maybe a little more than you might expect, wit the revenue drop relative to the comparator period. Part of that solution is we had relatively light semiconductor sales in the most recent quarter compared to the year-ago quarter. Semiconductor is a lumpy part of our business -- most of you know that -- but when it's good, it's pretty good from a margin perspective. So we have $30 million in third quarter 2016 in semi sales. The most recent quarter was down to $20 million. That's a fairly substantial drop in a profitable part of business, and it shows up in our margins.

And then beyond that, just lower volume hurts. We are running a business that is structures and designed for higher business volume, and we think we're going to see that pretty quickly here, and I'll try to relay that when we start talking about our forecast. But until we get there, we're definitely seeing some margin compression just because of the revenues that we've been seeing for the first 3 quarters of this year are not representative of where we expect to be in relatively short order.

Year-to-date, revenue through 3 quarters was $453 million, down 5% from where it was in 2016. Net income is $25.3 million, down substantially, 34%, from $38.5 million, where it was last year. Our net margin percentage this year through 3 quarters, 5.6% of sales, $0.85 per diluted share. And again, the margin declined, being driven by a drop in volume and, to some extent, a drop or a change in mix from more profitable lines of work to less profitable lines of work, both on the test and the aerospace side of our business.

Good news, again, is bookings through 3 quarters, $492 million, a book-to-bill of 1.09. And again, to try to put the year in perspective, the headwinds we've been dealing with are in some of our core markets. And we've already talked about our semi test market, where we were down pretty substantially in 2017 compared to '16 and '16 compared to '15. But also in 2017, our in-seat power product line, which is a major part of our business, struggled as the wide body market cooled off. We've made progress in narrow body and have released a press release recently highlighting that that we'll talk about a little bit more in a minute. But the narrow body growth and narrow body progress thus far to date has not been strong enough to offset wide body weakness. We think that's going to change and start to flip around next year.

To give a sense of some of the headwinds, not only that we've faced but also our customers, our 5 largest customers are cumulatively about 50% of our sales, and 4 of the 5 are down substantially this year. Collectively, the 5 are down 13% in terms of revenue.

We also had some product launch delays. One of the most significant ones is in our antenna business. We've talked about our tail-mount system a number of times on these calls. We think that's starting to turn around, too. We've had some successful demonstrations and we've got the system officially for sale, and we anticipate initial sales of substance this quarter, the fourth quarter of 2017, ramping up and being a good contributor next year, 2018.

Looking at our segments, aerospace revenues for the quarter were $129 million, up slightly from $125 million last year. Operating profit was $13 million or 10% of sales compared to $17.6 million last year. Bookings in the third quarter were $146 million, our strongest, again, of the last 4 quarters. Last 4 quarters have gone from $114 million to $123 million to $135 million to now $146 million. Our third quarter book-to-bill at $146 million was 1.14. So 14% ahead of shipments, leaving us with a backlog at the end of the quarter of $233 million.

Revenues year-to-date for aerospace, $395 million, 87% of our total and down slightly compared to 2016. Operating profit year-to-date, $47 million, 11.8% of sales, down from $61 million or 15% of sales in 2016. And bookings year-to-date, $404 million, slightly ahead of shipments.

If you look at our markets, commercial transports are $307 million, 68% of our total business, down 7.3%. That's something we're not used to seeing and, again, is representative of the cooling off of the wide body market that we talked about. Military sales year-to-date are $46 million, 10% of our total, up 16%. And business jet and VVIP, $29 million in sales, 6% of total up 41%.

If you look at our product lines, electrical power and motion, $199 million sales -- again, down 9%. And that's 44% of our total. Lighting and safety is about 27% of our total and up 1% at $122 million. And avionics, one of our smaller product lines, 7% of total, is up 38% at $31 million in volume.

Looking at trends in aerospace, the wide body weakness we've talked about and narrow body growth has not been enough to compensate, but today we think that's about to change. We think wide bodies has bottomed out. We think narrow bodies is going to grow strongly in the near future. We've seen some of the schedule slides in terms of our tail-mount business jet antennas. We think that delay has come to an end and we think it's going to start contributing in the current quarter. And we think price reductions that we've built into our models in exchange for longer-term agreements with major suppliers -- major customers -- has had an impact on our margins. We think that's, hopefully, about to bottom out, and we think it can be largely compensated by efficiency increases in our business, including new agreements with some of our supplier base.

We've issued some press release in the last quarter that are relevant for our aerospace to look at, to consider. We issued a press release saying that we've won a series of narrow body awards with a number of North American airlines totaling somewhere between 700 and 1,400 airplanes. Those are substantial wins. In some cases -- most cases -- those orders, or the orders that will relate to the agreements we've signed, have not been placed yet. They are not in backlog. Most of them will be awarded in terms of purchase orders and reflected as time goes on and those programs mature and go into the production phase over the next 2 to 4 years. And we think those awards are representative of what we see happening around the world. North America is very active. So is Asia and Europe and South America. So we expect that to be a very positive part of our business going forward.

We also announced the intended acquisition of a company called Telefonix. Telefonix is a company that we are quite familiar with in the sense that we've been working with them and around them and near them for some period of time. And the reason for that is there's a highly complementary product fit between some of the things they do and some of the things we do in the area of cabin entertainment, in-flight entertainment. So we do power and we have antennas and we have certain communication protocol capability, and they make things like file servers and wireless access points and data loaders and modem controllers. And together, we believe we will have, really, an unmatched, broad product offering for this industry and enable customers to have a one-stop shop, if they choose to do that, of significance. And we think that will be a competitive advantage over time.

We are -- I think our press release said Telefonix this year is running in the $60 million to $70 million range. We expect next year an incremental improvement on that. And our purchase price, per the press release, was $104 million. Closing will be dependent on an HSR review, which is currently underway, certainly expected before year end and could happen in the next couple of weeks.

Moving to our test system segment, revenues in the third quarter were $21 million, about eve with recent history, and 14% of consolidated sales. Operating profit was $1.1 million or 5.2% of sales, which is on the lighter side of what we've come to know. Revenue year-to-date, $58.1 million, down 20% from last year, when it was $73 million. Looking at some of the detailed tables in the back of our press release, you'll see that our aerospace and defense test business is pretty much flat compared to last year in terms of volume, but our semi test is down substantially, 46% from where it was last year.

Bookings year-to-date are the highlight, $88.4 million, a book-to-bill ratio of 1.52, so bookings are beating shipments now by about 50% and give us quite a bit of optimism for the future. In the third quarter, we detailed bookings of $40 million, which is a book-to-bill of 1.91 and includes a substantial order for a new semi program that we have underway, $29 million for that. And in the press release we detailed some early bookings in the fourth quarter of $15 million for more semi tests, our legacy program, which is not included in the summary numbers because the summary numbers are specific to the third quarter. So that $15 million will be included in the fourth quarter, but we wanted to get that news out there sooner rather than later.

And I think the thing that I'd like to emphasize with respect to our test business at the moment is that we are optimistic for the coming year, not only based on the bookings we've had to date, but also on the programs we're continuing to pursue. I think I said last quarter that we're operating in what we would call a target-rich environment, and we still are. And we anticipate substantially more program wins in the coming months, which will play out in significance in 2018. Those are not included in the forecast that we're putting forward today, so we will revise as we see how we fare. But my point is I don't think we're done. I think the orders that we've received are substantial and important and provide a good basis going forward but aren't the whole story. The third quarter backlog for the test business ended up at $69 million, which is a high number compared to where we've been operating.

Switching gears, looking at our balance sheet, we continue to be in pretty good shape. We feel cash at the end of Q3 of $15.4 million, total debt of $177.4 million, so net debt of $162 million, less than 2x EBITDA, comfortably within our covenants and providing plenty of room, we feel, for our anticipated Telefonix acquisition, which will be coming up before the end of Q4.

Our CapEx in the fourth quarter was $4 million; year-to-date, $9.7 million. During the quarter we purchased 702,000 shares at an aggregate cost of $18.9 million, basically completing our $50 million authorization, which we announced last year. Since inception, that $50 million bought 1.675 million shares.

So looking forward, we are expecting pretty strong Q4 sales of $169 million to $183 million. Aerospace will be $139 million to $150 million; test will be $30 million to $33 million. The low end of that range, $169 million, would be our best quarter in years, frankly, and the highest would be our second-best ever. So it's a wide range and we know that, and it's a function of the big pieces of business that I talked about earlier, the four $5 million chunks, all of which could fall into this quarter. We're expecting at lest one of them to hit that kind of low end of the range. But in any event, those programs, even though it's frustrating to watch them slide from one quarter to another, it's not a function of us losing them and it's not a function of them disappearing; it's just a function of timing.

There is no accommodation or no inclusion of any revenue from our planned acquisition of Telefonix in the Q4 numbers, so those Q4 numbers are base business, organic, so to speak. And again, somewhere in the $169 million to $183 million. This makes our revised guidance for 2017 to total $622 million to $636 million. The midpoint would be down slightly from our 2016 actuals. Aerospace would be $534 million to $545 million, up 5% over 2016. Test would be $88 million to $91, the midpoint being down about 10% from 2016.

But the important thing, we think, of the near future here is not only our Q4, but what we're anticipating in 2018, and we're issuing what we're calling preliminary guidance for the revenue side. As all of you know, we don't issue bottom line guidance, and we are initially stating we're expecting revenues to be, for 2018, to be $675 million to $750 million. That midpoint, $712 million, suggests an increase of about 13%. We're expecting aerospace to be $570 million to $630 million; the midpoint of that growth would be 11%. That's being driven by a stabilization of wide bodies. We feel growth in the narrow body, in-seat power and a number of other improvements across the business including the successful launch of our tail-mount antenna system.

We're expecting our test business initially to be in the $105 million to $120 million range. The midpoint of that level would see growth of about 25%. The big improvement in that piece of business at this point is the semi orders that we have received in-house.

So we're calling this kind of a preliminary and kind of an organic forecast for sales next year. Importantly, the forecast does not include, again, anything for our Telefonix business. When that closes we will revise our guidance. A sneak preview would suggest that that revenue level should be somewhere, we feel, in the $70 million to $80 million range next year. And it also does not include some of the major test opportunities that we have in play. And there major opportunities, both on the E&D side and the test -- and the semi side. And it's difficult to quantify those, but I'll go, I guess, help you out a little bit. We would suggest that the low end of the range of opportunities could -- will probably be, on a weighted average, somewhere around $25 million or $30 million, but it could easily be double or triple that. So a number of major opportunities which we're in pursuit of and optimistic for, but don't want to count them until we can count them.

So that gives you some color on what we're looking at here going forward. And I think that concludes my prepared remarks. So, LaTonya, I think we can open up for questions at this point.

Our first question comes from Ken Herbert with Canaccord. Please proceed with your question.

Pete, I just wanted to start off. You made a comment around pricing, and obviously, great news on the backlog and the bookings. But as I look at margins within the aerospace segment, could you help us just quantify maybe what pricing relative to volume has been for you as a headwind this year? And just to follow up on your comments that you see it sort of stabilizing as you get into '18, just any more color around that, and maybe, obviously, some of the upside you've won through that through maybe better guarantees on volume of longer-term horizons or predictability. But a little more color on that as we think about margins as volumes start to turn in aerospace or increase would be helpful.

Sure, I'll take a stab at that. Dave, I'll turn it over to you in a minute for your comments. But we have a number of very significant customer relationships. I mentioned something we -- I don't think we've talked about before, and that's our top 5 customers this year are about 50% of our business. And they've grown pretty substantially over the years. And we have solid, long-term arrangements, we feel, with all of those customers. In some cases we have exchanged lower margins -- or lower prices, which result in lower margins in the short term -- for longer terms. And the challenge for us is to become more efficient and to execute better. And I think we're fairly optimistic that we can cover a lot of those giveaways. But at this point this year, I'd say it's been a couple points, at least. So that's how I would phrase it.

Dave, how would you cover it?

I think that summarizes it pretty good. If you look at us historically, we tend to be able to squeeze out some decent operating margins, but sales growth and looking into 2018, if we can hit the top line numbers that we're expecting for 2018, I would expect to see some -- to see margin improvement on the aerospace side there, for sure.

That's helpful. And just as I look at aerospace into '18, as you get these, the volume growth, Dave, can you just quantify maybe what you see as an appropriate incremental margin, or how much can you get back next year to sort of your legacy aerospace markets?

I won't get specific on it, but qualitatively, I think we can start heading up toward the margins that we were starting to see back in 2016. And our margin profile was extremely high, if you go back to 2015, 2014. We were up in the 15% to 17% range. The profile of the company has changed a little bit since then. We've had a number of acquisitions. We're growing the top line. I don't know that we'll expect to grow the operating income and add businesses that are going to produce 20% operating margins, but I think for sure, as our top line grows, we can start to work toward that midteen level that we've hit before. At least that's what our goal would be.

Okay, that's helpful. And just finally, if I could, on the recent contract announcements for the narrow bodies for in-seat power, obviously, I think you said, Pete, that's not in the backlog yet. Can you just provide any more detail on timing and some of the variations? You've got a pretty wide range here in terms of the number of aircraft. Maybe over what time do you expect to start to see some of this work? What are some of the issues around the sort of 700 to the much higher number in terms of timing of those contracts or some of the put and take as we think about that particular opportunity into '18 and '19? Because it looks like that could be a pretty significant source of the upside into 2018 once you're able to put that into backlog.

No doubt. And we're starting to see that. There are orders coming through against these agreements. But that press release was largely based on agreements we've made for pricing and delivery and services with some major airlines in North America. And in general, you don't make agreements-airlines don't bother making agreements of this nature unless they have intentions of following through on this business. But some of these programs are a ways out there, and some of them are a little bit more preliminary than others. And that's what resulted in the range being so wide.

We think that there are 1,400 airplanes out there that we're going to do that are covered by these agreements, but in some cases, our customers don't have the formal approval yet to proceed with some of those fleets, and they may not have for maybe even another year, so it's a little bit preliminary in that sense. But we think it's very likely that the lower end of that range, those 700 airplanes, will happen, certainly in the next 3 years and probably consolidating more to 2. The trends that we've seen for desire for in-seat power, despite our revenue performance this year, continues to be very strong. Nobody's taking power off their airplanes, and most are deciding that they need to have it, and if not now, then when?

There are some holdouts, of course, airlines who haven't tried it and are not at this point committed to trying it. But those airlines are increasingly in the minority. The trend is more and more, not only putting power on, but putting it on nose tail, and that's what we're seeing, certainly in the North American narrow body market.

Okay, that's very helpful. I just wanted to ask one follow-up, one final question. You've obviously seen significant timing risk this year as some programs and projects have slipped to the right. You've gone out on a bit of the limb here with a pretty bullish sort of Q4 and, of course, initial 2018 outlook. How do you, as you look at your 2018 outlook relative to prior years, do you feel like you've maybe captured a bit more of the timing risk heading into '18 relative to prior years? Or how would you just characterize the timing risk around some of these initial comments into '18? And I'll stop there and pass it back. Thank you.

Sure, let me take a stab at that. We think we've de-risked our 2018 forecast, unlike kind of the trap we've fallen into in some previous years by keeping our initial forecast based ob booked business. So I'm not sure that -- I think 2018 will be weighted towards the second half because there are certain parts of our business that work that way. But at this point, we're going to take the approach, instead of telling you all at once what we really think we're going to do, we're going to take it as kind of some of the more tentative parts firm up. So we've de-risked it in that sense.

And as far as some of he major chunks of business moving around and delaying, that's a frustrating part of our business. And it's a little bit of a judgment call. But for a company our size, $ million to $5 million pieces of business moving around in any particular quarter can have pretty drastic repercussions. So we feel like there's a good chance that half of them or all of them will hit in the fourth quarter, but we've given you a range to try to de-risk it on the low end such that if we get one of them, we should be pretty comfortably in the low end of that range. So that's why we're within a month and a half or 2 months here of the end of the year and we're still giving you a pretty wide range because we need to have these things happen. But even if they don't happen, even if we're at the low end of that range, that's a very good quarter for s. Like I said, the best quarter we've had -- it will be the best quarter we've had in 2 years. So we think that it, combined with the booking strength and the positive things we continue to see in the market, along with the acquisition of Telefonix, which I'm personally pretty excited about, promises to make 2018 a pretty good year for our company.

Our next question comes from George Godfrey with CL King & Associates. Please proceed with your question.

I wanted to ask about the test bookings, $29 million this quarter and then the $15 million that's already come in for fourth quarter. I think I heard you say it was new platforms. Are those new customers as well or new platforms with existing customers?

I'm going to duck that question, George, simply because customers in this line of work are extremely sensitive, as it turns out. S all of our agreements say we can talk about things that we legally have to talk about, but beyond that, we have to be a little bit unclear. So the way I'd prefer to talk about it is more programs than customers because I think that's actually the more relevant thing to focus on anyway here. And we have -- our semi business is largely based on one legacy program to date. But yes, you heard right. The bigger booking in Q3 was for a new program. And it's one of these which is a, we think, important step forward and potentially can become quite a bit more valuable than that initial order if the performance is as our customer expects. So more on that as it happens, as I legally can talk about it.

But the other important detail not to miss here is that the legacy program that our business has been based on that was largely dormant in 2016 is showing signs of life again as we approach the end of 2017 in anticipation for 2018. So we expect, when I talk about a target-rich environment, there's certainly an element there also for semiconductor with the legacy program.

Got it. And then my second question is you talked about the tail-mount antenna systems, and that's starting to ramp up here and had -- the avionics segment really had nice growth this quarter. Can you talk about the issues, just so I'm clear in my head, what held that momentum back? And now that we're seeing that momentum, is that something that can really ramp as part of the nice guidance for 2018? I'll leave it there. Thank you.

Sure. Yes, it's -- an antenna by itself doesn't do anybody any good. You have to have a network along with it; you have to have kind of a service provider along with it. And we're teamed with a couple of prominent companies. Panasonic, one of our near and dear customers, is providing the network for this. And Panasonic and Astronics are working with a third company called Satcom Direct, which is a very prominent marketer and consultant of these kinds of services to the industry. So long story short, we can't -- nothing can be sold and nothing can be done, really, until all 3 companies are ready to go. And it took us longer to get our wagons hitched up and coordinated the way they need to be coordinated for the launch of this thing than we anticipated. But we're finally there, and there are some improvements that need to come down the pipe here shortly. But we think we have line of sight to that, too.

So the delays have largely been driven by that set of mechanics, just making sure we have these 3 companies all doing their job at the right time and getting everything coordinated. We think we're there now. And we do have a pretty sizable piece of business planned for that effort next year. Those assumptions and those goals are being reality tested right now. And as we move into next year and as we see what our experience base is, we'll refine accordingly our budget. And probably talk about it in more detail then. We'd prefer not to go in too much more detail about it right now.

Our next question comes from Michael Ciarmoli with SunTrust. Please proceed with your question.

It's actually Les in for Michael. A question on the wide body. You mentioned wide body was bottoming out. Is this more of like a slowdown than bottom and you'll see some improvement here from here on? Or do you see this more as like a steady movement lower?

I think we view it as a steadying. We do have some things to absorb yet, like a little bit of a stepdown in 777 new builds towards the tail end of this year. But we're thinking that things will stabilize kind of at the current level for wide bodies. And particularly in the area of in-set power, we're thinking that most of the kind of upside potential here in the short term will be more narrow body focused.

Got it. And also perhaps maybe a little bit more comment, too, on the biz jet side?

The biz jet side -- we have a pretty major lading franchise in business jets. Most of the industry is not anticipating a pickup in production volumes, but we are making steady progress in putting more content on airplanes, and we're doing that in 2 main areas. One is our airborne power side, where in commercial transports, we're known primarily for in-seat power, which is, at the end of the day, a passenger amenity. It is not flight critical. But on the smaller aircraft side, we're building a pretty good franchise for flight-critical electrical power generation and distribution. And it's a longer thesis than I think we can afford it here, but as a fan of the industry and as a pilot myself, it's one of my favorite product lines. And it's a system that's really based on high-reliability generation and electronic circuit breakers, which offers substantial flexibility and performance and weight advantages over traditional thermal-type systems. And we're making a lot of headway, winning a lot of programs. So it's not a major driver of our income statement at this point, but it is picking up speed. We've won a number of platforms, which I might advise people to go to our investor deck and they're spelled out there. But we're casting a pretty wide net and we're really leading that industry with some pretty good stuff.

The other thing we're doing is on the entertainment side with the addition of CCC. In particular, we're picking up some cabin management, cabin entertainment volume in the VVIP market, and we think we're making some inroads into expanding not only at compliance, but PGA, one of our other companies active in this market, expanding into the business jet world. So traditionally, PGA and CCC have done cabin systems for bigger aircraft. We're moving into smaller aircraft, and those 2 initiatives, I think, we expect will increase our volume in the business jet arena.

Thank you for that additional color. That's great. One last one for me and I'll jump back in the queue: any further discussions by the board on the extension of the share repurchases program?

We have not had discussions to that effect, but we do meet regularly as a board. I expect it will be an agenda item. Don't know where it will go for sure at this point, but yes, I expect we will talk about it.

Our next question comes from Jon Tanwanteng with CJ Securities. Please proceed with your question.

It's nice to see movement on the orders, finally. My first question, just to clarify on the new semi test business, is the new program a new or next-generation application of product that you're doing here, or is that similar to the legacy program that you've been doing already?

We would -- how do I answer that? I'd say it's a different initiative. It's not a next-gen related to the legacy program in that way.

Okay, got it. And then any preliminary thoughts on the transaction and one-time expenses related to Telefonix, assuming that closes, and the potential for accretion and either cost or revenue synergies from the combination, if any?

Sure. Dave, I could throw this to you in a minute. But I would answer the question by saying this is not a synergy play in the sense of consolidating or lowering our cost basis or combining product lines or any such initiative. The company is headquartered in the Chicago area. We already have an operation in the Chicago area, so geographically, we don't view it as much of a difficult expansion. The real issue is one of strategic similarities, in my view, I think. We have strong franchises in some of our core markets which revolve around the IFE entertainment world for commercial transport airplanes. They're a similarly situated company -- obviously, smaller tan we are. But the things that they're focused on have, and successful with, have a pretty uncanny fit with things that we don't do. There's not much overlap -- in fact, hardly any overlap t all. So as an aside, we would expect and anticipate the HSR process to go pretty smoothly, pretty quickly, although that's probably a really dangerous thing for me to say. There's just not much overlap.

So the beauty of it is the strategic combination and the ability to go to market and offer bundled packages of hardware and to be able to do a one-stop shop to customers who are current customers of theirs and of ours. And there's a lot of overlap in that customer base. It is not a movement towards entering kind of the retail end of the IFE market. We don't anticipate going to compete with our major customers as part of this initiative. But it does allow us to go in and say, "Here's a kind of a buffet of products, and you know us for this, but we can also do this, this and this for you," and thereby make it easier and potentially make more competitive offers than our separate set of competitors could or would do for those same pieces of business.

Dave, you want to take a crack at or add anything?

Sure. Because of the timing of this being late in the year, I expect there will be minimal income statement impact to 2017. So as we get into 2018, the beginning of the year, I expect we'll have the usual purchase accounting expense flush-throughs such as the writing up of opening inventory to market and some other short-term intangible asset amortization. We have not completed the purchase price allocation or valuation, so until we get an idea of what the amortizing of intangible asset run rate is going to be, it's difficult to predict. But I would say that we absolutely expect it to be positive on the EBITDA side next year. The question is the allocations of the intangible assets portion of the purchase price. But I do think ultimately in 2018, it's accretive. The question is I won't have a really good picture on that until we complete the final valuation process here.

Okay, fair enough. Pete, I think you went over Q4 pretty well, but how should we think about how you de-risk 2018, especially on the aerospace side in terms of the potential for other projects to push out the year or into further, the second half or later?

I guess we're, based on the agreements we have in place with major programs, we're pretty comfortable with 2018 on the aerospace side. Probably the Telefonix acquisition, obviously, you don't always know what you don't know until you know it, but I suppose there's some element of risk there, but we think we've done a reasonably good job of diligence and we think their book of business is pretty sound. I think our business always has a little bit of risk involved, in that compared to most aerospace companies, we're a little bit more aftermarket oriented and a little bit less OEM line fit oriented. So there's always kind of a major market disruption or financial problem that could affect us pretty quickly in that way.

I think the new product launch is one, in the tail-mount, is one that we've been spending a lot of time and a lot of effort, and we think we have strong market support. But that's one area where, obviously, you don't know until you start selling it, and we're starting to sell it now. So we'll watch that one pretty closely. And as I said earlier refine our estimates there based on what our experience is as other things firm up and we release new revenue guidance. So kind of more on that as it happens.

But beyond that, I'm not sure I'd point you to any major risk items in our portfolio. Dave, am I missing anything you'd want to highlight?

No, I think that hits the points.

Okay, great. One last quick one: any thoughts as to when CCC become profitable?

We would hope for CCC to become profitable some time in 2018. Without going into too much detail, that company has launched into a pretty major product development geared to a pretty major program, and therefore we've seen a little bit more of an expense load than we were anticipating, but it's a good deal and it's one that I think will be worthy of some headlines as it matures here a little bit. And so we view that as, and not by any means a negative experience thus far. It's -- the VVIP market is not turning around particularly quickly, but we think we've got a good position there with PGA and CCC, and we think some of the development work that is going on at CCC will be very valuable.

Our next question comes from Dick Ryan with Dougherty and Company. Please proceed with your question.

Pete, just a couple of cleanup questions. You talked a little bit about EPDS. When do you see that starting to contribute?

I think it's going to start contributing over the next year or 2. We've, as you know, Dick, spent a lot of time developing the science there, but some of the platforms that we've been working on are going to start hitting production volumes over the next year or 2. I'm thinking specifically about the Pilatus PC-24 and some of the new Bell programs. We have our first Textron program that use single-engine turboprop that they're working on. That's a little bit further out. But we think there's pretty strong enthusiasm and support, and our experience has been that once customers try it, they stock with it and they come back and they build it into their platform. So this is going to be one of those kind of slower ramps just because airplane development efforts are kind of long and painful. But the tail should be pretty long and we think the customer stickiness that we're experiencing is very promising. So at some point, I'd say over the next 3, 4, 5 years, it's going to become a much more significant portion of our income statement.

Okay, great. And Dave, what was stock-based comp in the quarter and how many 10% customers did you have?

Oh, boy. I don't have the stock-based comp number for the quarter. For the year it was about $2.2 million. You can go back to the last Q and you can do the math there.

And 10% customers?

Yes, give me a second on that one.

I think the answer's two, but we'll wait for Dave to firm it up.

Okay, Pete, just, and then one last one. As you were wrapping up your prepared text, you were talking about $25 million to $30 million with the opportunity of that being 2x to 3x that. I didn't catch what you were referencing. Was that your total test opportunity?

Yes, I was referring to a target, what I call a target-rich environment, especially on the test side. And test pieces of business tend to come in bigger lumps, both on the semi side and the A&D side. And we go through these exercises where we try to quantify opportunities and we try to probability-weight them. And it's a pretty big number. So for this initial guidance, given the questions and some of the history, we kind of took it all out. It's just not in there. We're not including these targets. But realistically, we expect that we will win some of them, and I think they're going to be -- the ones we win will be meaningful. So I was trying to bracket it for where the low end might be and where the high end might be.

So, Dick, there were two 10% customers. One was 20%; one was 17%, both in aerospace.

Our next question comes from David Cohen with Midwood Capital. Please proceed with your question.

Yes, I was just trying to get some sense of, given the amount of backlog you have relative to your fourth quarter forecast, what is sort of a typical book and ship magnitude for a quarter, and is there any particular strength, usually, in the fourth quarter? Things that aren't in your backlog, but basically you have to recognize into revenue in the fourth quarter? Does that make sense?

If you'd have looked back at our "typical book and ship," I don't know that there is a typical. It's kind of all over the map. To get to the lower end of our guidance for the fourth quarter, I think we need to hit about $20 million in book and ship, which is certainly within the range of book and ship that we -- in almost every quarter. It's just a low end, actually.

Okay. And just to clarify from the comment you may have made, Peter, in your prepared remarks, the business that's just shifted, those chunks of $5 million -- those are not in backlog?

Some of them are. One of them in particular is an order we're waiting for which could have pretty quick repercussions, just based on the nature of it. But most of them are in backlog. It's in most cases a matter of getting -- frankly, it's a matter of getting customers to either sign off on some of the technical requirements that we need to have firmed up in order to do our part of the job, or in some cases we need customers to sign off and accept product. And a lot of times there's a certain portion of a program that is dependent on customer's final signoff. So we've got a couple of those floating out there, too. Those are all in backlog.

Okay. And last question: you made reference to this, but maybe you could provide a little more understanding for folks. So if you could describe, just from a methodology standpoint, how your approach to guidance today is different from prior quarterly targets that you've -- they're annual targets -- but going back several quarters in a row, what is different about your methodology that alters your confidence level today versus past quarters?

I think we're getting a little bit more conservative, primarily on the test side than we have been in the past. Forecasting is always a little bit of art, and it's easy to pick up The Wall Street Journal and see how many 737s are going to be built and then multiply by our known ship set quantity. It's much harder to figure out what an aftermarket program might look like. But we're reasonably good at doing that.

On the test side, it is often an all-or-nothing kind of situation, and we've seen on both sides of our test business programs that we may have thought we were kind of perfectly in line for all of a sudden disappear or slide out for a year. So we're getting a little more conservative there, and that's what I was trying to say earlier. I think the good news is that the initial guidance that we're putting out there for next year doesn't have any of that in it. It's basically booked business or highly confident business with upside potential and I would say probability, based on when these other important targets actually come our way.

Our next question comes from Mike Wallace with White Pine Capital. Please proceed with your question.

Hey, just a kind of high-level question. Revenues peaked at about $690 million in fiscal year '15. And just wondering, with some of the changes in the business and the acquisitions, if we stacked on -- what were the amount of revenues that we've acquired over the past, since that time?

Since '15?

Yes.

This year the only acquisition we've done to date was CCC, which is a smaller business and not a major driver of those kinds of things. And the other one that would have happened in that time frame, although I think it was...

Armstrong was January of '15.

'15.

Right, that's what I was going to say. It was early '15, so that wouldn't really play into there since then.

Okay, how much did CCC bring?

Oh, we're still trying to figure that out, but it's this year been under $20 million.

$20 million, okay. And then what in terms of revenue? A little higher in revenue?

For the second and third quarter, it was about $7 million combined.

Okay, so maybe $20 million for the year is reasonable. And what's the most recent that's going to close by year end?

Telefonix.

Telefonix. What's the revenue run right there?

We're thinking next year it will be somewhere in the $70 million to $80 million range.

Okay, so we might stack about $100 million on top of that $692 million, just acquired revenues, right? This cycle? Does that seem fair?

Well, the $692 million is a number form a couple of years ago.

Right. Yes, but you're in a cyclical business and you're going through a cycle here that looks like things are starting to really turn, so I'm trying to think about what revenues could look like 2 years out for you with these businesses now attached to the company, and then what that revenue and margin profile could look like 2 years out. And if we're looking at -- I mean, do you think this cycle that you're going through is stronger than the last cycle? What's your feeling on that?

If you're talking about the aerospace cycle, it's a tricky thing to try to navigate. Our feeling has been, and continues to be that it's a really strong base of business cycle, and it hasn't been a 2- or 3-year cycle. I think the one thing that's been really hitting us is compensating for the fluctuations in our test business over the last couple of years. So that would appear to be a cycle. I think it's more just the EB and flow of orders on our relatively small size. I think the market's pretty strong, has been strong, and we're going to get a bigger piece of it going forward over the next -- certainly in 2018, and we'd like to think beyond that.

I think if you want to know where we're going to be, the best thing would be to take the range we just published for '18 and throw an allocation on these for Telefonix and throw an allocation on there for the target rich opportunities we see and see where that total gets you. Because I think that's where we're going to be in 2018, and then we don't typically get too involved with 2- or 3-year guidance to help you on that.

Where we could be in terms of (inaudible), and it looks like this cycle could be higher than last. There's 29 million shares out, is that the fully diluted share count, end of quarter?

Yes, that's right.

Our next question comes from Scott Lewis with Lewis Capital. Please proceed with your question.

I've got a Telefonix question. Can you talk a little bit about their current market share in the WiFi equipment market and maybe a little bit about the current penetration rates of WiFi and where you think that may go?

Sure. That's a big question. I think the way I would answer it is where are we -- when you say WiFi, Scott, are you talking about Internet access or are you talking about streaming content or kind of both?

Just depending on what Telefonix is selling, so you can talk about for in-seat power, where your kind of market share is and what penetrations are -- what would be the equivalent for Telefonix?

Okay, that's a really tricky question because they have some products that they are very, very high market share, like what we are, probably 90% or higher. And they have others that are relatively new and they're taking share away from more established companies. I'll go out on a limb and tell you that overall, I would guess they're, in the markets they compete in, maybe a 25% millions. And I'll reality-check that with them afterwards and offer corrections and apologies later. But just to give you a scope of answer there.

The one thing, though, that I think is really important to understand when it comes to IFE and comes to power, but especially comes to the kind of products that Telefonix builds, is that once an airplane is equipped with something, that's not the end because the technology is changing and continues to change very dramatically. In the power world, USB is increasingly common today. It wasn't there 5 years ago, frankly. And USB as we know it today will be obsoleted by a new USB over the -- it's happening right now with the latest generation of products. So there's evolution even when it comes to something as tried and true as electrical power. When you start talking about communication protocols or antenna systems or file servers or access points, the technology moves even more quickly. So it's kind of like we would look at the market not only out there of untapped airplanes, but the likelihood that technology gets changed and replaced over the course of an airplane's life.

A lot of times I get this question put to me in terms of where are we in the ballgame. And I guess I would say we're somewhere in the second and third inning. There are a lot of airplanes that have nothing on them yet in terms of power or WiFi or Internet access, and even those who do are likely to get upgraded and substantially rebuilt. Pick a time frame: 5, 7, years. This is a relatively short life cycle business. And one of our challenges and opportunities is to stay on top of that wave, obviously. But it's different than maybe some core aircraft systems like brakes, where you put something on and it kind of largely will work as it was originally designed for 30 years.

At this time I'd like to turn the call back over to management for closing comments.

No closing comments. Thank you for your interest. Obviously, we've got our hands full in Q4 here. We look forward to updating our expectations for 2018 when the time's right. Have a good day; good to be with you. Bye.

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