Greetings, and welcome to the Astronics Corporation Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thank you, Christine, and good morning, everyone. We appreciate your time and interest in Astronics. On the call today with me is Peter Gundermann, Astronics' President and CEO; and Dave Burney, Chief Financial Officer. They will be discussing the results of the second quarter fiscal 2012 as well as our strategy and outlook. We will conclude the call with a question-and-answer session. If you do not have the release from this morning, it is available on the company website at www.astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and question-and-answer portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in our earnings release, as well as in documents filed by the company with the Securities and Exchange Commission which can be found at our website or at sec.gov. So with that, let me turn the call over to Pete. Peter?

Thanks, Debbie. Good morning, everybody, and thanks for tuning in to our call. We're going to do the normal routine this morning talking through our results and what our forecast is for the rest of the year. And with me as usual is Dave Burney, our CFO. We'll pull him into the question-and-answer period as necessary. So our second quarter, we feel was another very solid quarter for the company. Revenue was $64.9 million, just shy of our quarterly record set in the first quarter. Our second quarter result revenue was 17% higher than the second quarter a year earlier. We were 95.5% Aerospace, 4.4% Test Systems. That's pretty consistent with where we've been the last few quarters. Margins were in the -- from our perspective in the expected range, net profits of $5.2 million, 8% of sales, $0.39 per diluted share, that's up from net income of $4.5 million a year ago. At that point, 8.2% of sales. During the year, we had -- or during the quarter we had pretty high engineering and development expenses of $11.1 million, up from $8.8 million in the year earlier quarter. We also had somewhat higher SGA and costs across the company, and we'll talk a little bit more about that later on in the call. I think one of the most relevant aspects of the quarter were bookings. We set a new record there, $77.2 million. To give you an idea, our average for the previous 4 quarters was $60.1 million. So $77.2 million was a good 28% higher than where we've been for the previous year. So combining our second quarter with the first quarter, we feel we're off to a really good first half for 2012. Revenue through 2 quarters was $130 million, up 17.7% over 2011. Net income…

[Operator Instructions] Our first question is from Tyler Hojo with Sidoti & Company.

Just I guess to start, I mean, you indicated that Max-Viz is going to contribute about $4 million this year to revenue. So I guess that would be incremental. What else is driving the sales guidance up?

Well, it's a function of the strength that we're seeing really across the business from different markets. And a fair amount of our revenue is predictable because it's driven by aircraft production rates and those are generally pretty well understood. But there's a fair amount of spare parts and aftermarket element to our business and a lot of times, those are a little harder to predict in the short term. But we're just seeing continued strength and no real noticeable weakness outside of our Test Systems segment, and it's a combination of all those factors that give us the confidence to raise our sales budget for the year.

Okay, Pete, maybe you could talk a little bit about the narrow-body win that you announced a couple weeks back. In that press release, you said that targeted about 500 aircraft, could you give us a sense of timing on that? I mean, are you going to see some of those revenues flow in this year or what's the timing there?

Most of it would be over the next year or 2. These are agreements which are in place. And while we have seen some narrow-body sales and while we are shipping every day some narrow-body sales, what we're sensing is more of an agreement or a commitment or a conclusion, I guess, I'd say on the part of the carriers, to install their fleets with this kind of hardware going forward. And it's a combination of our traditional systems, so to speak, that we sell either direct to the market or through the IFE providers and a combination of the new system, which I think we talked a little bit about in the last call, which is the USB-based system kind of optimized for personal electronic devices that run off USB power. That's a lighter and cheaper version of our system, which is going to be coming to market towards the end of this year. And we have a couple customers who are specifically interested in that program who fly narrow-body airplane. So it's a combination of all of those things. One of the things that we're not prepared to say today is the exact split of wide-body versus narrow-body. It occurs to us that, that may be something of increasing interest to you and to other people who follow our company. We're trying to figure out how to track that. It's not exactly obvious because none of our products are specifically geared towards narrow-body airplanes. In other words, it's not a simple thing of saying these products go to narrow-bodies and other products go to wide-bodies. It's a modular system, and we have a general sense of what our major customers are doing with it, but there's no real clean-cut way for us to track that. But we will find some way to estimate that for you as time goes on here.

Well that would certainly be helpful. But just getting back to the narrow-body business wins that were announced I guess on August 2, my understanding and maybe this is incorrect, but my thought was that those were all USB, is that not the case?

That is not the case.

Okay. Could you give us kind of a breakout of how much was USB and how much was the legacy product?

In that press release -- I do have Mark Peabody on the line, so actually I'm going to defer that one to you, Mark.

Okay. Actually, Tyler, the majority of those are not USB. And the current USB product that we have out there is a combination of AC Power for powering laptops, et cetera, and a USB. We're also coming out with next year a USB stand-alone charging system. And so that announcement didn't address those at all.

Okay. All right. Very interesting. And just lastly for me, I was hoping that maybe you could talk a little bit about the increase in E&D expense guidance. Just maybe if you could talk a little bit about what's driving that. I don't know if you can talk specific platforms or areas, but anything you could provide would be helpful.

Okay. Well, we have a number of programs, which we have been turned on to work for that we have not been allowed to make announcements for yet. So it's a little bit of a tricky situation, but I guess I would tell you, Tyler, that most of the increase is due to contractual -- contractually obligated programs, which we have agreed to pursue. And it's not being driven -- internally driven programs. So it's a little bit of a shift in that respect. And what happens is a customer will maybe conceive of an airplane or conceive of a project and hold a definition phase with competing suppliers like us and then actually pick one and start formal work on it even before the thing is announced in public. And we're kind of in that stage on a couple of programs. So we're limited as to what we can say. But I guess I would tell you that we're not spending more money on things that we have thought up at this point. We are spending more effort and spend money on programs that are real programs with real customers, we just haven't been able to announce them yet. There's also a situation where, in some cases, existing programs or programs we've been working on for quite a while continue to kind of evolve and develop maybe a little bit longer than we thought they would. So we're -- that's a little bit of a difficult situation. But if our customer runs into certification trouble and things keep changing, we end up keeping -- we end up incurring additional cost to develop those programs. So it 's a -- I don't know if that's enough color to help you understand it, but we continue to think that, that element of our business is a very important element. We're stringing together some pretty solid growth performances over the quarters and over the years. We've done little bit of acquisition work to help that, but a big portion of it is the direct result of the development work that we do and have done. And we continue to think that, that's a really important way that we can add value to our business and to our shareholders.

Okay. That's helpful. And just one follow-up to that, I mean, with the higher level of E&D spent, likely kind on a go-forward basis, are you going to still be able get back to like a 19%, 20% type operating margin within the Aerospace segment?

We'd like to. We've been there at times. Usually when we're there, it's a function of rapid growth where our revenue and our throughput exceeds our infrastructure investment. And as we've talked about in the past, it's a little bit of a iterative process there, but we don't predict the bottom line guidance. So it's a little hard for us to commit to that.

We weren't -- the second quarter wasn't that far off. It was a couple of percentage points.

Our next question comes from the line of Gregory Macosko with Lord, Abbett.

Just perhaps maybe a little bit elementary, if I may ask, but with regard to the narrow-body program and wins, are these new aircraft only or are you doing any retrofit on those?

It's mostly retrofit. It's mostly a -- it would be airlines making a decision to offer that kind of amenity to the passengers on their narrow-body fleets. So when they make a decision like that, they will typically put the product on new narrow-bodies that are joining the fleet. But from a supplier standpoint like ours, the biggest opportunity in the short term is to get on the installed base. And so they would typically make a decision to do both.

I see. And the point being that on the regular rehab cycle that those electronics would be -- that power would be installed in the seats?

Correct. Correct. As they take the airplane down for a maintenance or maybe they outfit the whole interior. They redo the whole interior, and this is one of the features that they put in.

But it wouldn't be a driver just to overhaul it. I would assume it's part of a full teardown?

I would say, typically that's the case.

Okay. And then -- so at this point, you're saying only 10% of the installed base has power at all. Would you be -- is there -- are there other supplying that? Do you have competitors doing the same at this point?

We do have competitors. We feel like we've got a very strong market share in this product in general. It's hard to say exactly what it is, but we would typically say that we're well over 75%.

Okay. Good. And then with regard to just the lead times, just generally speaking in the Aerospace commercial area, are the deliveries much in advance? How much inventory could build up in the system? Is there any risk with regard to that?

Any risk?

Yes, in other words, that delays in the programs could push back and then the hold back in terms of your deliveries relative to the installation in the planes.

Greg, I think it's a tough thing to figure out. There certainly is inventory in the pipeline with our customers. What's difficult to determine is, I guess, how much inventory there is. What we do know is for the majority of the past 6 months, we've been running pretty much as hard as we can. We saw a little bit of slow-up toward the end of the -- to the second quarter. But we think that, that's going to pick up in the third and fourth quarter here. So we have this buffer between us and the ultimate customer generally with our products. So it gives us a little bit of a filter we have to try to look through.

Okay. And then with regard to the programs that you're developing, I assume there's no compensation for the engineering and development. That's part of the deal, and your expectation is that the program will be completed, and that is sort of the upfront cost of participating the program?

Those are good assumptions, yes.

Okay. Does it ever happen that those programs are canceled?

Yes, it does. Absolutely. But part of the challenge in our business is to pick the right customers and pick the right programs. So there are certain customers that we will do anything at any time for. And there are others where we get pretty selective, and that's part of how it works, no doubt.

With regard to the business jet area, that was up 6% or so, I guess, year-over-year. What's your outlook there? I mean, clearly it's a nice growth but much slower than the other pieces of the business. What are your expectations in that area?

Long term, we're pretty bullish on business jet. I mean, every time I get on an airplane I'm reminded that people who can't afford to fly privately will. I think there's a market for that. And I think that the performance and the safety of that particular type of airplane is getting better and better every year. I think it's generally fair to say that the segment, so to speak, the business jet world has not performed this year like everybody thought it would. It continues to be pretty soft. It continues to be pretty weak, and there continues to be some overhang in terms of used aircraft that are making it harder for the OEMs to meet their own ambitions. But that's a short-term thing, we think. We think that, that's a positive market to be in. And you look at our distribution of sales, and we are 65% Commercial Transport through 6 months. Certainly, Commercial Transport is a good place to be, and we're happy to be there. But I can't tell you that 3 years ago, we set out a target of being 65% Commercial Transport. That's just kind of the way the winds of fate have taken us. And similarly, we are 6% or 11% business jet through 6 months. I would tell you that we probably have a disproportionate level of investment going on right now towards that market. And that's in part because that's where we think the opportunities are. That's in part because we think that long term, there are very good prospects there. But right now, this year, 2012, from a half year perspective, I think it's safe to say that, that market has been softer than we expected, softer than most people in the industry expected.

That's very good color. And then lastly, if you would, military was up 11%. I guess that surprises me a little bit, so just give me some color there and help us to what we should be looking for and what is making it grow that much?

Part of that growth would be the result of our Ballard acquisition last year, which contributed a certain amount of money. Percentage-wise, you got to be a little careful with Military because it tends to be bigger programs and it tends to be a little bit lumpy in the program start and the program stop, and it's one of our smaller product lines. So a $3 million contribution from a new acquisition can make it look like quite a bit of percentage growth. But I would agree with you, we're happy with 11%. There's a lot of fear out there about Military sales in general. I think our perspective on it is that we're on some pretty good programs and have some good opportunities, and we are not overexposed to Military at this point. So we think that we're comfortable with the situations that we have, and we're comfortable with the programs that we're on. But I wouldn't read too much in that 11% number. That could go up and that could go down based on the starting and stopping of programs over the next year or so.

You mentioned Ballard up 50%, and we shouldn't expect that. I understand that. But looking forward, are there some programs there or are there any that are kind of running out or coming to an end or anything?

No, they've been performing at about a 25% or 30% growth rate for a number of years. And we're kind of expecting them to continue to be in that realm. And there is some upside potential. I guess I'd leave you with this idea. We're just talking about Military, and there's an undercurrent of concern in the world these days about where Military spending is going to be. One of these things that the Ballard acquisition brings us is a presence in, what I would call, Military retrofit types of markets where maybe it's a lot cheaper to upgrade an older airplane than to buy a new one. And that's exactly where their products go. Without going into too much detail, their products basically enable new avionics systems to communicate and work with old avionic systems. And when you're upgrading an airplane, you're typically not upgrading it from nose to tail and wing tip to wing tip, you're upgrading it incrementally. So new equipment has to work well with old equipment. And to that extent, that's an example where we think, yes, the Military market may be in some trouble going forward. But we've got a little bit of a hedge here and maybe even a way to exploit those kinds of budget problems. So that's an example of how I can sit here and tell you that I kind of like the way we're positioned in our Military business. And I don't want to pretend that we're not concerned about our joint strike business. We have a pretty good position on joint strike. But even if joint strike takes a hit, we think long term that it's still a very valuable program, and we're happy to be on it.

Okay. And then with regard to test, I mean, the loss increased on lower sales, has it stabilized? Or is there a level that's stable that makes sense to -- that we should look for? I mean, clearly it's a small piece but it is losing money.

It is losing money, and it's a very difficult situation. The challenge we face is maintaining the capability and capacity that we need organizationally in order to exercise the opportunities when they come. And it's pretty easy to see the staffing levels and the -- kind of the capability that we're maintaining. The real art here is anticipating when customers are going to come through with business to justify the capability and the capacity. And we're constantly looking at that, and we're constantly reviewing it. We're also looking at ways to use that talent elsewhere in our business. That's -- and we have a couple of initiatives that have been started and have -- are underway and a couple that have even wrapped up and wrapped up pretty successfully. I don't expect that we're going to get to the point of breakeven there. And I'm not sure we should get breakeven there. I think it's a small enough part of our business now with potential upside that actually is pretty significant. As long as the rest of the business is doing well, we're invariably always going to have little pockets in little areas where -- they're basically investment centers, and that's kind of where that segment is right now. I can't sit here and tell you I expect it to change dramatically in the next few quarters.

Okay. And is that primarily defense, or is that commercial or how's the mix just in terms of in mark?

That's all defense.

It's all defense, okay.

Absolutely. It's defense electronics at a very broad level, and it's basically automated test capability for military equipment.

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

Say, Pete, just a couple more on the narrow-body side. You mentioned majors and some of the low-cost carriers, is there any one in particular kind of pushing this? Or are you seeing it pick up a fairly broad level of interest amongst those 2 groups and geographically?

It's pretty broad. In the press release, we talked about North America, South America, Europe and Asia. We can't get much broader than that. And we talked about Airbus and Boeing, Canada Air and Embraer. So I would tell you it's pretty strong. Certainly, there are certain airlines that are coming forward more quickly than others. And those are the ones that -- we look for opportunities that use specific names, but I guess I would say that people who travel a lot, who stay alert, will start to see our product introduced in promotional mailings and in promotional materials offered by these airlines. But I think the best answer to your question, Dick, is we think it's pretty broad.

And getting into the market, is it your leg work, or is it the IFE guys that are helping to drive event?

I'd say it's both. In the narrow-body world, full-blown IFE equipment is not real common. There are certain airlines out there that feature live TV and things like that, but those are exceptions. So I think in the narrow-body world, you're more likely to see our system as a stand-alone type of offering, not exclusively, but I think that will be more common.

Okay. So Dave, do you have a customer concentration information with Panasonic and/or Thales for the quarter?

We do.

Panasonic -- so you got to direct these questions to me, Dick. Q2 Panasonic was $21 million, Q1 was $27 million.

Okay. Looking at SG&A, you mentioned there were some legal in there, compensation, how should we look at that SG&A level going forward? Does some of that drop out or -- with the addition?

I don't look for any big changes in the near future, I think. We're kind of running in a rate -- SG&A rate of about -- a little over $9 million a quarter. I think -- I don't expect any big changes there one way or another.

One interesting comment there, Dick, from, again, back to Ballard which is getting a lot of airtime in this press release, but the company is growing and it's pretty successful. One of the differences about Ballard is that they tend to have a cost structure that's allocated quite a bit differently than the rest of our business and they test -- and the influence on our SG&A cost. So that's not necessarily a good thing or a bad thing. All -- net in, we think that we're pretty happy with that acquisition as I've relayed. But they do contribute to our SG&A cost disproportionately.

Okay. And one last one, some of the other companies in the aerospace sector were talking about some aftermarket weakness. They are seeing -- you've said you're not really seeing much to this point. Can you give us a little sense of what you might be seeing in the aftermarket side? Or shouldn't we draw any parallels from what commentary we're hearing from some of the other commercial side?

Well, I would say in general, we are not seeing that. And that's probably more a function of our products positioning than -- maybe than the market in general, I don't know. But again, we just had a record booking quarter not just incrementally but substantially higher than what we normally see. So we can't say we've seen much weakness there. Most companies, when they're talking about aftermarket or I guess talking about a replacement or repair kind of element to their business, that's really not our deal. We don't do a lot of replacement or repair business. As we've talked about before, we sold to the aftermarket a lot like we sold to the OEMs. It's the same kind of product. It's the same kind of pricing. It's just more of a fleet sale rather than a OEM production kind of sale. So, no, I would say we don't see that kind of weakness.

[Operator Instructions] Our next question comes from the line of Scott Lewis with Lewis Capital Management.

Pete, Dave, on your bookings, your have very nice quarter bookings. Was there much 787 starting to build up in that, or is that still in the future?

Mark, are you still there?

I just got back, if you could repeat the question.

Scott was asking if there's much 787 in our bookings for last quarter.

Wow, I don't have the numbers in front of me, but it's not that much -- under a million.

We're expecting 787 to start to contribute towards the end of this year, but those kinds of orders are covered under long-term agreements. So we'll get delivery orders in relatively short notice. So it's probably, and I'm just speaking off the comp here, but if we start delivering, say, in December, January, we'll probably start seeing those orders in October, November.

Okay. And then a question on Max-Viz, is this the kind of business where your relationship with the OEMs is going to help you grow that business?

I think it will be complementary, absolutely. We are pretty familiar with that part of the market. We're obviously a bigger company than Max-Viz is, but they have some relationships we don't. And they actually have some primary customers that are relatively new to us. And so we're happy about that. And some of their biggest prospects are companies that we do work with every day. So yes, I think it's safe to say there are some marketing and share of customers synergies that could work both ways. Does that answer your question?

Yes. And then a question, I noticed you guys have a new consumer product, a little personal locator beacon product that's supposed to come on the market soon, is that something you guys are going to be pursuing? I know it's been delayed a little while.

It has been delayed a little while. And it is a personal locator beacon that we've been developing and it's been going through FCC testing, which is completed or pretty close to being completed. And it's not something we're prepared to talk about a whole lot at this point. But it is a little bit of a difference for us in that it's a retail product. And you'll have to tell me where you saw that, Scott, because we haven't had a question like this come up recently.

You know, that Google is an amazing thing.

Yes it is.

And then last question, I was just wondering, Dave, if you have a figure for legal cost for the quarter. I know you guys got a bunch of kind of moving pieces in there.

We haven't ever talked about what our total legal costs are. We've talked about what the increment -- or the difference has been from the prior periods. But for the second quarter, it was pretty -- well flat with the second quarter of last year. Year-to-date, it is slightly higher. And if you give me a second here, I can -- order of magnitude, I want to say, $200,000 or $300,000 higher on a year-to-date basis over last year. So I can get back to you in a minute.

Mr. Gundermann, it appears that we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Okay, very good. Thanks again for tuning in, everybody. We're pretty pleased with our first half, and we're looking forward to the second half. We'll talk to you at the end of the third quarter. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.