Greetings, and welcome to the Astronics Corporation Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Astronics. Thank you. Please go ahead.

Thank you, Brenda, and good morning, everyone. We appreciate your joining us today and your interest in Astronics. On the call with me today is Peter Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Pete is going to first go through his prepared remarks and then we will open up the call for questions and answers. You should have the news that was released this morning and is available on our website at www.astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation as well as during the Q&A portion of this teleconference. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the earnings release as well as in documents filed by the company with the Securities and Exchange Commission. These documents can be found at our website or at sec.gov. So with that, let me turn the call over to Pete. Peter?

Thanks, Debbie, and good morning, everybody. And like Debbie said, I'm going to have some prepared comments to you on our second quarter and year-to-date results. We will review the expectations for the rest of the year and then we'll open it up for questions. Our headlines for the quarter, despite kind of the trend for the day, I guess, we felt that was actually a pretty good quarter. Our Aerospace segment performed well with pretty strong sales and bookings and a record ending backlog. We felt that our Test segment also performed pretty well with a solid sales rebound from the first quarter especially and very solid bottom-line results. The other headline is we tightened our 2015 revenue forecast to a range of $680 million to $715 million. There is some moving parts in there that we'll clarify and discuss when we get to in that section of my little monolog here. But as a review again, talking about the quarter on a consolidated basis, we thought it was a pretty good quarter. Revenue was strong at $173 million. That happens to be our third best quarter ever. It also happens that our comparator quarter, our second quarter of 2014 was our second best quarter ever. So we're comparing our third best quarter ever to our second best quarter ever. A year ago our sales in the second quarter were $174.5 million. Aerospace sales were up 8.8% for the quarter. Test sales compared again to the second quarter of last year were down 22.7%. That sounds pretty bad but if you compare it to the first quarter of this year, sequentially, in other words, we were up over 100%. So it’s a lumpy business; everybody should know that by now. What's important to us is what the prospects are…

Brenda?

[Operator Instructions]. Our first question comes from the line of Dick Ryan, Dougherty & Company. Please go ahead with your question.

Hey, Pete, I'll let you catch your breath and I'll try to bring Dave in for the first couple. Dave, noticed just in the quarter some of the numbers. Tax rate seemed higher than what we were looking. How should we look at taxes for the remainder of the year?

I'll give you a two-pronged answer. First is if we don’t see approval of the R&D tax credit we're looking at about a 34% rate for --

An year?

For the year, yes, and that’s about where we were running in the first quarters. If we do see approval of the R&D tax credit before year-end we will see a catch up in the third and fourth quarter depending on whenever the legislation is passed, but that will bring our annual tax rate down to about 32%.

Okay. And looking at E&D expenses you didn’t change your guidance there which would suggest we should see a step down in E&D for the second half of the year. I think you're still looking for $75 million to $80 million.

Yes, I mean, we're still running kind of around that high-teens $20 million per quarter run rate for ED.

Okay. Any FX impact in the quarter, Dave?

Not significant. It's a bit of a headwind for our PGA business in France as we -- that entire operation is about 85% revenues there are denominated in euros and most of the cost are in euros. And the relative contribution of it on the bottom-line is fairly small. So it wasn’t a real big impact on the quarter from the euro.

But one thing that we are watching there, Dick, is we compete in an industry where most international sales are U.S. dollar denominated but we have competitors who are located elsewhere and especially those in Europe who all of a sudden get a price increase and they can opt to stay at those levels so they can maybe offer their products cheaper. So we're seeing pressure that way, not so much something that’s affecting us immediately but should affect us in the future.

Okay, great. So Pete, you talked the guide down a little bit or tightening the range. Can you give more specifics what you might be seeing on the aerospace or the test side that you factored in for that change in guidance?

Yes, I think the way to look at it is that when we start the year we have kind of known business and unknown business or things that we're pursuing and we weight those and we take them as a range. We've seen some things slide out and delay a little bit and we've not been successful on a couple of things that we thought we were going to be successful in or hoped we were going to be successful in and kind of a sum total of that is bringing the top-end down a little bit. But again, I look at it and I think our aerospace business is continuing to be very well-positioned and performing pretty much as we expected and our test business I think it is much more subject to short term customer demand; they are going to order what they want, they are going to want it when they want it and we do our best to respond. So I think from a performance standpoint we are doing pretty well. It is just some of the -- I guess some of the market timing and market opportunities are leading us to that somewhat lower top end on the range.

Okay, great, one more for me. You talked about the -- or no, maybe you did not talk about it, I was going to ask on the In-Seat Power itself what you saw in their organically and how would you describe that. Can you talk retrofit versus new build?

I guess we just studding on it is some combination of retrofits and new builds. That product grouping that we talk about electrical power and motion, In-Seat Power it is probably safe to say it is a good 75% of that grouping and it is the growth leader in the grouping. So if we do the 11.9% for the group over the comparator period a year ago you can safely assume that In-Seat Power was above that.

Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please go ahead with your question.

Pete, I just wanted to follow up on the question around the second quarter I mean you had a -- in terms of organic growth, a fairly significant sort of deceleration this quarter, within Aerospace in particular, is there anything you specifically point to where there are particular contracts maybe the timing did not fall this quarter or catch up in the second half of the year was there any maybe inventory issues or a key customer or two or any other factors that might help sort of explain specifically the 2% to 3% organic growth for aerospace in the quarter.

I guess, I just do not -- there is nothing major that drove, but I guess our feeling is that was more a function of maybe a little bit of lightness on our side and some real strong comparator to a quarter from a year ago, the combination of the two. I think we feel that we still have very positive growth year-over-year. There were a couple of situations where we ended up with some production snags in terms of supply or components that we ended up with a couple of problems where that will be rectified in the current quarter but I do not think we can think of anything that easy to shake a stick at and explain that. I think contrary to the number of 2.2% organic growth we still feel like we are facing a strong set of market opportunities and we feel like we are executing pretty well on them and we think that it is going to be what it is going to kind of quarter-to-quarter, but we are not feeling any sense of alarm if that's the way to say, and I am looking at Dave for any kind of color he wants to add to this. Shaking his head, no. So I guess that answered your question.

Okay. Were the one-time sort of I guess manufacturing issues or product shipment issues; is it possible to quantify that? Were those one or two points of growth or may be not that material or?

You could probably say it is like $5 million in revenue affected, somewhere in that range. Not loss but moved from one quarter to the next.

Okay. That is helpful. And I guess the guidance still implies, you are up against obviously still some very tough comps, even harder comps in the third and fourth quarter for aerospace with the guidance still implies 7% give or take organic growth in the back half of the year. Is there, aside from maybe some shipments here that shifted from the second and third quarter. Anything else that you brought the guidance down a little bit. So you must be feeling pretty good about the second half but again the comps are even tougher than the second quarter. Anything else you can say to help with confidence on the second half of the year or anything you could particularly point to that helps give you get us to the sort of the lower but still the 7% full year growth number for the year?

Well, the process has not really changed. We weighed our factors and as it close to the year you can look at firm backlog, which obviously helps, but we do have to fix the problems that I was talking about earlier in terms of restarting production from these component issues and that is one thing that is hanging in the balance. Another thing that hangs in the balance is short term orders, and we are watching that closely we go through this time of the year because we are still in the timeframe where we can receive orders in some of our product lines and ship them yet this year. So demand over the next two months will certainly influence where we are going to end up at the end of the day. And then we have some big customers who we build the inventory and we recognize revenue and they pull the inventory or ask us to deliver it. So we build the forecast, ship the demand and sometimes it is a little difficult to predict exactly how those two are going to sink up. So there are some variables, but usually historically when we get in this time of the year we get pretty accurate. And so I think we are pretty confident in that range. There is a potential of being at the low end, there is the potential of being at the high end. It is the rate set up factor, it is kind of all line up, but usually they do not, usually end up somewhere in the middle.

Yes, okay. And I guess specifically on your short term where I guess that colors for cycle sales, have you seen any step back by the airlines and their willingness to desire to sign these contracts or to spend on discretionary cabin work over the last few months or is that still holding up pretty well?

I'd say we think it is holding up pretty well. We don’t notice any changes in the climate or we would obviously certainly report it. So we think for our products and our demand it continues to be pretty strong.

Okay. Great, and if I could just one final question on the test side. Obviously, you have got the contract with the one customer, I think a lot of that shifts in the third quarter. Any update you could provide on additional visibility to bookings this year that might provide more of a foundation for that business heading into fiscal '16? Any change in the outlook there? Anything you can specifically comment on?

No, there is nothing I can really say. Our experience has been that those expectations get refined, obviously, as we get towards the end of the current year and we expect that same cycle to hold. So our expectation is we're comfortable, we're positive, it could be higher, it could be lower, but we are thinking that it could be in the similar range to where we are right now, but we will report that more firmly as soon as we know it.

Okay. Perfect. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Kevin Ciabattoni with KeyBanc. Please go ahead with your question.

Pete, you did a good job of foreseeing the question on aerospace margins I guess and I know that has been kind of volatile historically but this is the first quarter at least on an adjusted basis that there has been kind of below 16% in a couple of years at least looking at my model. Just wondering it seems like there has been a more consistent. Maybe wondering if there is anything particular this quarter and kind of what you expect through the back half of the year maybe?

I guess we would expect them to be more at historical norms. We do not see a fundamental changing of our margin profile. If anything -- the thing I talked about earlier with respect to competitive dynamics and foreign exchange, if that holds true in the long-term, we may face more pressure than we have historically. But I don't think there is anything kind of happening in our business right now that's fundamentally changing our margin profile. There is the -- I guess to the extent that we did, I keep coming back to this production problem, which isn't something I really expected to do well on a whole lot in this. But that's definitely one factor that drove our margins down a little bit, because we're incurring a lot of a cost and we're not shipping a lot of the product. So that's one issue. But I guess we would look at it and say that there is kind of a normal range of fluctuation. We would say that this quarter wasn't really out of that range. It's not something that we're stretching our heads about or concerned about at this point.

Kind of following up on the production issue that you mentioned, it looks like inventory was up may be 10% or so sequentially. Was that one of the factors there? Anything else you can kind of point to?

Well, that was one of the factors there. I think the bigger overall factor is our revenue expectation for this quarter. Well, we're going to go up to $200 million in shipments, that's our expectation. That's a substantial increase over where we've even been before. So there is a cycle that will have to happen in terms of building inventory that execute that sales plan. And that's a big driver in terms of inventories.

And then on Test Systems you did a nice job on the margins there. Obviously it looks like you guys have a pretty good handle on the cost structure at this point. Looking at that big booking you had in 4Q '14, obviously that didn't start shipping until late first quarter, early second quarter here. Any kind of color you can give us on the cadence, 3Q obviously expected to be big, how does that order starts to fade out? Just any color you can give in terms of timing?

Well, we're expecting majority of the remainder to be the Q3 and there could be some leakage into Q4. The way the revenue recognition works there it's kind of a phased recognition plan where the final chunk of the business is recognized when the hardware is installed and functioning and approved by the customer. So there is some scheduling issues that are little hard for us to predict, but majority of the weak Q3 and some of it historically we've experienced leaks a little bit in the Q4.

And then last one for me. Looking at the E&D expense line, historically you kind of point into -- you've been able to point to some big programs that drive that. I mean if you go back a couple of years it was the EPDS system on Lear, the starter generator. Any kind of big ticket items in E&D that you guys are working on right now?

That's a good question. I guess my reaction is that our E&D spend these days is a little bit less big ticket and a little bit more broad-based as our company has grown up and as we've got more areas to do development work in, so it's more dispersed. The big programs that you referenced that we invested in the past, a lot of those programs have not worked out exactly like we'd hoped. But the investments we made led to maturity of kind of, some of the architectures of our system and gives us kind of a modular library that we can pull from on new programs such that the investment in the new programs is substantially less than the investment in the old programs. So that's part why we have left big ticket programs today. But, so I guess the short answer is no, I can't give you any real big programs that are hit me off the top of my head here; it's more of a broad-based distribution of activities that we're involved in.

Thank you. And our next question comes from the line of JB Groh with D.A. Davidson. Please go ahead with your question.

I've just got a couple of left. You called out the SG&A related to Armstrong, because I was curious if there is any consolidation opportunity there or redundancies that can help you improve upon that?

No. I think we called those out just because that's our standard way of explaining the integration of new acquisition, not because we view it as a particular issue that we need to address.

Okay. So just better detail, okay. That's good. And then maybe you could talk about acquisition sort of appetite given what you've done in the past year or so? What you're still active and what you're looking forward to?

Yes, okay, Well, I think we certainly review as part of our job to stay involved in the acquisition effort. I think as we get bigger, we're shown more things by the industry, our financial profile and the cost of debt these days makes it something we could actively participate in. And our experience would be companies that we bought, there are pressures, but by and large we are really pleased with how it's doing. So yes, we're definitely active. On the other hand, I would say that we are not compulsive and we don't anticipate being compulsive. So we look for things that said we look for things that are of value. And the stars kind of need to lineup to make some things happen. And we had a real spurt a year-and-a-half ago and since then it's been a little bit lighter, but we are still -- we got a radar up and we still are involved in various processes that we're interested in.

And may be just one last one on kind of your structures related businesses, there has been a lot of talk of rate increases. Well, how does capacity utilization -- how does that mount? What are your thoughts on these 60 a month rates that's been out there?

We're all for it, the more the better. Yes. Capacity wise -- is that your question, can we handle the foreseeable demand?

Yes, is there any sort of CapEx attached to getting to that rate? I mean obviously, there will be some, but I'm curious as to how big it is on an incremental basis?

Yes. I don't think it's major. We've made a made a lot of investments, as you know, looking at our results from the past particularly, on Portland our PECO operation we kept them setup in our brand new facility and we brought a bunch of new equipment. And they're the ones probably -- they're quite closely tied to production rates in the commercial transport market. So we're in good shape there. We have certainly grown a lot in certain of our other operations, but we've taken our new space either by buying the space or renting the space. I don't think -- I can't really think of a -- of an operation where we're really constrained right now in terms of capacities. Obviously, when you win a new program you got to do a bunch of tooling and things like that, which tend to be capitalized and look like that capital goods. But I don't -- it's not a chronic issue that we're very worried about. We think we'd be happy to see production rates continue to rise.

Thank you. [Operator Instructions]. Our next question comes from the line of Dick Ryan with Dougherty & Company. Please go ahead with your question.

Great. Thanks for the follow-ups, Pete.

Okay.

A few subsidiary specific ones. AeroSat, how is the performance there? I mean your main customer there is talking about moving to different technology in 2016. Can you kind of give a sense of what your view is of that business giving that potential transition? And are there efforts that you're exploring with that antenna program?

Sure. We are -- well, you obviously can't speak for other companies, but we're aware of the press and we understand that and we will do our best to continue to service that account and as we do all of our customers. When we bought that business we viewed it as an early innings play, so to speak, on an emerging market; we still feel that way. There are lots of very good opportunities out there not only in the commercial transport market, but in other markets. And it's interesting. This whole connectivity situation is one that we're involved in in a number of our operations not just AeroSat, but Armstrong involved and AES is involved and our Ballard technology is involved. We are kind of all-in at this point, and we think there are interesting and meaningful long-term opportunities in that market. And we'd obviously, like to see everything go right in the short-term, it doesn't always go right in the short-term. But we're keeping our eye on the long-term. And we're certainly not in a situation where we're sitting here twiddling our thumbs and regretting decisions of the past.

Those longer-term opportunities are they -- you direct going taking advantage of those or partnering?

It's kind of the Wild West with there is bunch of opportunities that we think we can be involved in. Connectivity has in recent times largely revolved around IFD and passenger entertainment, but there is a whole world developing of other ways or other uses for connectivity and other techniques for connectivity. And we find ourselves even unintentionally in some cases being drawn into those kinds of opportunities with other customers. So it's a little hard to say at this point exactly what the architectures of one of those programs is going to look like. But what's interesting to me, if you look at the way our company has evolved and the capabilities that we have and you look at the way the industry is evolving and we think that we can play a meaningful role in a number of different ways going forward. So it's an area of emphasis, it's certainly not an area of de-emphasis.

One last one. PECO, has there been any decision on the 777 [indiscernible] in that program, has any decision been made there?

Not that we know. It's in play and we're -- certainly, we've been pursuing it for probably at least a year-and-a-half now. So we're expecting something will be kind of finalized probably by the end of the year, but it's really hard for us to know.

Okay. Great. Thanks, Pete.

Sure.

Our next question comes from the line of Josh Goldberg with G2 Investment. Please go ahead with your question.

Hey, guys. Just a couple quick ones. First, did I hear right, your bookings for aerospace for the first two quarters of this year are running about 14% higher than your bookings for the first two quarters than last year, is that correct?

That sounds about right. I don't have the last year ahead of -- in front of me.

Okay. Let's just call it --

That sounds what I've expected to be, yes.

Okay. Obviously, last year you had some acquisitions that helped you in terms of your bookings versus '13. But now, on almost like a like-for-like basis you're showing good growth, I know Armstrong helped a little bit. But my question is do you see the aerospace business, the power opportunity and some other opportunity of the lighting, do you see your company -- so obviously, because nothing changed since you last spoke to us has a 10% to 15% grower on the aerospace side? And I have a follow-up.

Yes. And that's -- we have certainly got some parts of our business that are growing at that rate. We've got some parts that are growing up a little bit smaller or less than that. So probably, the weighted average is a little bit less. But we are continuing to feel a lot of momentum with various programs. So we consider ourselves still actively growing in the aerospace world certainly.

Okay. No worries in terms of slowdown or some of the aftermarket companies talked about the slowdown here in the June quarter, not seeing any of that whatsoever?

Yes. No -- we -- I've heard the comments, I've seen the press. That's not been our experience. We're a little bit more narrowly focused than some companies that kind of are more focused generally on the aftermarket. So -- but our products that we offer, the aftermarket continue to see pretty good demand.

Got it. Then on the test side, obviously you have a nice operating profit based on the revenue on the test side. I think your profit was almost $9 million and $41 million, is that right?

That's right.

Okay. Do you feel comfortable that you might be able to get the similar amount of margin as you ramp into the September quarter on that part of the business as well?

Well, I think it's the age old situation where volume allows you to absorb overheads and incrementally contribute to the bottom-line. And so, to the extent that we expect third quarter revenues to be higher than second quarter, yes, I'd expect we'd be okay. But you go back to the first quarter and looks on the other way pretty quickly revenues are low. So over the long-term we're interested in a certain margin profile. On the short-term it can be -- it can swing quite a bit depending on the top-line.

But the point is that they're close to $200 million revenue number in September. You're not sacrificing profits, but to the contrary your margins have probably improved and your earnings will show some nice improvement even versus June?

I would expect the third quarter to be really impressive and strong quarter, yes, across the company.

Okay. Last one for me. When I look at your test business obviously, very focused along customer. And you talked about how you're now used to the sort of end of the year decision making. I guess at the end of your fiscal '14 results, you talked about your opportunity to expanding to other customers or maybe even to expand inside this customer little more. Can you just talk about what you've done the first six months this year to really go after the opportunity in test? Thanks so much.

Yes. It's a good question. And thank you for that. I -- you look at the results and you look some through our discussion and we do tend to talk a lot about one customer, who is a very large customer, an important customer to us right now. But there are -- there is a whole universe of other potential customers that we are interested in and discussing things with. And we think that -- and we also have a traditional market in our aerospace and defense test, which we have seeing signs of light after a pretty difficult spell here for the last six, seven years. We booked some orders, we've seen some backlog, we've had some I think pretty fruitful discussions with other major defense clients on roles we can play in their programs going forward. So I guess, we feel in the short-term we are obviously in the situation where we're in and we're going to deliver the schedules that our existing customers are giving us. But we're certainly not waiting around for good things to happen without any effort. We're out there beating the bushes and we have a number of prospects. And I guess I would say that we are encouraged that we have a skill set where we can go to a customer and if they're willing and they're open we can develop very fruitful and meaningful solutions to their problems. And we're also, during this last six, seven years, certainly stayed involved in our traditional aerospace and defense test market and that market is showing signs of life. And I think we're better positioned today than we ever have been to capitalize on that going forward. So we're hoping that there is some reward for that endurance that we've been through over the last few years. So again, it's a little early to predict where we are going to be next year. There are some real big questions we need to answer. But we're not sitting here with a big sense of panic. We're working hard and we're actually pretty pleased with the quarter we just put in. We're quite excited about the quarter we have coming up. And even though we are executing on a short-term, we're actively continuing to kind of peer into the future and see what we can do to position ourselves for whatever opportunities may come up. So long answer to a short question, but thanks for that.

Got you. Thanks so much.

Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please go ahead with your question.

Yes. Hi. Thank you for the follow-up. Just one quick one. Does the aerospace guidance assume any revenues from smart tray this year? And can you maybe just give quick update on where you stand with certification there?

There is not much in there, if any, for this year but we are involved in some pretty interesting engineering exercises and certification exercises. And we expect that we will have hardware flying on at least one and as many as three or four airplanes by the end of the year. So we continue to think that's an interesting little add on to our arsenal here. And the reception that we're getting in the market is pretty positive. So we will certainly talk about it when we can. I am expecting that -- it's a little bit of speculation, but I am thinking that we will have an opportunity that we can talk about in the market by the end of the year, not necessarily affecting our financials really heavily, but one we can announce.

Thank you. This concludes our question and answer session. I'd like to turn the floor back to Peter Gundermann for additional remark.

Okay. Thanks Brenda, and thanks everybody for your interest. We look forward to the third quarter and talking to you in a few months. Have a good day.

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