Astronics Corp (ATRO) 2018 Q2 法說會逐字稿

Greetings, and welcome to Astronics Corporation's Second Quarter 2018 Financial Results Conference. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Debbie Pawlowski, Investor Relations, for Astronics. Thank you. You may begin.

Thanks, Sherry, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics.

Joining me here today are Pete Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer.

You should have in hand the news release that crossed the wires this morning before the market. And if you don't, 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 actual results to differ materially from where we are today. These factors are outlined in the earnings release as well as in documents filed by the company with the Securities and Exchange Commission. 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. Pete?

Thanks, Debbie, and good morning, everybody. We're going to do the normal routine of talking through our second quarter results and -- including a review of our expectations for the rest of the year, and then do questions and answer as usual.

So the highlights for the second quarter. You saw the numbers this morning. It was a strong top line performance for our company. We had record consolidated revenues. Our Aerospace segment turned in another record performance on the top line and our Test segment had its best quarter in 3 years or so, almost tripling sequentially what it did in the first quarter. With the strong top line performance, our margins recovered well from our first quarter, again, largely driven by the volume improvement. And finally, we remain on target for our 2018 forecast, which at the midpoint calls for consolidated sales of about $790 million, up about 25% of where -- from where we ended last year.

So diving into the details of the second quarter, specifically. Revenue was strong at $208 million. That is a new all-time high, as I said, about 38% higher than our comparator period of a year ago, and up about 16% from our first quarter of 2018.

Acquisitions, specifically, Telefonix contributed about $27 million of the $58 million in growth. So if you're inclined to back out the acquisition growth, you'll find organic growth in the quarter was about 20%.

As I mentioned, Aerospace set another record at $166 million in revenue, up about 28% over the comparator period, but up marginally over the first quarter. Test is -- gets a lot of credit for our second quarter results with revenue of $42 million, doubling the comparator quarter of a year ago and tripling the first quarter of 2018.

Margins responded nicely with the increased volume. We had net income of $14 million, about 6.7% of sales, up substantially from $7.7 million and 5.1% of sales in the year-ago period.

We talked a fair bit about margins in our first quarter call. And to recap that conversation briefly now that we have the benefit of second quarter results in, we said at the time that the company was sized for a higher volume, and we think our second quarter kind of confirms that thesis. With the higher volume, our margins came up substantially. It's most easy to see in our Test side. We did experience kind of reduced purchase accounting or legal expenses. As we expected, that dropped from about $5.7 million of expense in the first quarter to $2.5 million in the second quarter.

We made some progress, but frankly not as much progress as I might have expected in our -- some of our challenged operations on the Aerospace side, where we had collective operating losses in the first quarter of about $8.7 million. And in the second quarter, that dropped to about $8 million, but not as much as we had hoped. We expect further improvement in that number over the rest of the year.

In the second quarter, we had diluted earnings per share of $0.49 and that compares to about 26% (sic) [$0.26] in the second quarter last year.

Finally, bookings were solid at $187 million. That's slightly off the pace from the last couple of quarters, but still very strong by historical norms. It's a book-to-bill of 0.9., and in our Aerospace business a book-to-bill of 0.96. So our bookings are keeping up with our record shipments. Test was quite a bit lower at 0.66. And one way to think about that, everybody knows that our Test business tends to be a little bit lumpy in terms of shipments. The bookings, if you think of it, is even -- tends to be even lumpier because we tend to get big orders that are delivered over multiple periods. So lumpy shipments, but lumpier bookings. So we don't get too alarmed about a Test book-to-bill of 0.66 in any particular quarter.

Our backlog consolidated at the end of the second quarter was $377 million. We think that sets us up for a really good second half. We'll talk about that more in a minute.

Year-to-date results. Revenue consolidated $388 million, up 28% from $303 million last year. Acquisitions contributed about $52 million. So organic growth, year-to-date, was quite a bit smaller, 4.7%. Net income for the first half was $17.3 million, 4.5% of sales. That's down about 10% from $19.3 million in 2017. We had $0.60 per diluted share in the first half versus $0.64 last year.

One observation which I'd like to put forward is that last year we started the year with our strongest margins in the first quarter and the margin profile dropped throughout the year. We think this year, 2018, it's going to be just the opposite trend. We started on the low side and we're going to continue to strengthen. So those year-to-date comparisons are going to flip pretty dramatically from this point going forward through the end of 2018.

On the bookings side, through 6 months, we had consolidated bookings of $383 million. That's a book-to-bill of 0.99, and just almost exactly equal to shipments. Aerospace through 6 months is -- has a positive book-to-bill of 1.03. So bookings are leading shipments a little bit. Test is trailing book-to-bill of 0.76.

Turning to our segments. The Aerospace segment specifically, again, revenues in the second quarter of $166 million, up 28% over the comparator period. Operating profit of $18.2 million or 11%. Bookings were $159 million. That's a little bit of a drop from where we've been the previous quarters, but still strong with a second quarter book-to-bill of 0.96 and the year-to-date book-to-bill of 1.03. Ending backlog in the second quarter of $299 million, among our highest ever, and quite adequate for where we expect to go through the rest of the year.

Looking at year-to-date numbers, referring to some of the charts in our press release. Revenues of $331 million, that's about 85% of our consolidated total, and again, up 24% over the first half of 2017. Operating profit of $31 million, 9.5% of sales. That's down a little bit from where we were through the first half of 2017, but we expect those numbers to flip as we're going to have a stronger second half this year. We had a weaker second half last year. And bookings are hanging in there, with a book-to-bill of 1.03, $340 million through the first 6 months.

Looking at some of the market numbers and product line numbers. Commercial transport sales through the first 6 months were $266 million, that's about 70% of our total sales, and up strongly at 27%, 28% compared to where it was last year. Our acquisition at -- of Telefonix gets a lot of the credit for that.

If you look at our major product lines, our Electrical Power & Motion, which includes our In-Seat Power franchise, which makes up a significant portion, but not all of the category, had second quarter sales of $67.6 million, up 8% over the comparator quarter and $140 million year-to-date, up a smaller 3.9%. We're pretty excited about prospects for this group and the demand continues to be pretty strong, despite the smaller 3.9% growth through the first 6 months. And as a sneak preview, our expectation is that by the end of the year, we will see strong double-digit growth for the year cumulatively in our Electrical Power & Motion group in 2018 over 2017.

Lighting & Safety, a major product line of ours, $86 million through the first half, 22% of total, about flat with the year before.

And Avionics, this is where we categorize a lot of the Telefonix product lines that are -- that we're delivering on today. About $69 million sales in the first half, that's up a pretty crazy 245%, and making up 18% of our total.

Before I forget, let me make a little comment here that our Telefonix acquisition is working out very, very well. If you kind of read the little comments throughout the press release, the group there is doing a really good job, fitting into our company culturally, strategically and executing on their business plan. So it's only been 6 or 7 months, but we're very pleased with how that group is performing so far, and we're happy to have them as part of the team.

Some trends in Aerospace. Market demand continues to be really strong. We're setting record sales. We're having record bookings, and we're very, very busy on the front end of our business, kind of across the company. And we don't see that changing. There are some weak spots here and there. There are some scheduled slides in various programs, particularly things we're trying to get going on the antenna side of our business or some foreign military programs. But by and large, demand continues to be very solid. There is always a little bit of price pressure. We see it in some places in our business, especially in product lines that have grown dramatically over the years, but it's not dramatically changing things. We have been spending some time in recent weeks trying to understand the potential implications of the tariff talk, which dominates the airwaves these days. And we don't have any definitive answers today because nothing is firm yet. But potentially, it could be a negative impact, difficult to quantify, but we think it -- in a worst case scenario, it could be somewhere in the neighborhood of a $10 million charge or something like that. But there's a lot of puts and takes between here and there, we believe.

Turning to our Test segment. Again, a very good second quarter. Revenues of $42 million, almost double last year and triple the first quarter. The operating profit was $6.3 million, 14.7% of sales. The improvement was driven by strong semiconductor test shipments. Those were bookings that were pretty evident in the second half of '17. If you look back at those booking numbers from the second half of '17, you'll realize we still have quite a bit in backlog. And that backlog is expected to deliver substantially in Q3, maybe a little bit in Q4 and Q1 of 2019. But it's good to see that demand come through, which we've been waiting for quite a while.

Year-to-date revenues $57 million, up 50% from last year. Operating profit year-to-date $4.3 million, 7.6%, with Q2 contributions covering the loss from the first quarter. Bookings in the second quarter were $28 million. That's a book-to-bill of 0.66. We actually had some success in the Aerospace and Defense side. And we have some other prospects which we are not ready to talk about today, but we believe we're on the verge of some important wins that I guess we'll have to communicate in some other way, if and when they happen, but -- I guess I'd tell you that between the Semiconductor business and the A&D business, we've got a more optimistic prospect list for potential business than we've had in some time. And we believe that we've got more good times ahead of us, not like 2017 or even 2016, for that matter. Our backlog at the end of the second quarter was $78 million. We think that's really good enough to drive our forecast for the year.

Balance sheet at the end of the second quarter. Cash was $10.7 million. Total debt of $265 million. We expect our cash position to strengthen as the year progresses, the one thing that could throw a wrench in that is substantial test orders that require material investments, which may deliver in 2019 rather than 2018. But of course, that's a good reason to have -- to use cash, if it comes to it. We feel that we're comfortable where we are with our debt covenants right now. And we expect we will have more room as the year progresses and we put up stronger quarters.

So looking forward, we are maintaining our initial guidance for revenue for 2018. That specifically is an expectation of consolidated sales of $765 million to $815 million, with Aerospace coming in at $650 million to $680 million and Test coming in at $115 million to $135 million. If you take the midpoints of all that, you would anticipate consolidated growth of about 26% for the year, Aerospace growth of about 24% for the year and Test growth of about 39% or 40% for the year.

We are obviously maintaining the same range as we had before. That's because there are -- there is room for things to move yet. We've got some programs that need to be nailed down. We've got some other things we expect to win, which could generate upside potential. And we would normally expect to be tightening ranges at this point, but felt it appropriate to leave them where they were.

When you look at Q3 and Q4 specifically, for those who want to make models, we expect Q3 to be perhaps the stronger of the 2, with Q3 coming in, I would suggest, a little bit higher than where we were in Q2. And Q4 coming in a little bit lighter maybe than we were in Q2. But we have better insight in Q3 and Q4. So there's room for Q4 to move. There also will be a little bit of a mix change. Q3 will have stronger semiconductor shipments, again, kind of like Q2. Q4 will be much stronger Aerospace-oriented as we expect an uptick in certain Aerospace programs towards the end of the year.

We expect also that margins will continue to improve. We talked about some of the dynamics that we are working towards. The acquisition, legal, SG&A expenses we expect to drop as -- on a predictable path. And we expect that we'll continue to make progress with our more struggling units. How much progress we can make will be something that we will report on when the time comes, but we think we've got positive trends underway as demonstrated by the second quarter results. And we don't think we're going to disappoint going forward on that front either. So I think that concludes my prepared remarks.

We'll open up for questions now. Sherry?

(Operator Instructions) Our first question is from Jon Tanwanteng with CJS Securities.

First one. You spent a lot of time going through the margin expectations last quarter. Where do you expect that kind of $8 million operating loss to trend for those problem businesses in Q3 and Q4? And can you break it down by either product or business line?

It's a little bit of a moving target. I would tell you that I would like to see that towards the end of the year cut in half. I thought we were going to do a little bit better than that if -- due to the timing of some business. And there are really 2 aspects to margin improvement in those 3 companies. One aspect is just being more efficient, lowering cost. And we're doing that. But the other one is generating more demand. And I think it's safe to say that in all 3 locations, we're seeing greater demand. It's a question of when those -- when that demand comes through as sales. So I don't know exactly where we're going to end up as 2018 comes to a close. I can tell you very confidently that when I think about 2019 across all 3, it should be a much different picture. I think we see strong demand or increasing improving demand opportunities in all 3 locations. And I'll be happy to report that when the time comes. The question is we don't know exactly when that time is going to come.

Okay, great. And then just on the Test side. Any further orders in the near future? Will they impact 2018 at all or is that slated for '19 at this point?

It's possible, but time is kind of running out. So we are now in kind of the mode of understanding where 2019 is going to be. I will tell you that we continue to pursue various opportunities, both on the semiconductor side and on the A&D side. And I would expect over the next 3 months to have pretty good insight over where we expect 2019 to be. And most of the indications we have are up to -- middle to up based on where we are this year. So we don't expect to go back to kind of 2017 results. We expect, if anything, we're going to build from 2018.

Okay, great. And then just finally on the Test margins themselves. I think the last time you did this level of revenue, maybe exactly 3 years ago, you had 24% operating margins in the business. This time around let's call it 15%. What's different this time around? And kind of how do we expect that to trend going forward?

Well, part of it is -- let me talk about 2 different sides of it. The A&D side is running at a -- not at a breakeven level right now. So that's one of the problems we have going, but we have been investing pretty heavily in these new programs that I keep kind of alluding to, which we have not won yet, which we are hoping will have material ramifications next year. So that's kind of in an investment area. On the semiconductor side, we are -- in the second quarter, we're basically shipping on 2 programs in quantity; one new one, one old one. The old one is the one that was pretty much exclusively making up our sales back in the 2015 period you're talking about. And as happens often in these kinds of businesses, over time there are price drops. So we've seen some of that. And with price drops come margin drops. And with the new program, there is a significant amount of learning curve effect going on in the initial shipments. And so we're incurring a little bit of that too. But we're pretty optimistic that both programs are going well, both have long legs. And it's a question of how they're going to play out next year. And then finally, when you compare the business today versus the business 3 years ago, we have a much more filled out infrastructure, especially on the semiconductor side. So we have a more competent and larger engineering technical group. We have a sales group that spends a lot of time spanning the world. So it's a little bit of a different cost structure, but we think the prize is worth it. The programs, when they hit production, make up for that investment.

Our next question is from Ken Hebert (sic) [Herbert] with Canaccord Genuity.

I just wanted to, Pete, revisit, first, the Aerospace margins. I mean, if you're able to get $4 million in savings or $4 million less of a loss in the 3 troubled businesses, I mean, in the fourth quarter that should help with maybe over 200 basis points of margin. How -- in the second half of '18, what's a fair assumption for the kind of margin improvement we should see within the Aerospace business? Or how do you -- to maybe quantify some of your earlier comments on sort of a steady ramp through the year, can you put any more numbers around that?

Well, let me rely on our age-old pattern of not giving bottom line guidance, first. You realize that.

Yes.

A certain amount of it is predictable. I'd like to think that we can on the Aerospace side get up, easily up over 11%, 12%, somewhere in that range. Our goal is to be in the mid-teens. That's where we want to be. And we have -- a majority of our businesses that are there, it's really a question of getting some of the troubled ones to stop hurting us and maybe even helping us. And part of what's difficult to predict, Ken, is -- as I was telling Jon earlier, I think there's a flip coming where these 3 collectively are going to stop hurting and actually start helping. And it's hard to say when that flip is going to come. But in each case, I can make a compelling reason why our revenue prospects in 2019 are going to be much more positive than 2018. So to a certain extent, the challenge is not just managing the cost, but developing the opportunity such that we can actually execute on them when they mature. So we don't like having the drags and we don't like looking at the red ink on those businesses. But it's not a situation where we see nothing but red ink in the future. So we feel pretty good about it.

Okay. So I guess, maybe to interpret that, I know you don't give guidance, but -- steady improvement for Aerospace, but really maybe a step-up in '19 obviously from these businesses, but then also it sounds like from sort of incremental volume improvement in '19 as well?

Yes. Well, especially from those 3, I'd be disappointed if we were talking about the same topic in '19. I think this will drop off the radar screen and we won't be talking about it anymore. There are some challenging questions overall -- or not challenging, but question marks in the whole business in the IFE space, in particular, about how 2019 is going to shape (sic) [shake] out. There is a fair amount of turmoil going on in the industry with certain airlines switching models from 1 supplier to another or even going in a different direction and a different path. And we feel like we are really well positioned because we are suppliers to pretty much all the contenders. But it's a little nerve-racking watching. So it's a little early to put real firm numbers on 2019, as you know we come out with that guidance towards the end of the year, but we feel well positioned for whatever is coming down the road.

Okay. And if I look just at top line on Aerospace, the guidance implies sort of, call it 7% organic growth -- 7% to 8% in the second half of this year, which clearly was the pace you were at this quarter. It sounds like maybe it was some of your comments that it could be a little conservative in the second half of this year. Maybe just -- can you just talk about a few of the puts and takes within that? And it sounds certainly like the Electrical Power & Motion side of the business could be a swing factor. But maybe a little more detail on the half Q outlook at least for the Aerospace top line?

Yes. There are puts and takes. And the way I'd describe it is this -- and maybe Dave has a different perspective because he spends a lot of time studying these numbers also. But we have some significant programs scheduled for execution towards the end of the year, which if they slide, obviously, could hurt revenues in this period. But looked at from another perspective, we always look at the backlog we have and how it's scheduled. And what we have to book to fill in the shipping holes to make our plan and make our forecast. And we don't have far to go. So with any kind of optimism on the book and ship kind of business through the end of the year and if the big programs stay on schedule, we actually, I think, have quite a bit of upside potential to our -- to the median point of that range. And those 2 dynamics are kind of why we ended up leaving the range as wide as it is. I would expect by the end of the third quarter, we'll tighten it. But there is upside potential. And as usual, there is the possibility that big things flip -- or a couple of big things flip and that can throw us towards the bottom end of that range.

Okay, great. And if I could just finally -- you -- sequentially, you had a nice improvement in free cash flow. It seems like working capital is still a pretty significant use of cash. Seasonally, you tend to have a really nice strong end of the year from a free cash flow standpoint. Are we -- considering all your other comments, should we expect something similar this year? Or is there maybe any unique opportunities to do a little bit better on cash flow and specifically on working capital in the back half of the year?

Ken, this is Dave. You're right on. We expect the last half of the year to be really strong in terms of cash flow. We saw the ramp-up of our working capital, particularly in inventory in the first half of this year. I expect that ramp to level out or stop. As Pete mentioned earlier, the only thing that could impact that is if we get some Test orders that are scheduled to be delivered in the first quarter of next year. That could impact us buying inventory in the last half of this year, but our expectation is that our working capital will remain relatively flat over the next 6 months and we should see significant free cash flow improvement. Receivables went up quite a bit in the quarter too. We had a heavy load of our revenue hit in the last 6 weeks of the quarter. So I don't expect receivables to increase significantly as they did the past 2 quarters either. So there's sort of a long way to say, yes, we expect our free cash flow to impact -- increase significantly in the next 6 months, particularly in the fourth quarter.

Our next question is from George Godfrey with CL King & Associates.

The $8 million drag in the Aerospace segment here, what is the revenue approximately associated with that -- those businesses that are making the $8 million drag?

I'm doing it in my head. I'd tell you it's probably about $12 million.

About $12 million, okay. So if I add back the $8 million drag and take out that $12 million from the revenue just reported, then ex those businesses, Aerospace segment margin is more like 17%. So the rest of the businesses look like they are going really well.

That's a good point. And that's kind of what we were talking about, I think, a little bit in our last call. If we could just fix those businesses, even without getting a big contribution on margin improvement would be dramatic.

So that's the exact -- that's the math that I was doing even if you just plug in 3% margin on that business, you're hovering near a 20% segment margin, if everything is going well.

Yes. Agree.

Okay. And then, back on the Test business. I heard your -- I listened to those comments very carefully. And this was my interpretation, that based on the current product set and customer set as it exists today, then the margins are structurally lower 3 years later than they were 3 years ago. But with new products and a new customer or platform set, then that 24% margin is achievable or 24% incremental margin on new products and new customers. But because of the pricing discounts from where we were 3 years ago, yes, that revenue is going to be at a lower margin than what it was 3 years ago.

Yes. To the extent that -- I've got to think about this. But basically, the semi sales that we had in the second quarter was half -- think of it as the old program and half the new program. So the old program is a little bit lower margin than it used to be. And the new program is lower margin primarily because of start-up costs. So we expect the newer program will continue in force and get better. The older program is always a little bit of a question mark, but we're [given] indications that there's more demand coming in the future for that than there -- than -- it's not going to go away at this point.

Great. And then, my last question is, and I feel like I ask this every quarter is the ability to get more customers on this business. How is that incrementally changed today versus a year ago or 6 months ago? And I'll leave it there.

Sure thing. Well, I'll give you the same answer I probably gave you last quarter or a year ago. We're working on it, and we're closer. And we have real live bids outstanding and we've got real live discussions ongoing. So nothing to report at this point, but we are kind of building up a team and developing the expertise to more effectively execute on those opportunities. So we certainly haven't given up. And hopefully, next quarter we'll be able to talk about some success.

Our next question is from Michael Ciarmoli with SunTrust.

Just looking at the quarter on a sequential basis, the trend, Aero revenues down sequentially, specifically in the core Power & Motion was down to 7% year-over-year on a pretty weak compare. You kind of said demand remained strong. I would have expected that we would have seen a pickup there. I mean, you kind of mentioned turmoil in the marketplace. Was that a factor, or any color you could provide in terms of why the core Electrical Power products took a little bit of a dip?

Just -- I would tell you, it's just the program scheduling. I also tried to address that in my comments telling you that our plan is by the end of the year, we're going to see strong double-digit growth there. So it's going to be a little bit back half weighted, obviously. But overall, we think we're doing pretty well and demand's remaining really strong. I understand -- your observation is correct, obviously, looking at the numbers, but we're expecting double-digit growth when all is said and done and you look at 2018 compared to 2017.

Got it. In that Electrical Power & Motion product line?

Yes. Specifically there, yes.

Okay. What -- on the margins. And I know you might -- you kind of gave the color on 3Q to 4Q. If Test has a similar run rate in the third quarter, presumably it falls off a little bit in the fourth quarter. It sounds like though the Power & Motion products could be up double-digit. Can we expect the margins to kind of grow sequentially? Or will they -- I'm just trying to get -- just given sort of the mix and then the movement with Test and obviously, you guys still have the wide range of guidance, so it sounds like there's some room for things to move around plus or minus. But is there going to be any -- I guess, what I'm trying to get at is, is there a material change in the Test margins? If you kind of do another $42 million quarter and then we drop down sequentially, you kind of mentioned you were sized with a lot more infrastructure. So just trying to get a sense of the margin mix profile.

Well, I guess -- I think the biggest driver will probably be volume related in Test and for the overall business. There will be a mix change away from Test and towards Aerospace as we move from Q3 to Q4. I think it's reasonable to think that Q3 will be a very strong quarter, both top line and bottom line. There are more question marks over Q4 in part because of the mix change, but in part because it's just a little further out there. So -- but if you're going to be careful, then I would probably, at this point, model a little bit of a reduction in Q4.

Okay. And then the last one for me. Can you just give maybe some color -- the amount of E&D expense. Can you sort of break out how that's being allocated between maybe just Aerospace and Test at the high level? And then, maybe within Aero? Are these still -- is the spending for large commercial transport -- is it more on the business jet side? Just maybe some color on where the R&D dollars are going?

Sure. This gets to some of our basic operating philosophies as a company. And it's a big number and we have talked about it for years. But it's one of those things that we think drives the business forward in terms of coming up with the innovations and the technologies that our customers want. Sometimes they are clearly directed at demand that customers are presenting to us. We have a handful of big customers. They ask us to do something. Even if we think it's crazy, we will do it because we want them coming to us with their request. There are other situations where we will develop technologies even in a very secretive kind of climate that nobody thinks -- nobody expects from us, nobody even really anticipates from us. And it's kind of a self-directed, self-funded R&D kind of effort. And over time, we believe that, that's an incredible way to create value for our company. And a lot of those initiatives over the years have been very successful. Certainly true that some of them are absolutely unsuccessful and it just doesn't work for whatever reason. The technology doesn't work or the customer changes their mind or whatever. But -- basically what we do is keep the initiative for the marketing and for the product development out in our operating units. We are not a centralized command and control kind of company where those decisions are made at corporate. We look at them in the context of the operating unit's finances and also on a consolidated basis to make sure we can cover the expense, of course. But what we do and how we do it and staffing to make sure we can be effective is really an operating unit responsibility. So it's a decentralized decision-making process, if that makes any sense. And in our past, there have been times when our spend has been incredibly outsized relative to the resources that we had on hand because the opportunities that we were seeking were that important, we felt we had to do it. Today, even though it's still a big number as a percentage of sales, we feel it's a manageable and responsible number and we've been floating in that 13%, 14% range. And I would expect as our revenues increase, if anything, it's going to come down a little bit. So that's kind of a long-winded answer as to how we think about it and how we allocate it and how we manage it.

Our next question is from Dick Ryan with Dougherty & Company.

Pete, back on Test, delivering you said volumes for the old program and the new program and it was roughly 50-50. Those are both with the same customer, correct?

We can't -- our customers get very sensitive about any kind of identification, so we prefer to just think of it as programs.

Okay. How does the backlog -- if the revenue is coming out [at] 50-50, is the backlog 50-50 old and new program makeup there as well?

I think it's -- at the moment, it's probably weighted more towards the older program, the semiconductor side. But I don't have that in front of me, Dick. That's just kind of out of my head.

Yes. No, that's no problem. Looking at the 3 challenges you had. Certification sales, look like they came up nicely. So I'm moving that under Telefonix. Looks like it's a good move. CCC, if I recall, was kind of more of a demand issue of big jets in certain regions. Again, higher net worth individuals. But AeroSat, the tail-mount satellite, trying to get Panasonic and SATCOM direct. Can you give us an update there? And am I kind of correct in the characterization of the certification business?

Sure. Let me go around the horn. I gave Telefonix some compliments earlier. I'll repeat them here. We basically merged Armstrong with Telefonix under Telefonix leadership. And that process is going very well. The combined business is now referred to as Astronics CSC and the revenues are split between the certification numbers that you quoted in the Avionics product line. And we think there is a lot of opportunity there. And I think we're turning the corners. I think the leadership team at Telefonix has been really good at bringing in opportunities. The challenge now for that operation is execution, frankly. It's having the capacity and the competence to turn on these programs effectively. And I think they're doing a good job and they're making a lot of progress. There's a ways to go, but so far so good. So if we can just extrapolate current trends and assume some kind of execution success, I think that operation is going to be doing just fine. Moving to CCC. And your characterization of their business is correct, VVIP. There are 2 aspects to their improvement. One is executing on a big development job, which has been a nightmare, frankly, from a cost management perspective. It's costing a lot more than what they anticipated. And we took another $1 million estimate-to-complete charge in the second quarter. So we think we're getting our handle around it. And it's, we think, long term going to be a very worthwhile program, in time that will be I think quite evident. But even beyond that 1 program, there are what we call VVIP, big commercial transports converted to private aircraft; A330s, 777s, 737s, A320s, things like that. That market is turning around also from a demand standpoint, in part based on some quieting of the geopolitical scene around the world. So that may seem hard to imagine when you look at the news every day, but also the fact that many of these airplanes are now available for these kinds of modifications where they weren't, say, 1.5 years ago. The 737 MAX is out there now, the A320neo is out there now, the 787 is more available. The A350 is starting to be available. 777X is not yet available, but will be shortly. So for people who want to spend $100 million converting their $200 million airplane into a private aircraft, they want the new version, not the old version. So there's some natural life cycle that is happening there. So getting our handle -- that increase in demand and getting our hands around this development program combined should make CCC have a brighter future starting soon compared to what it has been over the last year. That gets us to AeroSat, the third one of the trio. And at AeroSat, there are a couple of things going on, but a big part of it is demand related and a big part of that is this tail-mount program that we've been working with our partners for some time. And we are still waiting. We are expecting an order that will be deliverable yet this year. It will be a material order in terms of volume. I think there is a handful of airplanes flying right now, but we expect that handful to be multiplied pretty significantly, we hope, by the end of the year, at least in terms of our hardware being delivered. I guess our look at it -- we're a little bit on the outside looking in. Our antenna system is very [good]. We think it's -- everything can get better, but it's proven, it's qualified, it's [buildable], it's ready to go. We just need to have the switch turned on, have the network proven out and get the customers lined up. And we're doing everything we can to kind of cooperate with our partners, but we got to have everybody do their part and get that program turned on. And we think it will. There is substantial demand out there for those kinds of airplanes, and depending on who you talk to there's a universe to be addressed, easily measured in the thousands of airplanes and up to 5,000 potential. It's a huge market. And it's a moving target in terms of technology, which is the kind of market that we generally like to compete in because it gives you more opportunities to take a bite at the apple. So we think that, that program sooner or later, people who fly those kinds of airplanes are going to demand this kind of service. And we think we're in a good position with our teammates to start delivering on it. We just -- we got to get the ball rolling. So you look at all those 3 things in combination and that's why we think -- I think that there's going to come a point where they're going to collectively go from being a drag to being contributors. And if they just stop being a drag, we're going -- it's going to be a big improvement to our Aerospace results specifically.

Our next question is from Doug Thomas with Gabelli & Company.

Just a question for Dave. I didn't -- can you -- will you for a moment talk about the share repurchase? Were you -- if you executed on any buyback this quarter? And what's your -- given the discussion about cash flows, what your thoughts are about share repurchases over the -- whatever couple of quarters next year?

Sure. Well, nothing has changed in our philosophy on capital deployment in kind of the ranking of what we will do with our free cash flow. The share repurchase tends to be at the bottom of the pecking order there. We continue to be interested in acquisitions and reinvesting in the business. We have historically utilized the share repurchase plan opportunistically when we feel the share price is ridiculously undervalued. We have a $50 million authorization available to us. And we will disclose in our Q filed next week if we had any activity under that. So I would suggest that -- as my comments (inaudible) yes, our view is that it is a tool we can use when we need to, but the focus is on growing the company.

Okay. I appreciate that. And then, Pete, the discussion about where we are in the cycle, and obviously, it's a fairly strong environment with lots of potential in the orders out there. The one thing -- I'm assuming that you could take a lot of business to make the top line look better albeit obviously, at lower margins. And you don't talk much about the business that you choose either not to take or not to competitively bid for or that -- you're flat out not interested in. But I was kind of hoping you would maybe chat for a minute about -- in terms of the bidding process at this point in time, you talked about price pressure in certain -- across certain areas. What is your -- the discipline that you guys employ when it comes to bidding for work, particularly in an environment like this where demand appears to be growing?

Well, I guess -- I don't get this question very often, Doug. Let me think about it for a second. But my initial reaction is that we tend to view ourselves as a technical innovation leader. And our interest is to be leading kind of new markets. And when you do that, you tend to have some -- a little bit of pricing flexibility. And we tend to be very close to our customers. We tend to provide value that we think is self-evident. And they -- for the most part, we feel generally appreciate it and agree. There are situations where we end up having to negotiate maybe a little bit lower than we would like to, especially on older programs that are a little bit more mature or things that start small and grow really big. A lot of times the price that you can get for a new product and low volumes is a little bit different than the pricing you can get once it has proven itself and everybody wants to buy it. And to some extent, we even lead that charge because we want to protect our markets and not invite in competitors who want to copy us. So it's a little bit of a process like that. But I would tell you that we are, by no means, kind of a bottom feeder kind of company, where we're looking for volume at the expense of margin in general. That's not the way we kind of go about our business.

We have reached the end of the question-and-answer session. I would like to turn the call back over to management for closing remarks.

Well, we liked this call better than the last call. And we're hoping that the third quarter is even better yet. So thanks for your interest. We'll talk to you soon.

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