Astronics Corporation (ATRO) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to Astronics Corporation Fourth Quarter and Full Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I will now turn the conference over to Mr. Craig Mychajluk, Investor Relations for Astronics. Thank you, Mr. Mychajluk. You may now begin.

Yeah, thanks, Manny, and good morning, everyone. We appreciate your time today and your interest in Astronics. We have here, Peter Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Pete will go through his prepared remarks and then we'll open it up the call for questions-and-answers. You should have in hand a news release that crossed the wire this morning and that is available on our website at astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation, as well as during the Q&A portion of this teleconference. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause 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 Securities and Exchange Commission. You can find those documents both at our website and at sec.gov. So with that, let me turn it over to Pete to begin. Pete?

Thanks, Craig and good morning everybody. Thanks for tuning in. We're going to first talk about Q4, which was a little bit weaker than we wanted, but generally consistent with both the preceding quarter and our comparator quarter. We'll then do a post-mortem on 2016, now that it's over, which in general was fine with us. We're ready to move on to 2017, which will be our third topic. And give some initial colors to what we expect to unfold over the course of the year. So starting with the quarter, the fourth quarter revenue was $154 million, slightly below our comparator quarter of the fourth quarter of 2015, and pretty much even sequentially with the third quarter of 2016. Aero sales were $128 million, up from Q3 but still one of our weaker quarters in 2016. Test sales were $26 million, down from $30 million in the third quarter but better than the first couple quarters of the year when we were in the $21 million to $22 million range. Bottom line results were also a little bit lighter than we would have liked, net income was $9.9 million, 6.4% of sales, diluted earnings per share of $0.33, down from $0.46 in 2015. If you look at the tax line that largely explains the differences between the fourth quarter 2016 and the fourth quarter of 2015 with a very light tax rate in 2015 and a much more normal tax rate in 2016. Engineering and development expense for the quarter was $22.7 million, 14.7% of sales, down slightly from last year and consistent with recent quarters. Bookings were little light also at $137 million, about the same as Q3. Aerospace was $113.8 million and Test was $23 million, book-to-bill of 0.89. Backlog at the end of the quarter and the end of the year was $258 million. Moving from the quarter to the year, revenue for the year ended up being at $633 million, down 8.5% from $692 million in 2015. 2016 as a year marks the first time since 2003 where we recorded a sequential decline in sales from one year to the next. The drop of $59 million can largely be explained by two events or situations. One is a reduction in our Semiconductor Test product line, which was $54 million, again $54 million on a total decline of $59 million. And our Avionics product line declined $23 million. So those two together the Semi-test and the Avionics product line explains the decline in revenues of $77 million. The rest of the business cumulatively fought some of that back, so that instead of a $77 million decline, we ended up at $59 million. Net income, jumping to the bottom line, for the year was $48.4 million, down from $67 million in 2015. Our net income margin was 7.6% of sales, a $1.61 per diluted share versus $2.22 in 2015. The margin decline was generally driven by this 1% drop in aerospace operating profit but a substantial drop in Test that you might expect looking at the drop in revenue. 2016 bookings ended up at $617 million, roughly equal to sales with the book-to-bill of 0.97. This despite a weak bookings quarter in Q3 and Q4. You might remember Q2 was one of our best booking quarters ever, and Q1 was pretty strong also. So if you take it as a moving four quarter average, roughly worked out to be in the same neighborhood as sales. And again backlog going into 2017 was $258 million. Looking at our segments starting with aerospace, year-to-date revenues were $534 million, about 84% of our consolidated total and down marginally 2.9% compared to $550 million in 2015. That decline of $15.7 million was again more than explained by Avionics which was down $23 million for the year. Operating profit turned out to be $78 million, 14.6% of sales down from $85 million or 15.5% of sales in 2015. Sales by market, looking at the table in the back of the press release, commercial transports were $435 million, of our sales 69% of total, down 4.4%, again mostly driven by Avionics in that case. Military turned out to be $55 million, 8.6% of our total sales and up 26% largely driven by some military missile products that we have. Business Jet sales turned out to be $25 million, only 4% of sales and down 22% from 2015, largely driven by in-flight entertainment systems that we make for VVIP airplanes. So a lot of movement in our Aerospace business. If you cut it a different way and look at it by product lines, our electrical power and motion product line which includes our In-Seat power franchise was $289 million, 45% of our total revenue, and up 3% for the year. Lighting and safety was a $157 million, about flat with 2015 and 25% of our total sales. Avionics, this is the one again that was the big mover for aerospace, $33 million in sales in 2016, down 42% over 2015, and making up 5.2% of our total. And finally our system certification product lines $16.5 million, down 22%, only 2.6% of our total sales. Moving to Test, revenues in the fourth quarter were $26 million, up 25% over the comparative period of the fourth quarter of 2015. Operating profit of $2 million, 7.6% of sales. Year-to-date, our Test segment reported revenues just shy of $100 million. That’s down 30% from $142 million in 2015, a decline in semiconductor Test sales was somewhat offset by an increase in our traditional Aerospace and Defense test sales. Bookings year-to-date where $76 million, book-to-bill with 0.77. The news here is, is that obviously in 2016 we did not record a substantial semiconductor test orders, but to the extent we had semiconductor sales that would erode our backlog. Our backlog at the end of the year for Test was $38.9 million. Our balance sheet we consider very healthy, cash of $18 million at the end of the year, a total debt of a $148 million for net-debt of a $130 million. Year-to-date on our share repurchase plan by the end of the year we bought 523,000 shares at $17.6 million. The total authorization was for $50 million. So we have $33 million remaining. And finally looking forward, talking about 2017 we are issuing initial guidance for 2017 of $640 million to $720 million. We expect our Aerospace segment to be in the $560 million to $600 million range. The midpoint there has us growing at 8.6% over 2016. Our Test business we're coming out with initial revenue guidance of $80 million to $120 million. So that's a pretty wide range and it reflects a number of open issues that we have in the market that collectively could throw us off the midpoint pretty strongly one way or the other. We're putting a plus or minus 20% on that midpoint range. So we could very easily -- and our goal is to be towards the high end of that range. $120 million would be an increase of 20% over 2016. But it's possible if everything were to go the wrong way we end up at other end and that's a negative 20%, down around $80 million. We will report on those -- on those orders as they develop, as quickly as we can but today, we think it's prudent to take a pretty wide range. When you look at the year, we're expecting the year to grow in momentum, based on the scheduling of programs as we see it. We expect the first quarter to look quite a bit like the third quarter and fourth quarter of 2016 and we expect the second quarter and third quarter to represent a step up and the fourth quarter represent another step up to make our budgeted numbers. So it'll be a year of growing momentum, if everything works to plan. I think that is my -- that concludes my prepared remarks. Manny if you want to open up the lines for question we'll take them now.

[Operator Instructions] Our first question is from Jonathan Tanwanteng of CJS Securities.

Good morning, Pete. Thank you for taking my questions.

How are you doing, Jon?

Can you talk about, what gives you the condolence in the aerospace growth now looking, kind of the sequential step up you're going to see in the next couple of quarters or over the year? I think you mentioned in the press release on past several calls that, the pipeline, design activity looked good? But what's actually going to break the logjam in terms of spending from your customers?

Well, I’d say there are two things that are going to happen. One thing is kind of more of the same. We have a number of product lines that are doing very well, are very well positioned and we expect those product lines to continue their performance going into the New Year. Nothing has changed in the kind of the feedback or the orientation that we get from our customers, which might sound a little surprising, given the lighter than average bookings we've had for the Q3 and Q4, but we think that those -- that waiting is more driven by just customer scheduling than anything else, there is nothing systematic changing. So kind of more the same from the good parts of the product -- product lines and then the part that we've had trouble with for example, the incentive systems we've invested pretty heavily in a number of new products and we continue to get very good feedback from the industry. And we're excited about where that may go. So we're in the final stages of the development and certification processes, and we would expect to start recording revenue there towards the end of the first quarter beginning of the second quarter. And if that all goes to plan, that will we think go a long way towards driving us towards our growth expectations, our growth initiatives. So, I would say those are the two things.

Okay, great. And then…

On the aerospace side.

Okay. Got you. And then just again on the aerospace segment, at a higher level we've seen some reports that airlines seem to be more inclined to let the customers bring the screen on planes these days. How does a plane with no screens but with in-seat power compare to a plane with a full in-flight entertainment system compared to each other in terms of benefits for you guys?

Well, I guess our standard position is that we think power is important and we think power needs to be there one way or the other. I think there is a -- the different airlines will have different perspectives on whether seat-back IFE is important. There certainly is a prominent view and there are some in our company that share this, that this - on wide-body long haul airplanes, seatback IFE will continue to be quite prevalent. It appears that the trends in the industry in the narrow-body airplanes are going the other way, where maybe seatback IFE isn’t necessary as long as there is streaming content or Wi-Fi access and people can use their personal devices. Either way, we think power is needed and we're seeing those trends workout. There certainly are outliers; of course there are wide-body operators who choose the streaming content. Maybe that will increase in the future we don’t know and there are narrow-body operators that like to offer a higher amenity suite to their passengers and that will often include seat-back IFE and that’s fine too. We just think power's important either way.

Okay. Great and just moving on to the Test segment outlook, what are you guys assuming in terms of legacy or new customers actually at the high-end of the range and at the low-end and what could margins look like at those two extremes?

Well the margins can be highly variable, I think we've demonstrated that over the last year, year and a half. We have been and we continue to be on a march to develop a set of technologies, a set of capabilities that we think are of interest and are appealing to both the traditional Aerospace and Defense Test markets, also to the Semiconductor market. And we have a number of programs in process in both markets that we think are pretty exciting and we think could be good. On the aerospace and defense side, there is a new Sherriff in town in the Whitehouse, and we think that that probably will mean good things for that market in general and for us, because as we look around after eight years of the last Sherriff, we think we're one of the better positioned, better equipped companies to compete in that arena. And we think on the semiconductor side that we continue to work with a number of customers on a number of programs. They’re promising. We think they’re good. It’s a question of timing. So we're very confident we're going to have good news there, it’s a question of when and a question of how big. So 2017 has a defined end, we're already in the middle of February. So the question really for both sides will be -- will these new programs be kind of launched in time to have substantial impacts for the year. So I guess, the way I would answer your question is we think we've got aligned on some good opportunities, we think they’re going to happen, it’s a question of when and a question of how much they’re going to help 2017.

Okay. Great and one final on just regarding consolidation in the industry, especially with Zodiac which is someone you do work on a regular basis I believe, just any high level thoughts on how that might impact to you either benefit or hurt you?

Zodiac and B/E both - they’re both important I guess I call them contenders, they’re not really competitors of ours, they’re more customers than anything, we do work with both of them. We work closely with them for our airline customers, lot of our products bid on their products even though they’re not necessary our customer for that. So they’re important entities and I guess our -- we're kind of in a wait and see. We don’t see any obvious impact. We expect that that they were both purchased, because Rock McCallums [ph] in the one case and Saffron on the other want to have substantial roles in the cabin, they’ve got them now and I think we're going to be the partners that we've been in the past, and I don’t really see it having much of an impact on us.

Great. Thank you for the color.

Sure.

Thank you. The next question is from Ken Herbert of Canaccord. Please go ahead.

Hi, good morning, Pete and Dave.

Hey Ken.

Hey, Pete I just wanted to dig a little deeper into aerospace, if you look at the midpoint of the guidance and the sort of implied $45 million in growth there. Based on your comments is it fair to say that the majority of that to the midpoint would be sort of a recovery or sales in the avionics products and maybe the low point of the guidance since applies, sort of flat to up slightly avionics product sales, is that’s the way to think about the guidance?

That’s one possible set of outcomes. Yes. But there is a - there are bunch of moving parts obviously and a bunch of possible outcomes, but yeah, we are thinking that our avionics product line will make up a good chunk of that increase.

Okay, and I guess than the subsequent question to that would be, when you look at the range on the again the aerospace guidance for the full year, what would you identify as maybe one or two of the other either product lines or markets where you see perhaps the most variability or maybe what help you get to the upper end of guidance for the full year?

I am not sure, I would see they are major risk items, I’d say it’s certainly be the cumulative effect of a bunch a little things that could happen. There are kind of major programs that get scheduled and then sometimes moved. So something like that could affect us. The 777 product rate is important to us. So to the extent of that moves unexpectedly that could be a little bit of a problem or a little bit of a challenge for us. But I think overall we would expect the rest of that business to be fairly consistent and fairly predictable and I think on a percentage basis it’s a relatively narrow range when you back out as you suggested the expected growth from the avionic side.

Okay, okay, that’s helpful. And then gross margins in the quarter were some of the lowest you have seen in quite a while. Was there anything unique going on there? Was that really just sort of a combination of the negative mix with the mix headwinds you faced across the year?

Yeah, we'd chalk it up more to the noise than anything else.

Okay. And same thing like, you know in aerospace and operating margins again sort of a weaker second half and I know mix and the volume was a part of that. What should we assume or what’s a good starting point to think about 2017, are you back to maybe the '15 to '16 range for aerospace or what’s your expectation from an operating margin standpoint?

I would expect -- I just would expect the first half of the year which would be qualitatively similar to the second half of last year to be kind of what you see, is what you get, I would expect things to improve in the second half of the year, when we expect the volume to kick up.

Okay. Okay that’s helpful. And then you obviously have cash remaining left on the buyback authorization, you have been -- you could argue, quieter than your historical pattern in terms of M&A. Can you just comment on what you’re maybe seeing in terms of the M&A pipeline, maybe any change in your thinking around capital deployment considering what’s left on the authorization and maybe what’s out there in terms of the M&A pipeline?

Well, let me answer the second part first. We -- the way we look at our authorization is that continues to -- is consistent with we have looked at it since we put in place. And you might recall a year ago we went through some gyrations with some anticipated business that kind of fell through and our stock reacted badly to that. And we created the authorization in part to make sure that if that happened -- it was to prevent that from happening, again basically, because we thought that was unnecessary at that time. And we have used it on occasion when we have thought that the stock kind of gets in that territory and we continue to think the same way about that authorization. We’re not -- we do not feel like we create cash in order to buyback our shares. That’s not been our objective. Our objective has been and continues to be that we want to do what we can in terms of strategic investments in our business to make our company bigger and better in the future, than it's been in the past. So that continues to be our priority that we -- as you know do tend to invest pretty heavily in our own product development efforts to get there. And we continue to do that. And we continue to be active in the merger and acquisition area. You're right, you're noting that we have been quieter there over the last few years; at least it looks that way from the outside. I'll tell you that from the inside we do actually spend quite a bit of time and quite a bit of effort on this front. And I think, because we are bigger than what we used to be and because we are pretty conservatively financed we are being shown more and more opportunities. It actually may be one of the things that could play into our favor to the earlier question from Jon, I think about the impact of some of the consolidation in our space. It could be that we get shown more opportunities, not less because there are fewer buyers maybe in our chosen markets. We'll see how that works out. That’s obviously up to the new owners. But we are seeing a pretty steady stream and we do spend a lot of time. So it's reasonable to think that if the right thing comes along and it's at the right value proposition for us we'll be ready to move.

Okay that's helpful. And then just finally one final question for Dave. Can you just comment on where free cash flow ended 2016 and expectations for free cash flow in 2017?

Sure we ended up in 2016 roughly with around $50 million in free cash flow, if you look at our EBITDA. And you take away for cash taxes and CapEx. We see the CapEx in 2016 as being a little bit higher than 2016. We had a couple of smaller things that we were thinking we're going to do in 2016 that were going to slide into 2017. So we think that the CapEx will go up a little, not a lot, $4 million $5 million, something like that. And I think our tax rate is going to remain in that 30% range, so you can put those into your models and see where the free cash flow ends up.

Okay. So no, we shouldn't make any assumptions around any material changes in working capital in 2017?

No, I hope it gets better. I think that we have some receivables that have become a little bit longer in the tooth, on a couple of military programs that I think we're going to get the final billings out later in the first quarter this year, that will help that a little bit probably close to the about $10 million there. Other than that I think the working capital is pretty consistent with what you've seen with the exception of those roughly $10 million of receivables that I think will pick up at the end of the first quarter.

Okay, great. Thank you very much.

Thank you. The next question is from Dick Ryan of Dougherty & Company. Please go ahead.

Thank you. Say Pete under the electric power and motion umbrella can you talk specifically on what NC Power did in Q4 and what you're looking at for that segment in 2017?

Q4 compared to Q4 of 2015 was actually pretty flat. Year-to-date it was up in the order of 3% or so, which was a lower growth rate than we've seen in a while. We -- I guess some color on that we saw a couple of major programs slide. Some of them were actually broadcasted in the industry but we think that we continue to be pretty well positioned from a competitive standpoint, nothing's changed. And we think there is pretty strong demand continuing. So but growth rate was definitely a little bit lighter than we seen in recent years.

So the weakness in the remaining part of electric power was out in the PGA side?

Sea power was definitely down a little bit, or sea motion, I guess I should say and our other power businesses were relatively flat.

Okay, so I think the competitive landscape hasn't changed and I think you always say it’s either side of kind of 50:50 retrofit versus new build. Can you give a perspective of how you think the remaining market is for wide body and narrow body deployment?

I guess I wouldn’t say there is anything major strange. I think we’ve been on a trend where we’re seeing narrow bodies increasing and we continue to see that. There’s more narrow body demand today than it was two years ago for sure. Wide body is relatively mature but [indiscernible]. So it’s one of those situations where we’re more and more on every airplane that gets built and we’re more and more nose to tail on every airplane that gets built in the short term with A-384 slowing down and 777 slowing down there's probably a little bit less coming up off the production line. But in general that reduction's been more than compensated for by increased usage in narrow body operations.

Okay, and any comments on the issues that Panasonic maybe facing how that may or may not impact you guys?

Well, we certainly can’t talk for them. We don’t really know the situation there. We feel sorry for some of the people involved because we’ve known them for a long time and we obviously have been a big partner of Panasonic and we are through many parts of our business at this point. So we’re watching and waiting to see what we might do to help them in their situation. And it obvious that you'd prefer not to have one year bigger customers go through something like that. But other than that we’re not involved.

Okay, and just trying to connect the dots on your comments on the Test side, looking at the numbers in your commentary, I mean if you look at Aero Test that ended the year at $60 some million was up 20%, you said that’s more of the same for next year. That puts that kind of in the 70, low $70 million range, which isn’t that far from the $80 million floor guidance you gave. Semi Test were $38 million. In your comments of multiple programs and a rebound in semi would suggest that you’d be looking for more than $8 million in that business, just to get to the low end of the guidance. So I guess I'm trying to kind of look at the numbers and weigh your commentary, can you give us some further comments on test, and maybe looking at Apple how much of the $38 million did they represent and are you seeing flow from other customers yet?

Okay, a bunch of questions there. The one thing that you got to remember, maybe you’re not aware of or not thinking about is, a fair amount of our revenue, when we sell equipment is deferred to cover warranty expense over the first couple of years. So some of the revenue in 2016 was based on equipment sales in 2015 and 2014. That’s going to drop off. So it’s not just building from that base, that, that base is going to drop off unless we get new business to replace it now. That help you understand the dynamic and the potential for the lower floor. As far as customers go we're just unable to talk about them other than to say -- talk about them specifically other than to say that we think of customers, but we also think of programs and I think programs is probably a little bit more useful because it’s the programs that yield the potential, doesn’t really matter, if they are the same customer or different customers. And we do certainly have multiple programs that we’re pursuing and we think they’re all promising and they all have very -- I guess I’d say from our perspective, very productive thoughtful and encouraging joint efforts, joint studies that go to prove out the technology and to basically establish the value proposition. And once that value proposition is established, which represents a pretty substantial investment on the part of both us and our customer. We both have to -- it's a collective effort to get -- to prove the value in the technology. Then of course there is the funding cycle and the production cycle and a lot of those things are a little bit outside our control and we can obviously control how quickly we respond to request. We can control how quickly and how effectively we can cooperate. But there is a level of initiative and a level of scheduling that comes from the customer's side that we can't necessarily influence. So that's where a lot of the lack of predictability gets and I guess our perspective is that it continues to be very promising. It's a little bit slower than we thought, it would be no doubt. But we're still hopeful that there is upside, lot of upside potential yet in 2017. It's February, we're going to announce first quarter results in early May and if we get to early May and we don't have anything exciting to talk about at that point then it's going to start to look like, the window on 2017 is going to get a little bit darker, that would be bad news. We're hoping we don't get there. But that's kind of the timing we're talking about.

Sure. One last, has the exclusive with Apple dropped off?

Well, we pretty much every project we have with customers involves the exchange of what they would consider to be proprietary data, and proprietary practices. And one of the things that I think we do really well is we expect that proprietary information. So to that extent, when we work with the customer, whether it would be Apple or anyone else, there are certain aspects of what we do with them, that will be proprietary and confidential forever. I think what you are referring to is a contract cause that we had a while ago that was maybe a little bit different than what we would normally consider to be useful, both for them and for us. And we were able to work that through and it's I think mutually satisfactory at this point. It's not restricting us from what we think, we need to do in the market and yet it protects what they feel is important about their technology. And that's where you get to a win-win situation on these kinds of things. So no, that's not a significant restriction in our efforts these days.

Okay, great. Thanks, Pete.

Sure.

Thank you. The next question is from Michael Ciarmoli of SunTrust. Please go ahead.

Hey, good morning guys. Thanks for taking my questions.

Sure thanks.

I am just still having a little bit of trouble, I guess with the aerospace guidance. And you kind of talked about some of the wide body pressures. Did you guys have a good sense or good visibility into some of the big customers, Panasonic, Talus, Rockwell, what their inventory levels are right now? Or do you think there could be some destocking as those guys prep for five per month on the 777, certainly A380 deferrals and I know you got some of the narrow bodies ramping. But do you guys have that sense that they are sort of stocked correctly right now?

I can't -- I don’t know if we know enough to answer that question, Michael. I think those -- there is a certain amount of maneuvering going on in the industry between the wide body, narrow body but also just in competition between the feedback IFE suppliers against the connectivity supplier that are kind of moving into the space. So it's a little bit different than it used to be in terms of competitive pressures for those customers of ours, at their level. And how they respond to that is, is a little bit beyond what we do. We standby basically to help out as best we can with whatever they want to accomplish. But your question specifically about their inventory levels, I don’t think we can answer that. I don't think we know that. I think sometimes they ask us to inventory, to hold certain inventory for them and to do direct shipping. And I don’t -- I can’t tell you that we have seen significant changes in those practices. So nothing really noteworthy to talk about there. Otherwise we -- if it would have helped to explain anything in our financials we would have kind of done that proactively. But beyond that, we would just be speculating. I don’t thing we are knowledgeable enough on this particular issue to speculate.

Got it. And even I mean looking at the uptick, I know it sounds like first quarter will be kind of consistent here, but you’re going to have to get to a fairly steep run rate, you know the booking trends haven’t been great. I mean are you seeing any change in the bookings so far this quarter? We’re basically half way through, have you seen any kind of directional change or pickup in the bookings on the commercial transport side, or the broader aerospace segment?

Yeah, I don’t know if we have prepared that look for this call. So I am not sure we can talk about that. But you are right. We are going to have to see things pickup to make the second half fit our forecast. And I am sure that will be active part of our discussion when we talk about the end of the first quarter. But as of today we are pretty comfortable with those expectations.

Okay, is there anything in the pipeline that you sense is getting close on maybe the retrofit side, I mean United was talking pretty aggressively about used aircraft the other day. Do you kind of get the sense that maybe you see a pickup in the retrofit side that could offset some of the wide body OE weakness?

Yeah, I don’t think I meant to talk about the wide body as a major concern of ours. I mean we put a lot of product on the 777, not just in-seat power but passenger servicing and some things like that. So I was talking about that in the context of things that can go down a little here or up a little over there. Our business compared to a lot of aerospace companies has a heavy aftermarket element to it. We don’t see that being weak really. We see it being a pretty strong part of our business and continuing there. And we would assume to have growth in the second half. I guess to the - to get to your question, to the extent that OE business drops off, we would expect to be -- if we’re going to do better overall, we’re going to have to do a quite a bit better in the aftermarket. I mean one thing to think about too, most of our antenna ambitions at least to begin with will be aftermarket-related, although we feel there are some exciting OE opportunities in that environment also. But to begin with, we would expect that to be largely an aftermarket pursuit.

Okay.

Mike, I’ll color -- piece that a little bit just to help you guys in your modeling a little bit. We usually don’t like to get into kind of the talking about quarterly breakouts. But I think in this case clearly we expect our first quarter to be much lighter, the lightest quarter of the year for us. So down similar to where we were in the fourth quarter here in terms of revenue anyways.

Okay. And then I mean Pete you just said that you’ve got significant content on that 777. I mean that’s going to be a pretty tough comp, just on that platform, you know would them going down to five per month in the back half for the year. So it sounds like you have got enough potential offset to negate that headwind if you would?

Yeah, we have got their stated plans build into our plans.

Okay.

I think my comment earlier was if there is an unexpected cut further, because we built parts well in advance of when they build plans. So we will start to see all that before the end of the year. They would a cut say for example the middle of 2018 or something.

Okay. And then just the last one, it was brought up earlier, just on operating margins for aerospace I mean, you know they have been trending down maybe since 2011, I think is there - can we see these margins get back up into 17%, 18%, is there anything kind of structurally keeping them lower at this point? Maybe if you can give any color there.

I think the biggest challenge we have margin wise, and the biggest opportunity for improvement that would be to fix those parts of our business that are real sore spots. The way we work, we don’t have one huge factory where we do all these different product lines. We have got a number of different operating entities and when they're all operating well, then we have tremendous margin potential. When one or two of them stumble and struggle then we can get in trouble pretty quickly. And I think that's most of what we're seeing. It is a competitive world. We do have competitive pressures here and there and those can at times influence margins also. But I would say the biggest opportunity for us and the things that's kind of baked into our plan here especially in the second half of the year would be to get some of those softer operations back on their feet. And that should have a good positive impact on our margins.

Got it, perfect. Thanks a lot guys.

Sure thing.

Thank you. The next question is from George Godfrey of C.L. King. Please go ahead.

Thank you. Good morning, Peter and Dave, how are you today.

Doing well, George, how are you?

Fine. thank you. Wanted to just roll the clock back a year and if I look at the aerospace guidance that was provided at the beginning of the year, the midpoint was 594 and today the finished result is 534. So if we go back and look at that $60 million delta relative to the midpoint with the benefit of hindsight how much of that was in your control, meaning having the right product, the right quantity, power whatever, versus customers just not demanding products. And so therefore that wasn't in your control.

While it was a little bit of both. We certainly did not expect the drop off in some of the weak parts of our business that we got. And we've talked about those a lot on this call. So that's a big part of it. Some of the other parts though, to address your question it is lower growth rates of demand on the part of some of our customers. We've fallen into this pattern like the rest of the industry for example of expecting business jet unit volumes to increase. I mean every year there is a prediction of that and every year it seems like at some point early in the year the industry decides well not this year maybe next year. So there was some of that. I think some of our bigger product lines in-seat power, we talked about 3.5% growth rate or something over the last year, that's well off of where we've been, and it's a big number. So you take that and you calculate what could have been or what usually has been in the 12% to 15% growth rates, and then you pretty quickly make up that delta on the aerospace side. So it's a combination of the two.

Okay, so where I was going with this, if I look at the midpoint of your guidance for this year within that aerospace segment as a percentage of what you can control and cannot control. Would you view it the same to get to that midpoint that going into 2017 is similar to 2016.

No, I would like to think that we're one year older and one year smarter. I think we're a little bit more cautious. And I guess I'd look at it across the board. A year -- I try not to think about this too much. But we had some contracts under development, or actually pretty much approved negotiations signed off on major programs in the Test side of our business that basically evaporated. And so that taught us a lesson. I think we've historically expected and achieved higher growth rate in some of our products that last year didn't work out. So this year even though we seemed to sense strong demand and strong enthusiasm on the part of our customers, I think we're little bit more reluctant to bake those things into the numbers. And we last year thought we're going to be able to claw our way out of our Antenna situation a little bit more quickly than we have. So we've got those dialed in at I think a more conservative rate. So I'd like to think that there is a higher quality to our projected growth rate this year than there was last year at this time.

Got it, great. And then the second question is just looking at test business at the extremes if I take out the aerospace and the bench test, that call it $73 million with the 20% growth. And then I look at the variability on the forecast and assign that all the semiconductor going from $7 million to $47 million at the range of those extremes. And I don't want to put words in your mouth but what I heard is, I feel pretty confident I can get towards the $47 million like number over a period of time. It just may not be within the quarters of the calendar year. It could happen, may not happen but as far the volume of business eventually flowing to us I feel pretty good about that. Is that what I should think away from that?

Yeah, I'm not sure I followed some of the numbers you’re producing there but yes, I think we feel like we’re on a good track and we feel like there’s very good potential. We feel like customers there are pretty enthusiastic. It’s a question of when those programs are going to kind of hit the ramp stage. So we’re hoping that we get a good weighing in 2017 but it will be the second half of 2017 just based on how the calendar is going. And again I guess in advance I guess I would tell you that if it doesn’t happen in 2017, if we are talking again in another quarter and it’s still kind of a little bit loosy-goosy out there a little bit, when I tell you I think we got a pretty exciting 2018 that’s going to be one of those situations but at this point from the best we can tell, we got a good shot at getting a meaningful portion in 2017 and that’s what we’re shooting for.

Got it and you just answered the question the way that I tried to frame it. And then just on the last housekeeping item, how many weeks or months have you been selling the test products to customer or marketing I shouldn’t say selling but marketing and pushing the product, now that you've worked the Apple agreement. How many months have you been able to talk more freely with perspective customers about the product?

I got to think about that. It's got to be close to a year, it was a while ago. But I don’t have that in front of me. But I really don’t think that was a -- that’s not a material issue in our business again. We -- for a long time we’re doing a lot of work for that customer and we were basically standing on our heads and doing whatever we had to do, and agreement or no agreement, limitation or no limitation we were doing everything we could just to keep that program and that customer happy and coming back and we were affective at that I think it’s worked pretty well. But it’s never been the situation where we had some kind of legal situation either because of our own capacity or because of whatever. That’s not really been an excuse for how we run our business. I think that’s been a cooperative relationship and I think we have a good sense of what’s important to them and what’s important to us and I think everybody is okay with it.

Understood. Thank you very much for taking my questions.

Sure thanks.

Thank you. The next question is from Matt McGeary of Eagle Asset Management. Please go ahead.

Hi, sort of a couple quick ones and I'm sorry if I missed. I got in late. Do you know what your defense -- what your exposure is from a revenue perspective to the defense ministry?

Well, that’s on the tables on some of our press releases. So if you go back to the page eight, there’s basically a military aircraft and there’s an aerospace and defense test line and if you add those two percentages of - they’re 8% and 10% so 18%, 20% or so. That’s -- we’ve been there for quite a while.

All right and just on the in-seat power could you remind me what the new build versus the retrofit percentages are roughly?

Working numbers are roughly 50:50 with the caveat that we have major customers are IFE customers for example, where we ship them product and we don’t necessarily know where they send it. We don’t know if they’re sending it to Seattle for a new build line fit or they are sending it to wherever, Singapore, China, whatever. So we can’t really track it and that’s a big chunk of our sales. But for working assumptions, 50:50 I think is probably a pretty good assumption. It could be 60:40 one way or the other in any period you’re looking at depending on how the programs are working but one way or the other in any period you’re looking at depending on how the programs are working, but 50-50 is probably as good as anything.

Perfect. And I know you mentioned in the past -- you made some guesstimates on sort of the penetration rate on the retrofit side, do you have any update on kind of what you think that looks like at this point?

I -- we would say, probably hasn’t changed much, over the last six months or year. Wide body is a more mature market, we probably say the - on a per seat basis, it's somewhere in the 50%, 60% range of available seats. Now we discount some seats, older airplanes closer to retirement, generally don’t get the same level of investment or updating that new airplanes do. So there is some subjectivity in deciding what’s the available market, as the narrow-body side is much newer, much younger and much lower penetration rate. We’d say its somewhere [indiscernible] 20% worldwide on a per seat basis.

Okay. All right, great and just lastly, you mentioned, you talked earlier about sort of some of the softer parts of the business, impacting our margins in negative way, which parts of the business is that and sort of how are you adjusting that and sort of what is the timing look like and you think about those things in terms of potential or some of these potential divestitures, possibly or is it just a sort of cyclical like?

Well, we have a bit of a portfolio. I don’t think we've ever really sold anything.

No so, so, not in 15…

Yeah. Not in quite a while. So we're not active sellers of anything. The major weak parts of the business are, as we talked about throughout the call the semiconductor test area. This point is between programs and the -- and our avionics product line has a couple of challenges on the VVIP side and on -- which is a function of where that industry is right now, geopolitically and economically, but also the antenna system side. So we've got, I think effective plans underway for all those and we're working them aggressively and we're expecting substantial turnaround this year for both of those. So yeah it's getting a big part of our investment. It’s got a big part of our plans. Are we looking to sell them though, I guess just from whatever its worth, I’m a pretty firm believer that it’s pretty much impossible to expect that everything is going to be going great ever, all at the same time. There is always going to be challenges in a company and one of the things that you got to do and one of the things I think we do is try to identify those areas and make an adequate investment. We don’t try to strangle those businesses to the point where they can’t do anything unless we think the market potential's like next to nothing, which in neither, both these cases, I just mentioned, I think we think that there is very legitimate demand and it’s a long game, what’s weak today can be strong tomorrow and that’s what we're trying to do.

Thank you. The next question is from Scott Louis of Louis Capital Management. Please go ahead.

Thanks, good morning. Pete, good morning Dave.

Hey, Scott.

Just a quick question on antenna system, the new business jet product, could you talk at all about what [indiscernible] items there are on that program? And then just purely regulatory getting us to these, or are other things that might affect, when you can kind of ramp-up that product?

Well, it kind of boils down to three big gates, I guess I would say. And I’m kind of thinking off the top of my head here. One of them is, we got to make sure the products are worthy and ready to go. And that’s certainly has been a challenge. These are complex systems with lots of -- literally lots of moving parts, and making sure that there are all kind of cemented and final and airworthy, I guess. You’re a pilot, you understand a lot of this, but airplanes go through a ridiculously harsh environment up there and we need to make sure that this rather dedicate looking piece of equipment, that sits up on the tail of an airplane is ready to go, when we put it up there and bolt it down. It’s not cheap. Customers expect it to work. So that’s number one. Number two, I would say is getting an STC, like you ask for each and every possible installation. So you can’t just bolt anything you want on an airplane like you might a car or some land vehicle. Airplanes are a different beast. So the way. It's installed, the way it's wired, the way it's reinforced has to be basically approved and solidly established by the FAA. The third thing is we need to make sure that our system works well with our partner, in this case Panasonic. We're doing the hardware. They're doing the content system network around the world. And so we need to make sure, they need to make sure that our antenna works well into their -- in their system. So they can't do that job until our antenna is kind of ready to go. So it's a little bit of a push-pull you go, I go kind of process. But I would tell you today we're really making pretty good progress on all three of those fronts, the preliminary -- the design is pretty much done, some tweaks here and there. We do have an STC [ph] the first one that's rolled out and the testing on the Panasonic network has been positive. And I think the overall response has been great. I think on our last call I talked about recently having been at the MBAA [ph] show and getting a sense for customer enthusiasm for this product. We think it's very positive and we think that it may be positive enough even though we're gearing it towards aftermarket installations at first. It may be strong enough from a kind of a competitive option standpoint to be attractive to certain OEM markets. So we're addressing those also again with our partners at Panasonic. So we're thinking that this is a promising product and a promising technology and we're looking forward to getting its feel [ph] and talking more about it in the future.

Okay. Thanks and then just following up on a very early question, just want to make sure when -- we're looking at a seat and one seat has just in-seat power, another has in-seat power plus a seat back IFE from a supplier that you work with, are you agnostic, in other words you're shipped out the same either way?

There will be slight differences but they're not different enough to really make us favor one program or the other. I think in general that the suppliers that do two jobs that, that both provide passenger, power but also IFE's seat back power tend to be a little bit bigger, probably a little bit more of an involved system there. But it's the same basic architecture and the same basic technology, and from a kind of from a bottom line margin -- excuse me from a bottom line margin perspective they're essentially equal. So we don't differentiate it a whole lot there. Again the most important thing for us is that passengers want power. We're here to help airlines give it to them and it maybe that we end up in these situations because we work, both with the airlines and with the IFE people that we can be on different ends of a program. They may decide to go seatback, then they may decide not to. If they go seatback, I guess I would say in that environment, to us we're going to put our best foot forward, both branches and we just, we would lie one of them to win but does it make a huge difference to us, which way it goes, not really.

Thank you. At this time I would like to turn the conference back over to management for closing remarks.

No closing remarks. Thanks for tuning in, appreciate your interest. Look forward to talking you at the end of the Q1, 2017. Have a good day.