Astronics Corp (ATRO) 2018 Q4 法說會逐字稿

Greetings, and welcome to Astronics Corporation Fourth Quarter and Full Year 2018 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations for Astronics Corporation.

Thanks, Dana. And good morning, everyone. We certainly appreciate your joining us here today. I've got Pete Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer, on the call. You should have the news release that crossed the wires earlier this morning, and if not, it is available on our website at astronics.com.

As you are aware, we may make some forward-looking statements during this teleconference, including during the Q&A portion. 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 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 the call to Pete to begin. Peter?

Thanks, Debbie. And good morning, everybody. And before we get going, I should assure you that I am, in fact, Pete and my voice doesn't sound normal. I've been assured that whatever I have, you can't get over the phone, so I apologize in advance.

I may get hit with a cough attack here sometime over the course of the call, and I got a mute button ready to go, I'm not afraid to use it. So if I go silent for a minute that's what that's all about.

With everything being equal on that, we'll talk about our fourth quarter results, which we feel pretty good about and do a postmortem on 2018, which we feel was a pretty strong year for the company and then we'll turn our attention to 2019.

As usual, there are some issues to talk about there, primarily relating to the sale of the semi test business that we announced on the 13th of this month and -- or didn't announced, but closed on the 13th of this month. And also, some of the issues that are likely to affect our 2019, including primarily the 3 businesses that we've dedicated some space to over the last couple of calls, we'll continue to do that today.

So with that as a backdrop, our fourth quarter ended up pretty strong, revenue of $203 million, was our consolidated -- was our third highest ever after only the previous 2 quarters, the second and third quarter of 2018. Our fourth quarter results were up 18% over the comparator period of a year ago, that's about $32 million of growth.

Acquisitions contributed $12 million of the $32 million of growth, and organic was the rest, $20 million or about 12% organic growth year-over-year.

Our Aerospace segment had a particularly strong quarter. We've set another revenue record of $175 million in the fourth quarter, that's our fourth record quarter in a row and up 25% over the comparator period at the end of 2017.

Our Test business was relatively light, revenue of $27.7 million, that was pretty much what we expected and predicted at the end of our last press release or last quarterly conference call. That result of $27.7 million was below both the comparator period of the year ago and well below the second and third periods of this -- of last year, second and third quarters of 2018 were relatively strong for our Test business.

Net income in the quarter was strong at $12.5 million or 6.2% of sales, that's up dramatically from the comparator period when we had a large impairment charge at our Armstrong business at the end of 2017 of $16.2 million, doing the year-over-year comparisons, that colors the comparisons, substantially, got to keep that in mind as you look at the older numbers.

Aerospace, again, was a solid contributor with operating margins of 12.7%, that's not where we want it to be, but it's the highest we've had in quite a while and it shows signs of improvement.

Our 3 struggling businesses that we've talked about, CCC, AeroSat and Armstrong, we've talked about them collectively as a group now for about 9 months, and they turned in a combined operating loss in the fourth quarter of $6.4 million. We're not particularly happy with that, that's below where we thought we would be. But it's down substantially from the third quarter when the 3 turned in an operating loss of $11.2 million. So $11.2 million to $6.4 million we think is pretty good improvement. We expect continued improvement from here, and we'll talk about that more specifically at the end of the call.

Diluted earnings per share in the fourth quarter was $0.37 versus a loss of $0.18 in the comparator period a year ago, again, because of that impairment charge at Armstrong.

Not only good shipments and margins, but bookings were pretty strong. We ended up with bookings in the fourth quarter of $220 million consolidated, that's a book to bill of 1.09. Aerospace bookings were like there with shipments, even on an all-time record shipping quarter, book to bill of 1.

Test had a pretty strong booking quarter of $45 million, a book to bill of 1.62. The star in that arsenal has to do with a number of things, with some progress we made with the New York City program for $30 million is a chief part of that.

Backlog at the end of the year was $415 million, a record high, included in that total is $12 million of backlog that was essentially sold with the semi test business in February to our friends at Advantest.

Year-to-date, to put some words, year-to-date, year-to-conclude, I guess, at the end of 2018, we ended up with revenues of $803 million, that was up pretty substantially, 28% from $624 million in 2017, that's total growth of $179 million and roughly split equally between acquisitions and organic growth. Acquisitions contributed $85 million of the $179 million in growth. Organically, we generated $94 million of growth.

Net income for the year ended up at $46.9 million or 5.8% of sales, up a 138% from $19.7 million in 2017 or $1.41 per diluted share versus $0.58 per diluted share in 2017.

Net income for the year was positively impacted by the lower federal tax rate and a change in our state tax position that we talked about on the last call and negatively affected, again, by the combined operating losses of $34.7 million of the struggling 3 businesses. Again, we're not happy with $34.7 million, it compares about the same as 2017 when those 3 businesses combined for $47.1 million, inclusive of the impairment charge at Armstrong. So $47.1 million in '17, $34.7 million in '18, we're looking for substantial improvement in '19, as -- and we'll get to that in a minute.

Total bookings for 2018 came in at $837 million, that's best in shipments by about 4%. Aerospace bookings were up about 5%. Test bookings were down about 2%.

Looking more specifically at our segments, our Aerospace quarter, as I said, was a really strong quarter, record revenues of $175.2 million, up 25%, 26% compared to $140 million in the comparator period, that's our fourth new record in a row for our Aerospace segment.

Operating profit came in at $22.2 million or 12.7% of sales, not exactly where we are striving to be, but it is the highest we have achieved in 3 years. If one were inclined to run the exercise and back out the losses from the 3 strugglers of $6.4 million or assume that we could get those businesses to breakeven, operating profit in the quarter would have been 16.4%. So we continue to believe that our best margin improvement opportunity is to continue to focus on reducing the operating losses of those 3 businesses. And we think we're making progress.

Bookings, as I mentioned moments ago, for the Aerospace segment in the fourth quarter were $175.5 million, slightly ahead of shipments book to bill of 1. And our Aerospace ending backlog of $326 million is our highest ever and sets us well -- sets us up well for entering into 2019.

Looking back at the whole year for our Aerospace segment, revenues of $676 million were up 26% from 2017. They made up 84% of our consolidated total with the sale of our semi test business, that 84% in the future will increase, it will increase over 90% of our total.

Operating profit for the year was $70 million or 10.3% of sales compared with $39 million in 2017. Again, for the year, the 3 trouble businesses that we're working with had an operating loss of $34.7 million, if you were to do the exercise to assume they were breakeven, our Aerospace segment operating profit would have come in at about 15.4%.

Bookings year-to-date were $712 million. So even with the record shipments, bookings exceeded shipments by 5% over the course of the year.

Looking at some of the tables that we put in our press release, and specifically, at the sales by product line table on the bottom of Page 10 of our press release, our Aerospace business these days continues to be well balanced in my opinion, our Electric Power & Motion product line makes up about 38% of our consolidated sales, our Lighting & Safety product line makes up about 22%, and Avionics adds in about 16%. And they're all doing pretty well. Electrical Power & Motion was up almost 15% for the year and 29% for the quarter. That's a combination of a couple of things, primarily in that grouping is our In-Seat Power product, which continues to do very well. But the other big contributor there increasingly is the seat motion capability that we have, where we're -- have picked up quite a bit of market share over the last 1.5 years. It's becoming a pretty good contributor to our overall consolidated results, certainly helping to explain that growth.

Our Avionics product line, as chart shows, up 144% for the year, that is largely because that's where the revenues come that from our Telefonix acquisition in December of '17 ends up being categorized, mostly in our Avionics product line. And Lighting & Safety is up 10% in the year. So obviously, a good indicator when your 3 biggest product groupings are up strongly. It's nice to be able to report that at the end of the year.

Switching over to our Test business. In the quarter revenues, as I mentioned, were light as expected, came in at $27.7 million, that's down about 13% from last year and well off the page from the second quarter and the third quarter, the volume was pretty much dictated by schedules, which are dictated by customers. So we knew it was coming, we were not surprised.

Our operating profit for the segment in the fourth quarter on that lower volume was pretty meager $600,000, 2% of sales. However, Test had a pretty strong 2018, revenue for the year was $127.7 million, that's up 42% from $90 million in 2017. Operating profit on that volume was $10.7 million, 8.4% of sales.

If you look at the charts again on Page 10 of our press release, you can see pretty easily that the year was driven by relatively strong semiconductor demand. Semiconductor demand more than doubled going from $32 million in revenues in 2017, up to $84 million in 2018. We'll come back to Semiconductor in just a minute.

Bookings for the quarter were $45 million and book to bill of 1.62. As I mentioned, very strong. And year-to-date, bookings were a $125 million versus shipments at a $127 million, that's a book to bill of 0.98, that ends our quarter with a Test backlog of $90 million.

So a few words on the sale of the Semiconductor product line. No doubt, people remember that in December, we announced a planned transaction to sell the business, the product line to our -- to a company called Advantest for $185 million cash at closing, an earn-out opportunity of $30 million and a contract manufacturing arrangement, which was the last for approximately 4 years.

Last week, on February 14, I guess, we issued a press release saying we had closed but under substantially different terms. It was a $100 million cash at closing, with an earn-out opportunity of $35 million and no contract manufacturing arrangement. And the simple explanation for what happened there is, we at the end of the year were badly surprised by some changes in expectations on the part of some programs that we had been working towards and they had a material change on the value of the business. And the change in forecast was substantial enough to cause the change in the valuation of the business. If I bring you back to Page 10 again, those product line charts or tables that we put in the press release, you, again, can see in 2017, we had semiconductor revenue of about $32 million. In '18, it was $84 million. We had been expecting a 2019 that was roughly at that same elevated level, and we expected based on visibility that 2020 would be a step change above that and instead, learned in late December that, for us, if the business stayed in our hands, 2019 was likely to revert back to 2017 more than anything else. So that was disappointing for us. That was a surprise to us also, but it was also -- when you look at in context that what's going on in the world with trade tensions and semiconductor industry trends in general and consumer electronics trends in general, in retrospect, maybe not as such a surprise.

So we weren't happy going down from a $185 million cash at closing to a $100 million. But at the end of the day, we decided that was a better thing to do. First of all, the business, we think is frankly better off with Advantest than us, they have a global reach. They're not a U.S. company, which has some benefit in today's world. And they have a much more comprehensive product line, which -- and presence in a wider array of customers around the world.

What it allows for us to do is to focus more specifically on our primary Aerospace business, that's focusing both in our internal operations and also in our external communications and dealing with the investor community in general. And the contract manufacturing thing means that we will have a little bit more of an abrupt change, but we believe that we're ready for that. And we think we can make it work, and we think that when we get to the forecast section and you look at the backlog that we have in place for our Aerospace & Defense Test business, that we're in pretty good shape to have this, if that happened today.

I think I'm going to go on mute for a second, Dave, and let you talk about balance sheet, because we've generated some cash now with the sale, both our results in the fourth quarter.

Okay. Thanks. Yes, Pete just finished talking about the sale of the semi business, that was certainly a big event for us in February. But going back to the fourth quarter, we had a very strong cash flow generating about $40 million of cash flow from operations in the quarter that brought our year-to-date cash flow from operations up to about $55 million, which is a very strong year for us and one that we've been waiting a while for -- to get back on track to where we think we should be in terms of cash flow generation.

Outstanding debt at the end of the year was about $234 million, down from $272 million at the end of last year.

Our current borrowing rate on our senior credit facility is at LIBOR plus a 125 basis points. And I expect that could go down, somewhat, when we conclude the first quarter, as I expect our debt load to be a little bit lower, again, by the end of the first quarter, as we use the proceeds from the sale of the semiconductor business sale, which were about a $100 million pretax to further reduce our revolver down to about a $134 million right now.

We do have a $500 million senior credit facility, and we have about $250 million available on that based on our trailing 4-quarter adjusted EBITDA. And we expect to have another strong year of cash flow from operations. So there's plenty of flexibility in our capital structure to fund the continued growth. And our capital deployment will continue to be as it has been over the last several years to be focused on growth and acquisitions. We do have a authorization to buy back shares that, if they present the right opportunity and when measured against other opportunities, we could exercise on, but our focus continues to be based on growing the business.

We had -- getting off the balance sheet a little bit because I know somebody will ask the question, we had 2 10% customers for the year, 1 in the Aerospace segment that was about 14% of our full year sales and the other 1 also in the Aerospace segment, which was about another 14% of our year-to-date sales.

That was all I had, Pete, if you're ready to speak again.

I'm done coughing, thank you. So switching to look at 2019. Last -- in December, we issued initial Aerospace guidance of $710 million to $745 million for 2019 that at the midpoint would represent 8% growth, and we are sticking with that forecast for today. We are initiating Test guidance, now that the shoes have lined themselves up, $50 million to $60 million in 2019. If you were to back out semiconductor proceeds that we sold from the 2018 base, that guidance would represent at the midpoint about 14% growth for 2019. So consolidated, we're looking at revenue guidance for 2019 of a range of $760 million to $805 million, again consolidated at the midpoint of that range, we'd be seeing about 8% growth.

We don't issue bottom line guidance, but I do want to talk about a couple of things that you might be curious about and be thinking about as we move into 2019. The first, is the potential for increased tariff cost. We talked about these from time-to-time recently in our company, and I learned a new technical term from my CFO on this subject, it's a wild a** guess, but he's talking about incremental tariff expense for us in 2019 based on a whole set of possible assumptions of about $10 million compared to $2.6 million in the '18.

So that's our best guess at this point, and a lot of things could happen, the tariffs could go away, suppliers could resource production. There could be other hidden tariffs that we're not aware of. So -- but $10 million is kind of the number we're looking at. And to spend a few more words talking about our 3 troubled business, AeroSat, CCC, Armstrong. We're not happy with the progress to date, but there is progress to date. In the third quarter of last year, we had combined operating losses of about $11.2 million and $28.3 million through 3 quarters. So through 3 quarters, we've been averaging about $9 million, a little more than $9 million operating loss per quarter. But fourth quarter was $6.4 million, so we're starting to see some predictability as to where we think things should settle out, $6.4 million obviously annualized with the $24 million, $25 million, which would be down from our 2018 total of $35 million. But we think we're going to do quite a bit better than that. In fact, we think the first quarter will be about $6.4 million, similar to the fourth quarter. We expect it to drop from there as a few things happen to a rough range of about $2.5 million in the fourth quarter.

We originally talked about being breakeven in the fourth quarter, we think that's less likely now for a number of reasons, but we think we're going to go from $6.4 million in the first quarter and end up about $2.5 million in the fourth quarter. And that would be a pretty dramatic improvement over this $35 million year-to-date losses we saw in 2018.

So how's that going to happen? Well, one thing that's going to happen by our plan is that revenues for those 3 companies will substantially uptick in 2019. They collectively ended up in 2018 at about $45 million in revenue. We believe they're going to be somewhere in the neighborhood of $80 million, and there's substantial upside potential in the future on that. But obviously, when you're dealing with a year, you're dealing with a firm cutoff. So we think second half of this year, we're going to be seeing some ramps that are going to get us into that range and that's critical for a bunch of things. But it's critical for saying that operating loss start to be manageable by the end of the year.

So why are we sticking with it, that's part of the reason we're sticking with it. We see that there are substantial opportunities in the market, we think we have some competitive offerings that we think are advantageous and desired by customers, and there's some inherent demand. And our goal is not to operate these businesses at losses indefinitely, our goal is to make them profitable contributing members of the company just like everything in most other businesses. But we got to get them to breakeven before we can do that. So that continues to be our goal, and we think we will continue to make progress and obviously draw attention to it as needed on calls like this going forward.

So we're pretty excited. We think the semi test move was a good move. We think it's good for us. We think it's good for our employees that went with the business and a fair number of them did, pretty much all the engineers and program managers and professional people that drove that business are now employees of Advantest. We think that it's a good time for our A&D business to stand on its own. We think our Aerospace business, which is 90% of our total or 90-plus is never been better situated than it is right now. And we're looking forward to another strong year in 2019.

So with that, Dana, I think we'll open it up for questions.

(Operator Instructions) Our first question comes from the line of George Godfrey with CL King & Associates.

Pete, on the 3 businesses, can you talk about what is holding up the ramp on each one and what I mean by that is, do you have to have product ready? Do you have to sell the customer in buying the product, or do you need partners to fulfill their obligations in order for you to then be able to sell your product? If you could just shed light on what holds or how that revenue ramp goes up on each of the 3 businesses?

Sure. That's a good question. And there are different answers for each of the 3. Maybe, I'll move from west to east. CCC that -- the big issue with CCC that they've been struggling with, really since we bought the company, is a development program for a pretty high-profile customer that they've struggled with mightily. And we've had to incur substantially greater investment to make the program work and we thought we would. And a smaller company or a less-involved company might walk away from it. We did not feel like that was even the slightest option, given this is our industry and it's a pretty core customer, a pretty core market. And so we want to make it work, and the key there is to get that technology proven out and get it functional and then get it delivered. And a major milestone for them over the course of this year is to get that done. From a revenue expectation standpoint, we're looking at well more than doubling revenues at CCC based on -- based in part on the successful execution of this program. Armstrong is a little bit of a different deal. Armstrong is a certification company, an engineering company first and foremost. We merged it into Telefonix. Those I think, George you were at our Investor Day in December, you met a guy named Mike Kuehn, he's running both those businesses. And they've done a really good job of integrating the skills back and forth that they need to be more successful in their business. So it's been a kind of a one-two punch of building up competency and strengthening weaknesses and going out to the market to find new opportunities to apply those capabilities. And they're well underway. I'd say of the 3, Armstrong's actually in the best shape right now in terms of low risk and a bigger opportunity. So if we were to start this discussion today, instead of talking about 3 troubled businesses, I might talk about 2, and they would not be on the list. That leaves us with AeroSat on the East Coast. And AeroSat's an internal company and we have been stuck at the starting line, it seems for about 1.5 years now on a few programs, most prominently a tail-mount program that we call tail-mount. It's basically a smaller antenna that sits up in the tail of bigger business jets for transoceanic, primarily transoceanic type of services for Wi-Fi access. And we've been partnered with different companies or came out with a partnership group to bring that program to life 1.5 years or so. I think it was one of those things everybody thought it'd be about a 6-month development effort and 6 months turned into 9 months, turned into 12 months, turned into 15 months. And eventually, the teaming structure kind of fell apart and a new teaming structure came together. That new teaming structure is by our account way above where the old one was, and we've got a handful of airplanes flying, and they're doing quite well from our perspective. And the plan is that, that program is going to get kicked off from a sales perspective in the earnest, early in the second quarter. So we think we're wrapping up kind of the Test sequence of it. And with our partners, we're ready to go. And we think that as the year ramps, that will become more and more of a significant program. That was part of my comment earlier that whether we're going to get to double sales or 90% of sales or 110% of sales, a little bit arbitrate based on some of these things getting kicked off in time. But that gives you, hopefully, a little bit of a flavor of the 3 companies. We think we've got a good plan in place for the 3. We think that, that plan, if we come close to the revenue expectations, should bring those operating losses down to a much more manageable level in short order.

Got it. And Dave, one question for you is, what is the margin look like in that Aerospace & Defense Test portion of the business? If we take out semiconductor just to get an idea for 2019, what that business is going to look like?

Yes, so our expectation, I think Pete mentioned in the -- for 2019 is to be in the ballpark of breakeven on the Test business, absent any structural changes in it that we'll be looking at throughout the year. But that's our forecast right now, is to be within spitting distance of breakeven, a little above or a little below, but that's where we think it will be.

And that includes the New York City deal, correct?

Yes. Yes.

Our next question comes from the line of Ken Herbert with Canaccord.

Pete, just to maybe take it one step further. It sounds like then the loss you expect this year from the 3 businesses, CCC, Armstrong and AeroSat, sort of maybe half of what it was in '18, give or take, $17 million, $18 million, is that as I think about a cadence from the first to the fourth quarter numbers you've provided? Is that a realistic assumption?

I would hope that's conservative.

Okay. So it sounds like you see a bit about -- maybe a step improvement from sort of the first to the second or second to the third quarter as you get to the back of the year.

Correct.

Okay. And as I look at those businesses specifically, on AeroSat, is that -- I know you've always or historically talked about this as a retrofit opportunity. But is there a forward fit opportunity for this antenna, and is that a part of the mix? Or is that meaningful in sort of the '19 opportunity, or is that really something that could kick in at a later date?

Well, it's a very good question. They're certainly are forward fit opportunities. Connectivity is a hot topic as you might imagine for anybody buying an airplane, new or used. We think our best, quickest bang for the buck, so to speak, is the retrofit opportunity because there's this installed base of airplanes that needs to do something. And that's the biggest initial target for us to go after. But as you might expect also, the OEMs in that space are very observant and very interested in what's going on in the aftermarket. And if they find an aftermarket trend, new product that they really liked, there is certainly is a poll to the lines that side of the house. So we're pursuing both with our partners and doing what we can to be ready in that time, but we think, to begin with, it's primarily an aftermarket opportunity.

Okay. All right. That's helpful. And just a couple of points of clarification. You highlighted the tariff impact, and I think you said an incremental $10 million versus sort of a $2.6 million incremental in '18. Is that sort of -- is the headwind $8 million or sort of $7.5 million this year? Or is the headwind really sort of $10 million versus the $2.6 million last year?

Yes. What I meant to say was that, with these incremental $7.4 million versus the $2.6 million last year, so $10 million of tariff expense total.

Okay. Great. That's helpful. And then you didn't or you haven't talked about sort of the E&D spend for the year. I'm just wondering maybe with sort of where that ended in '18? And any commentary or how we should we think about that here in 2019? Either on an absolute level or percent of sales, or however you like to talk about it.

Yes, I can do that one. We ended up at about a $114 million for the year. We began talking about E&D spend about 10 or more years ago when it was an important driver in understanding the fluctuations period-over-period or year-over-year. In the last couple of years, it's kind of leveled out, absent acquired E&D cost when we buy businesses. So the plan going forward is we'll talk about it when there's some significant change to the run rate for the spend. We are at about a $114 million in 2018. I would expect, going forward, we would see some inflationary type of change to it, maybe a couple of percentage points. A lot of it is dependent on salaries. And looking out in 2019, it looks like kind of the run rate we expect in 2019 will be similar to what we saw in 2018.

Okay. Very helpful. And then just finally, I know you -- we haven't -- we don't really get to talk about sort of ENC power much, ENC power segment much with everything else going on in the other businesses. But really nice growth there. It sounds like you're taking share. It sounds like, Pete, with a seat motion product. Can you just, high level, maybe talk about some of what you're seeing at your airline customers around discretionary spend in terms of interiors and sort of modification efforts and maybe how that's growing as part of the backlog growth in Aerospace?

Sure. We, in general, see continued strong demand for ENC power. I mean, it's been a very -- obviously, a strong platform for us for a long time, and it continues to be so. I would say that the trend towards standalone power systems, in other words, power systems without seatback IFE, in-flight entertainment, continues to gain in prominence in narrow-body airplanes around the world. So in a wide -- our general approach is that in wide-bodies, most wide-bodies do get and will continue to get seatback IFE. And our approach to getting on those airplanes continues to be through the IFE providers who are very large customers of ours. The narrow body airplanes, increasingly, are more of a streaming-content type of application in terms of IFE, so no seatback displays. And our approach to them is to go directly to the airlines. So we work with some 220, 250 airplanes -- airlines around the world. And in general, people maybe aren't buying as many cell phones as they used to, but they all have them, and same with iPads and same with computers. And the increasing prominence of connectivity on airplanes, in the narrow-body world in particular, means that demand for our product continues to grow, and we're doing really well with it.

Our next question comes from the line of Michael Ciarmoli with SunTrust.

Can we just go back? The -- if you're assuming that those -- the 3 businesses go from $45 million to $80 million, I mean, is that growth embedded in the guidance? I mean, if I assume $80 million for those 3 companies at the midpoint, it sort of implies that the rest of your Aerospace business only grows at something like 3%. So can you give us sort of what you're thinking? Or is that type of growth baked into the guidance?

It is baked into the guidance, not exactly the way you're doing the math. We put some -- we put that guidance in there at the higher end of the range, and we discounted it for risk as we moved to the lower end of the range.

Okay. Okay. Fair enough. And then just, I mean, if you're going to get that kind of growth, 77% growth, I mean, but being less confident or less likely to see breakeven, what are some of those puts and takes? And are we going to see antenna sales in '19? I know -- I think when you last gave us the update, we're waiting maybe to see how the antenna performed on the network. Is there any broad update you can give about the antenna? I mean, is it in the marketplace yet? Or what's the status there?

So it's out -- it's in the marketplace in the sense that it's flying around on a bunch of airplanes. You might remember, we had a handful of airplanes flying into the old network. And those systems have, I believe, all been swapped out at this point. So the airplane -- those airplanes are essentially acting as test nodes for a new network, and we believe that that's all going very well. As for expectations, we prefer not to get too granular in terms of what companies do on what, but I can tell you, we're not going to come anywhere near to that $85 million level without substantial antenna sales.

Okay. You anticipate what the timing would be for the first sales. I mean, is there significant testing left that has to be accomplished?

No, I think it's more getting the sales cycle warmed up, getting the contract structure established, kind of things that are actually kind of behind our scope. I mean, we've kind of done what we need to do, we think, and then there might be incremental things here and there, but we think we're kind of ready to go.

Okay. And then just, if you could just educate me on this. I mean, if I'm a business jet owner from a corporation, I'm already flying transoceanic in my business jet, I mean, I probably already have connectivity. There's a lot of players out there, whether it's Viasat, Honeywell, Collins. What's going to create the retrofit? Why am I going to say we need to go out and retrofit our existing solution? I mean, obviously, bandwidth, but it's -- I'm just trying to figure out what drives this sales cycle against all those other established players.

Well, they would be competitors to some extent. I mean, there's a whole debate. Most of the competitors you listed there are Ka versus Ku. So there's a whole lengthy debate as to pros and cons there. Our belief, frankly, is that Ku offers better global coverage, and with higher throughput satellites coming online offer, but the competitive differentiators between Ka and Ku tend to disappear. So we think that there's not an overly intimidating field of competitors out there at this point. The other thing is that, the starting assumption there, that most airplanes flying over the ocean are already connected, that is kind of true, but a lot of it is much older technology, not Ka, not Ku, even lower levels. So we think that there's pent-up demand basically for these older airplanes to be brought up to modern standards, and that's where we're kind of targeting. It could be that Ka right now is line-offerable. I think getting back to Ken's questions earlier, or maybe George's, that at the OEMs, I mean, there's a Ka presence there. Part of the reason we want to go aftermarket to begin with is we think that's where the bigger volume is, that's where we think we need to make more of a splash. We believe that as Ku proves itself with HTS satellites and the price point becomes apparent and the user community starts talking, we think we've got a good opportunity to move upward and displace Ka with Ku.

Got it. Okay. No, that's helpful. And then just one more on the -- just sort of on operating income bridge here, if I can. You talked about the 3 businesses, so maybe those losses get cut in half. I think you also had, earlier this year, a range of legal and some other onetime items, maybe in the 9-ish, $10 million. Can you -- is that the right way to think about sort of bridging operating income growth from '18 into '19? Adding back not only -- or cutting those losses in half, adding back some of those legal and other onetimers. And then can you just give us what the amortization might be in 2019?

Yes. This is Dave. The amortization rate that we saw in the fourth quarter is going to run through most of 2019. And I can get that for you in a second here, Mike. But as far as the onetime cost that you're thinking of, I know in the first quarter, we talked about a $1 million accrual for a legal issue. Important when you're looking at 1 quarter, kind of rounding when you look at a full year worth of expenses, so I mean, other than that, I'm not sure. We had, throughout the first 3 quarters, some increased loss accruals. Each quarter relating to that one long-term program at CCC. We did not have that in the fourth quarter. So we don't expect that to continue into next year. Those were the big things. So I'll get -- I don't have it at my fingertips right now for the amortization expense, but I'll get back to you before we're done with the call. I got it. It's about $16.5 million for 2019.

Our next question comes from the line of Jon Tanwanteng with CJS Securities.

Do you expect, Pete, that, that 16.5 roughly core Aerospace margin, ex the problem businesses, is likely going to hold up through '19? And if not or it has to be better, what are the puts and takes to that as you go through the quarters?

Well, I'm not sure I understand what you're -- can you say that again, Jon?

Yes. So you had 16.4% operating margins, ex the problem businesses in Q4. Do you expect that to hold up through the next year?

Yes. I mean, I think we're pretty comfortable with our margin profile in general. If I back up the clock, the whole reason we started talking about these 3 businesses is that there was some concern and pressure basically in the investor community about what was happening to our business in general. I mean, our perspective was most of it is doing great. We have these 2 or 3 things that are dragging us down that we need to fix. We still feel that way. And I don't think we expect anything else to bottom out on us here. I think we're pretty comfortable with kind of where we are. I mean, it's a competitive world and we got some difficult customers and all that. But in general, our hope is not only to get the 3 struggling ones to break even, but to have them become part of the contributing crowd. And if we do that, and the contributing crowd continues to maintain itself, I mean, the 16.4% of whatever it was is low, it should be higher.

Okay. Great. And then just going back to another question and what you disclosed in the press release about the Test business being flatter or moderately profitable this year. Was that on an EBIT basis that were describing that in? Secondly, what do you want those target margins to be in kind of where revenue or cost-cutting efforts you have to make to get there?

Yes. It's a very good question. And we're hedging a little bit. We think we can get to kind of a breakeven EBIT basis over the course of the year. I mean, there is going to be a little bit of -- I should maybe mention this for clarity. In our first quarter of press release, you're going to see some Semiconductor revenue, well, I guess, in part, because we didn't close until February 13, but also, we've got some service obligations that we're going to continue to have, really, over the next couple of years. So there will be some residual Semiconductor involvement and revenue there. Nothing that's market-related. It's more contractual service based on past sales. So you will see that, but it's definitely a turning point for our business. I mean, Semiconductor has -- it's been lumpy and it's been stressful at times. When it's good, it's really good. When it's bad, it's -- we've had to adjust. And one of the things that we've learned to appreciate, I've learned to appreciate, is that the crew that we have in our Test business is pretty resourceful, and they tend to do pretty well at responding to a challenge. And this is a challenge. This is a changing of the structure of the business. On the one hand, a lot of the overhead structure that was dedicated to Semiconductor has gone with the sale. So our headcount's way, way down, and our Irvine, California operation, related to that. But there's a lot of the structure that was shared that did not go. We've got that still. So we have to do an analysis of kind of where this transaction leaves us and what our prospects are going forward in other businesses and in other things that we might do to diversify ourselves and bring in more volume. But we're pretty pleased with the plan we have in place. I mean, if this -- again, we didn't go out trying to instigate the sale, it kind of came to us. But given that it did, and we thought we should pursue it, our remainder business, looking at 14% organic growth in a year like this, it's a good time to have it. So we're pretty pleased with that. I mean, obviously, we'll be updating on the Test business as the year goes on. We don't pretend to have all the answers at this point, but we certainly don't think it's a crisis. We're not going to be talking about our Test business like we've been talking about our 3 struggling business on the Aerospace side.

Okay. Great. But in -- from a margin perspective, is it going to start off pretty rough and then it progressively improves? Or how do you see that going through the year?

Well, it's going to show a pretty substantial gain in the first quarter. I can tell you that. But it's going to -- it's probably going to start off weaker. I mean, you back out the proceeds and the revenue of the sale, and then will -- it will stabilize and normalize towards the end of the year.

Yes. And we expect the revenue relating to that rail program to pick up as the year goes on.

Our next question comes from the line of Dick Ryan with Dougherty & Company.

So Pete, maybe to follow up on some of your comment -- latest commentary there. On the E&D test, you got 2 facilities supporting $50 million, $60 million in revenue, obviously, maybe some rationalization going on there. But a broader question, how does the pipeline of opportunity look there? I know when you're striving to get kind of into a prime position versus a supplier position, can you just kind of talk about the pipeline of opportunity for that business?

Yes, we think it's -- is strong or stronger than it's been in quite a while. We have been waiting for more of a robust market maybe in response to a regime change in Washington then -- that has happened over the last couple of years. But it appears to us that there are certainly more opportunities happening, and our bookings have been reasonably strong, our quoting activities have been reasonably strong. So I'd say we're more and more comfortable. It's going to be a lumpy business. So it's got to be a business where when we are -- when the times are good, they have to be good because there are going to be times when the volume's lower and the margins are worse. So we have to kind of keep that in mind as we restructure the business. But it's going to be -- it's not 50% of our overall business, it's going to be about 7% or 8%, at least this year. And barring substantial growth or acquisition or something like that, I expect it will kind of stay in that range. We do have the 2 facilities that you talked about there. We're going in with eyes wide open as to how we navigate this. The 2 facilities are not quite replaceable. We do different things in different places. So it's really not a kind of a slam dunk kind of go-forward option. We have got some people right now trying to figure that out, trying to decide kind of where we go from here. The -- as you can imagine, where we thought we were going to be with the Semiconductor sale, up until late December, was very different than where we ended up. And that was not a trivial exercise in and of itself. So our primary focus has been to bring that sale to a successful conclusion. We think we've done that actually. So now that exercise is to figure out what we have left and where we go from here. So more on that as it comes, and I expect we'll certainly know more by the end of the first quarter when we release first quarter results.

Okay. Great. Any updates on EPDS opportunities, the current contracts you have and any potential wins down the road?

EPDS, Electronic Power Distribution. It's a -- I don't have anything specific for you, Dick, but maybe one of these days, we should start to do kind of an overview because it is certainly an active part of the business, and we have established ourselves, in my humble opinion, as the go-to-people for that kind of flight-critical power in smaller aircraft. And there was a time when we had to look long and hard to find people willing to even consider us. I think we've established ourselves as the people, such that now, I would daresay that in the industry around the world, an airplane doesn't get developed without us being invited to at least consider participation. We don't jump at everything. We don't do everything. But we do pretty much. We have a very, very high hit rate when we decide to pursue something and it's because we've got the scars to prove it. We've got the capabilities and the maturity of the architecture to do it well and the industry knows that. So -- and it's -- we're about at the point, now that you bring it up, in 2019, maybe a little bit more in 2020, 2021, where this is going to be more and more of a meaningful part of our financial results. So why don't you let me have the homework of maybe doing a little side expose of that on one of these calls over the next coming quarters? And we'll revisit the topic.

(Operator Instructions) Our next question is a follow-up question from Ken Herbert with Canaccord.

Just one quick follow-up. You've got, on the Aerospace business, another 1 to 2 quarters here, with the first half of '19 with much easier comparisons than in the second half. As we think about the organic growth, is there anything from a cadence standpoint across '19 we should be aware of, just considering the comps and how '18 progressed?

It's a good question. We expect the first half -- the way it looks right now, we expect the first half of the year to be stronger than the second half. But I'm not sure that's -- there's a bunch of moving parts in there, and part of it is just by the time we get to the second half of the year, we don't have -- there are a lot of orders that could pop up between now and then that aren't in the books yet. So we were a little bit as intentionally vague there because I don't think we really know. But at this point, it looks like the first half is going to be a little bit stronger.

Our next question comes from the line of Michael Ciarmoli with SunTrust.

Pete, just on the Test business on the subway program. Should we expect -- I guess, just how are you thinking about that program? Or are there going to be any startup costs or learning curves associated with that? Just trying to think about how that program ramps up.

It's another good question. It's a -- the substantial award, we feel, in part because it's a little bit of outside the balance of what we've done in the past, at least it would look that way to the outside observer. On the other hand, it's kind of right up our alley in that the philosophy of tests that the customer, in this case, wants to drive towards is remarkably similar to what we've done in certain other arenas, including defense arenas like with the Marines or the Navy or whatever. So we're bringing a skill set to a new customer. And I'm sure there will be learning curves, and we think we've got it pretty well circled in terms of what the risks are. But definitely, there -- it's a little bit different. Anytime you would be something different, I don't care what it is or who you are, there's some risk of things, risk of learning opportunities, how's that? At the same time, let me just say that our sense is that there's really a substantial body of demand in this arena. I'm talking about rail and subways and specifically, around the world, and there are lots of cities that use rail and subways. So our feeling is that the way things have been done prior to this award and prior to our involvement, are a little bit different than the way they're going to be done in the future. And if the world kind of shifts towards the New York City model, we could have a pretty good opportunity here. And we are involved in various other discussions and conversations that could lead to bidding activity, that could lead to other awards. And this is going to be an interesting thing. Obviously, as developments go over the course of the year, we'll know how our engineering efforts, which are already well-underway, are proceeding, and we'll know how the market is responding. You might imagine that if you were responsible for the subway system, and I'm just going to pick a city, DC maybe. I'm just guessing. I'm just picking on the random. But pretty much every city in the U.S. anyway that has a rail system will pay attention to what New York City is doing. And New York City made a big statement going in our direction on this program. So we think that if we do it right and we do it well, we can solve some of the problems as to what -- that New York City has historically had. And if we do that right, it could lead to other opportunities in other cities. So who knows, we're pretty excited about it though.

Our next question comes from the line of Mike Wallace with White Pine Capital.

A couple of questions. Nice job on generating some good cash flow from the business this year and paying down some of the debt, that's despite the receivable balance at $47 million at the end of the year. Are we going to get $100 million from the Test business in cash? Can you talk a little bit about what you plan to do with that? It looks like we reduced some debt over the year, and just give us some thoughts on that.

Well, when those kinds of checks show up, Dave doesn't let me have them. So Dave, do you want to answer this question?

Yes. Yes. I mentioned earlier that we took the $100 million and paid down debt initially. There will be a tax bill due on it, probably later this quarter or beginning in the second quarter. That will be about $25 million, I think our estimate is on the cash taxes on that. But the short-term plan is as we did, we paid down $100 million on our revolver.

Okay. And there wasn't really any share repurchase activity last year. What's your thoughts on that?

Yes. Again, the focus is on growing the business and reinvesting and continuing to look at acquisitions as the priority.

Okay. Operating margins in the Aerospace business saw some nice improvement year-over-year as the 3 troubled companies started to show a little bit of improvement in some other volumes. How should we think about operating margins as we look out into 2019 for the Aerospace business?

Yes. I think the fourth quarter was a good example of some nice improvement in the Aerospace operating margins. If we operate at that level of revenue, I expect that, that's a continued achievable number there. We continue to look at opportunities to expand that. As Pete mentioned earlier, we're facing a $10 million headwind mainly in our Aerospace segment relating to increased costs for the tariffs. I should say incremental $7.5 million there. So that presents a little bit of a challenge to us as we continue to explore alternatives to buying some of those electronics from China. So yes, my comment is, the fourth quarter was a good solid Aerospace quarter with no real strange muddiness to it.

Okay. So would that be a good base to think about as we build off of for 2019?

Yes. Yes. For Aerospace, certainly. Again, there was -- unfortunately, for the last year or 2, we've continued to have a lot of muddiness in one-off things that have happened. We didn't have any of that in the fourth quarter. So it is a good representative quarter for us.

Yes. So probably one of the cleaner quarters we've seen in the last several of them. And could we see uplift of a 100 to 200 points over the next 12 months in that as you look through your backlog and think about converting it to revenues and running it through the business? How should we think about improvements from the 12.7%?

Yes, a lot of it will depend on sales mix. And we intentionally stay away from providing specific guidance on operating margins. But I would say that there is opportunity to expand margins. But as Pete said, the -- when you carve out the 3 problem businesses, the remaining operating margins for the rest of the Aerospace segment, it is really strong. So the challenge and the big opportunity for us to increase our margins is to improve those 3 or probably more appropriately, those 2 real problem areas that are dropping our Aerospace margins down, and that's what we expect to happen. We mentioned earlier that with regard to CCC and AeroSat, it's a top line thing there. We need to get top line growth there to see the margin improvement. And CCC -- CCC, we had a really strong booking quarter. We don't generally call out specific bookings for our different business units, but the bookings were good. The best bookings we had at CCC since we bought the business were in the fourth quarter.

Our last question comes from the line of George Godfrey with CL King & Associates.

Just a quick one. Dave, what is the remaining share authorization? And then I heard you say you're focused on M&A activity with the proceeds. But it's safe to assume we get those 3 businesses fully fixed and functioning where you want them before we see any more M&A activity?

Yes. There's a $50 million share repurchase authorization. And I wouldn't say that the fixing of the 2 problem businesses that remain is mutually exclusive from continuing to look at acquisition opportunities. We have a solid team behind us with the people that are running those businesses now that are the primary focus and the people with the broad shoulders doing most of the work at those 2 businesses, and we have others that continue to look at acquisition opportunities. So they're -- I don't view fixing those 2 businesses to -- as diluting our ability to continue to look at acquisitions.

Well, I would add that if you could script the world perfectly, that might be the way to do it, but you can't script the world perfectly. So if and when you find things that are good acquisition candidates, whether you're ideally ready for them with other things, you want on your business and now you're going to take them, and the best case and plan is the -- our last acquisition, which was the Telefonix acquisition about a year and 2 months ago, which was just -- has worked out to be super. So that was in the face of all these other 3 things working their way out. And most people who are involved in the acquisition game will tell you that you need to have the big hits every once in a while to compensate for the ones that are more of a struggle. And Telefonix was one of those big hits. We've had a few of them, but we're really pleased with that acquisition. It's one of the better ones in recent history.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Peter for closing remarks.

So thanks for your attention today. And we're, again, we're pretty pleased with how 2018 worked out. There were struggles, there are always struggles, but overall, we thought it was a really good year. And we think we're really well-positioned going into 2019. So thanks for your attention. We look forward to talking to you again at the end of the first quarter. Have a good day.

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