Greetings and welcome to the Astronics Corporation Second Quarter 2017 Financial Results Conference. 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. It is now my pleasure to introduce your host, Ms. Debbie Pawlowski, Investor Relations for Astronics. Thank you. Please go ahead.

Thanks, Donna, and good morning, everyone. We appreciate your time today and your interest in Astronics. On the call with me are Peter Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Pete's going to go through his prepared remarks, and then we'll open it up for questions and answers. You should have in hand the news release across the wire this morning, which is available also 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 the documents filed by the company with the Securities and Exchange Commission. You can find these documents both at our website and at www.sec.gov. So with that, let me turn it over to Pete to begin the call. Peter?

Thank you, Debbie and good morning, everybody. We're going to talk through our second quarter results, which were a little bit lighter than we hoped for and expected. Many of the trends that we hinted at and talked about in our first quarter results call continue to affect us. And we'll talk about those in some level of detail. But I also want to kind of balance it with a general I guess sense of enthusiasm that we have within the company. We're in one of these unique periods where the market is a little bit soft in ways that we haven't seen it recently or before and yet at the same time, we continue to believe that we're very well positioned, we continue to believe that we're working on some very worthwhile projects and there's a real sense of enthusiasm going forward. So it's a little bit of a strange connection between the current results and what our expectations are going forward. So I'll try to cover both those topics in some level of detail and relay our perspective as best I can over the remainder of this call. So for the second quarter, revenue was 151 million. That's below our comparator quarter of 2016 when we had revenues of 164 million by 8.1%. Our performance in the most recent quarter was at the lower end of the last four sequential quarters when we had revenues of 155 million, 154 million, and 152 million. Our aerospace sales in the second quarter were 129.5 million, which is 9.1% below the comparator quarter of 2016, but keep in mind that the comparator quarter of 2016 was a record aerospace quarter for us when we had best ever revenues of 142 million. In the last four quarters, our most recent quarter was…

[Operator Instructions] Our first question today is coming from Dick Ryan with Dougherty & Company. Please go ahead.

Pete, it’s probably similar to your opening comments of soft current market, but optimistic, but when you look at just the optics of E&D, stepping it up with revenue forecast to come down, can you maybe delve a little deeper in the spending. I know we're including CCC in there, but is there may be heavy STC work that can eventually go away or is there an inflection point for revenue to kind of reflect this spending maybe next year?

I would certainly expect so. We've kind of been targeting 12% to 13% of revenues. We’re now running around 15% and I think that will fix itself, largely with revenue increases like you’ve suggested, Dick. As far as where it’s going, I guess I'm thinking through my mind, we just have a lot of activity going on really across the company in major new platforms like 777 or major new antenna and connectivity systems and we’re doing a lot of work on both the A&D and the semi side and test, I mean, it’s really -- from our perspective, it feels like a market of investments. And not painful investment, but kind of I guess the kind of an investment you like to do, I mean, serious programs that customers are really interested in. The combination of the two obviously makes the, hurts the financials a little bit. But like in the past, I guess our priority has been and continues to be that we want to make sure we perform well on those opportunities and not short change what we think is likely to pay back handsomely in the near future. So we've let those programs run and we, for the most part, are strongly supportive of where our customers are taking us and that’s how it plays out. So for people who make models, we're running around 15%. We would expect it to drop a little bit with the revenue increases in the second half, but for the year, that's probably in the range of where we're going to be.

Okay. And on the in-seat power side, you commented on the wide body, is there anything you can talk about on narrow body and I think Panasonic can have some softness in Q2 with their fiscal year coming in March, but can you comment how that business is flowing.

Just in-seat power business generally?

Yeah. I mean with narrow, maybe on the narrow body side and then also how is Panasonic doing?

Sure. Well, I can't necessarily speak for them specifically, but they're obviously a big customer of ours, an important customer of ours and I would say that as they go, we go to some extent. So there's not a real disconnect there, although their business is obviously much broader than what we do with them and ours is too, to some extent. But I guess we feel that the narrow body side continues to strengthen and get bigger for us that the challenges that narrow bodies are, smaller airplanes with less seats and fewer seats and therefore a smaller revenue target. So it takes three or four of those to compensate for one wide body. So when the wide body world is plummeting like it or not plummeting, but declining like it has, it makes it hard for us to compensate on the narrow body side. But again, overall, our perspective is that there's a lot -- there's increasing enthusiasm, it's no longer a luxury, it's kind of a basic requirement to have WiFi and have IFE of various forms and pretty much all those forms require power, which is what we specialize in and we don't see that going away. I think, there is a little bit of a lull in the industry, having to do with wide body production rates and wide body operators, but there's also a sense that the services offered to passengers need to and will continue to get better and better and better and I think airlines are trying to figure out how to do that right now. They're trying to kind of recalibrate their thinking based on what they've done over the last decade and I think that's resulting in a little bit of a slowdown for us and for other participants in the industry in general. And yet, it's a huge opportunity because if systems need to get better, if services need to get better, companies like us are going to be looking for a way to fill that void and help out, help the airlines out and that’s what we do. So we think that long term, the picture, the thesis still holds and the opportunities there, it's a question of getting through this current period and positioning ourselves to do what we need to do to be successful long term.

Thank you. Our next question is coming from Jon Tanwanteng of CJS Securities. Please go ahead.

Is there any possibility that saturation is occurring in the in-seat power market or do you want to 100% believe it’s just a temporary speed bump or a pause here?

No. I wouldn’t say saturation. I mean obviously, it’s a little more mature market than it was five years ago, but at the same time, it’s changing. There are new technical requirements, particularly in the world of USB power and the personal device industry continues to change and it’s pretty vibrant. So we believe that there's ongoing demand and technical change driving what we want to do. If you look at the penetration numbers particularly in the narrow body side, but also on the wide body side, the wide body market has been one that we've been primarily operating in for almost 20 years and yet, we feel it's somewhere in the 60% penetration rate on a seat basis, not an airplane basis, but a seat basis. So that market all by itself, when the old airplanes are taken out of service and new airplanes are brought in, represents substantial business opportunities for us, but the narrow body side is much younger, much more room to run and no, we would not say that we feel like there's a saturation point there at all.

And just a question on CCC, did they have positive operating margins in the quarter?

No.

Okay.

But I will say, just let me -- you didn’t can ask it, but let me take that entrée. CCC is involved in the VVIP cabin management, cabin entertainment market as is our PGA operation. And our sense is that that world is starting to change a little bit and it's been pretty dry, but there seems to be more and more activity with the, particularly driven by the A320neo, Boeing, BBJ MAX. So there's more activity and I think we're cautiously optimistic about where that business is going to go for both PGA and CCC. It's particularly next year, so excited about it.

Okay. Great. Would you disclose how much of a drag it was at all?

I don't think I can do that, Jon, but David is there something in the press release we can expand on?

Yeah. It was about $800,000 drag.

Okay, great. That’s helpful. And then just on the business jet connectivity, I assume that’s a new antenna product. When do you expect that to launch now and kind of how does that ramp in terms of units or profitability and how it contributes to this year?

This year is a little bit up in the air. It’s going to be weighted towards the second, the fourth quarter, second half of the second half. And it's you know we are a little bit gun shy based on our experience to-date of predicting it. What we believe is that the demand continues to be strong, there's a really good window to get this going and it's a real enticing market. There’s a lot of airplanes out there that fly with very limited systems and systems that aren't as good as the average commercial airplanes actually for most of these guys. So we think if we can get that going with our partners, it will be good but we're obviously discounting quite a bit over what we originally anticipated for this year. My hope is it starts to contribute solidly in the fourth quarter and we can talk about it specifically, but it well may be a 2018 issue at this point.

On the drag from CCC it was actually rounded to 900,000.

And then just on the test side, you mentioned the press release getting an order from your legacy semiconductor customer. Can you give us a bit more color as to the size of that and what's going on there?

We have a business that on the semiconductor side has been largely driven by a prominent customer from a few years ago and that program that is still an active program in other words the test is still kind of the chosen piece of equipment. So we will sell some of those on occasion depending on our demand, it's basically capital equipment. So if they need to build more, they need more tools to support that effort and we obviously don't have insight into what those demand expectations are, but we know when we get an order and we did get one, I'd say it was not substantial in size. I’ll give you a range; it was more than 5 million but less than 20.

And just the relative size of the other opportunities you’re pursuing in that market, how do they compare to this legacy program you have and what your confidence level in some of those being signed this year or the next year?

I would say that some of the programs that we are involved in have the potential to be substantial, substantial being potentially even as large as the last legacy program. Timing wise, again it's a little bit out of our hands. We do what we're asked to do, but beyond that we don't really know how the chips are going to fall. But there's certainly potential for this to affect us next year. If it is going to affect us next year, positively you'd expect to see orders this year that obviously has not happened yet. But we're hopeful that it will. So if you see orders it's too late for new programs to kind of affect us this year, but if you see orders this year that's a solid indication they're going to be good for next year.

And Dave, just any thoughts on the tax rate going forward?

Yes, I think it's going to be consistent with where we've been running within a couple of percentage points.

Consistent with Q2 or just the average in last two quarters?

The average for the last two quarters [indiscernible].

Thank you. Our next question is coming from George Godfrey of CL King & Associates. Please go ahead.

Peter, I just want to begin on the revenue changes by the product line and then if we can talk about that narrowbody. But if I look at the electrical power and motion for the six-month period here, it was down 10% in the six months, but if I look at lighting and safety that's up 3.5%. I would have thought that in avionics we had results a year ago, so the growth there is explained by easy comparison. But I would have thought that those growth metrics would attract more closely. Why is electrical power and motion so much weaker than the lighting and safety specifically?

I guess a couple of reasons, lighting and safety is a relatively broad product line for us, it goes on everything from the smaller Cessnas to the fastest jets and rotary wing, military airplanes and all the way up to the 380s and 747. So it's a little more comprehensive that way. And you can see our business jet sales in general are up pretty strongly. So it's benefiting from strength in areas where our electrical power and motion area doesn't touch as much. Our electrical power and motion is largely skewed towards commercial transports and largely skewed towards widebody. So that's probably the biggest difference there. If the widebody segment gets hurt, it hurts electrical power and motion more than lighting and safety.

And that makes sense and the widebody issues are well documented, but narrowbody continues to be robust. And I think in the past you've talked about a 20% penetration rate on just the narrow body excluding the widebody is that right?

That's correct. I know where you’re going. Production rates are up there, so you’d expect there to be some compensation and there is to some extent, but most of our narrowbody installations these days are not line-fit, they are aftermarket. And the reason for that is that most of the airplanes being built today were ordered a couple years ago, a couple years ago, we were not as off offerable. And not as many airlines had picked our systems. So asking Boeing or Airbus to change an order in process is a relatively painful experience compared to doing it aftermarket when an airline typically asked to set up an aftermarket installation scheme to get their fleet done anyway when they decide to put our product on.

So, if Boeing is producing 42 plans now and they're taking up production on the 737 to 47 planes per month and that 20% delta just for easy math would suggest eight planes at 42. We really wouldn't see necessarily another one plane or perhaps two planes and incrementally higher penetration rate as that production rate increases, it's likely just stays at 20% and there's no incrementally greater penetration on the [indiscernible] production.

For electrical power and motion I would say you're correct, but to stick with your question, when Boeing picks up 737 production rates, our lighting and safety products do go up because we do have some standard line-fit products like passenger service units on every 737. So that's an example where our lighting and safety business would pick up based on that pickup in production rate. But our electrical power and motion sales to that same production rate increase really depends on which airlines are buying the airplanes.

My last question, just looking at that growth trajectories on the test business, looking at semiconductor versus the aerospace and defense and going at the midpoint. It looks like it's setting up to be about a $27 million semiconductor test business this year and 65 million in aerospace and defense test. Is that a reasonable place to be?

That's directionally accurate. And to add color to that, we're seen some pick up in volume for aerospace and defense, it was up something like 20% last year and it's continuing to do pretty well this year. So we're thinking that if we're going to detail in some of the kind of the needle mover programs as I think about them in my head, we've got a number of them in that A&D side of the test business. So we've been a little frustrated with program slides in that area also, but we're still hoping that with some of the things will shake loose and time to give us some contribution yet this year. In fact, if you look at internally our fourth quarter expectations, some of the increase is dependent on A&D orders shaking loose between now and then.

Understood. In the aerospace and defense growth this quarter was very good. I just wanted to hone in on that semiconductor piece, you talked about, you don't control the timing, but what do customers within that semiconductor test space push back on, do they want more data, better results, lower price, like what causes the deal of the pipeline not to close quicker and I’ll leave it there. Thank you.

It's a complex set of equations. These are very competent capable fast moving organizations and they can do pretty much anything they want as quickly as they want. But they've got plenty to do other than just work with us. So a lot of the timing of our programs depends on what else they have going on which we obviously don't have insight into. And they've got products to ship and a business to run day to day to and usually what we're involved with is a little bit more longer term in terms by nature. So their first priority is to like any business keep on top of the real hot issues and when the hot issues die down a little bit and they can work on things with us. So I think that's the answer and we don't have insight into where the priorities lie all the time. So we just do what we can to support the effort and hope that the payback becomes evident so that they proceed. No next question Donna?

Thank you. Our next question is coming from Michael Ciarmoli of SunTrust Robinson Humphrey. Please go ahead.

Pete, just back to maybe what George was asking on the electrical power and motion. I mean the run rate for this quarter took a big step down. I mean it was probably at a level not since 2014. Do you guys have any sense, I mean the widebody market, we know it's under pressure, rates getting caught on the 777 again, right around now. The A380 is going to see another cut. Is there a sense that there's maybe broader destocking of some of your products going on that just inventory levels in the supply chain were too high.

I wouldn't, no I don't think so. I think that the, you know, frankly the experience that we're seeing is being somewhat shared by other participants in the industry right now. It's just, if you're involved in cabin entertainment or cabin systems for widebody airplanes it's a little bit of a tough slog right now. But I don't - we don't have a distribution system that's dependent on a bunch of inventory sitting around, it's usually I’d say pretty lean actually both in our major IFE customers and with airlines or the OEMs themselves. So I don't think it's destocking. I think it's just current demand.

So I mean obviously the only widebody maybe I could see a little bit of a ramp is the A350. I mean what, you know, you still have a pretty significant step up here in the back half of the year and you're still going to have based on what shippable in your backlog a pretty good amount of book ship business you're going to have to go out and get. I mean you have confidence just given the trends you're up against here that you know you will see this kind of snap back in 3Q, 4Q.

We are pretty confident, there are a couple of things though that we are dependent on. I mean I talked about some A&D test business that we expect to be stronger in the second half and similarly with the semiconductor side of tests. And we have some antenna expectations for the second half which are needed to achieve those results. So there is some risk in those numbers, but when you look at our backlog and you look at what the shipping level has been to date. And you look at the other upside opportunities that could offset some of the downside opportunities I guess we feel like we're pretty comfortable with the range that we're putting out there today.

Just last one from me, I mean I know you don't guide to it, but know the margins here could be pretty volatile and we saw that in the current quarter with the lower volumes. You’ve got some higher A&D spending. Any expectation or any color on what we could think of as margins. I mean if you're looking at, you know, I think you said somewhere in a slightly higher quarter, should we look back at prior quarters to see a similar revenue run rate, where the operating margins can get to. I mean anything you can maybe share about the profit expectations in the back half year.

I think the idea of looking back in recent quarters as to where the volume was is probably as good a guidance as I can give you. I would also just remind that we are - when we run our business we try to think of ourselves as you know what we need to do today to be successful not next month or next quarter or even next semester, but where do we need to be to answer the bell when our customers call a year from now or two years from now. What are we signing up for and how do we execute on that as well as we can. We sat down this year and we had certain expectations for the year was going to roll out. And we balanced that against product development and investment opportunities that we think are appropriate. And over the course of the year, this year our experience has been really in an unprecedented way. That the opportunities that we saw coming through on our income statement short term are largely delaying or lying down. It’s not as though we're losing them, it's not as though they're going away, they're just delaying. But the corollary investment opportunities or demands that we see continue to be very much appropriate. So we're kind of pursuing that path as though it's not affected by the first path, it's kind of the way we've typically run things. Obviously there are limits for that and if the market were to go dramatically south, we would more actively reconsider our opportunities, but at this point based on where we think our customers are and where we think the market is going. We really think there are some really good opportunities. So I'm excited to see the current dynamics in the market change. We're confident they will. But if they weren't for some reason, then we'd have to revisit that investment scheme and react accordingly and we can do that if we have to.

Thank you. Our next question is coming from Ken Herbert of Canaccord Genuity. Please go ahead.

Hello, this is [indiscernible] calling in for Ken. First question, aerospace operating margins were a bit weak. So just wondering how do you think about your cost structure going forward? Is there anything specific that you’re looking to do to improve this besides you know looking for volume growth?

When we have that kind of revenue drop relative into our comparator period, we're going to take a big hit on the operating profit line. So, as you indicated that, that is the big short-term issue. We do live in a world that's price sensitive and we do have customers that are pushing constantly for price reductions and we compensate for that by looking for efficiencies in our own supply chain or in our own cost structure and it's a bit of a balancing act and we fight that fight every day on both fronts. And it's kind of the way the industry works. But I wouldn't say that there are major changes anticipated. Our emphasis in general has been on one towards innovation and on product development and that's been where we focus and that's been where we differentiate ourselves. Some day there could be an opportunity to significantly and comprehensively kind of review our cost structure and the way we do things and kind of change our focus. But today that's not been our decision. So I would tell you that the cost structure - is that the cost structure as and we intend to run it. We think we've got a lot of room to run with our existing kind of allocation of assets that way.

On the test business, you lowered the upper end of the guidance range and now kind of had a pretty tight range, which essentially implies basically flat second half of the year in terms of test sales. Can you talk about your confidence in the second half on the test segment and how you’re seem orders coming in?

If you look at what we did for the first half, what we have in backlog, I think we’re pretty good shape to execute on that, on that tighter range in 2017. We have to get a few orders for sure, but I think we're reasonably confident that we can do that. I think the bigger question and the thing people should be asking about on test is where we're going to be next year. And I think that the aerospace world is our primary business, but I think the test side has the potential to be a very pleasant surprise for us next year based on orders that we would again have to kind of get this year. And I’m talking about both the A&D side and the semi side, so 2017 to me is, I don't want to say in the bag, but it's not the big risk item. I think 2018 is where the bigger interest lies.

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

Pete, back on semi-test, when you look at next year and some of these programs, can you give us a sense of having success and moving beyond testing just the current components that you have with the existing customer. Does this mean you're moving into other customer who is going to come on board next year or expanding into testing additional components with Apple?

Well, we think in terms of programs more than customers and definitely we are looking at expanding beyond our legacy programs. And we have more than one. Our goal is to expand our capabilities and expand what our customers need and I'll tell you that it's really interesting to me that the kind of the profile that customers want based on various types of items under test can be dramatically different. So one of the things which I think we have done a pretty good job of is building an organization that can think outside the box and come up with certain solutions that are that are highly customized for specific applications. And I think one of the things that we're doing is developing a following of customers who know us that respects that and recognizes that as a real asset. Kind of tying our engineering capabilities and creative capabilities with their product knowledge can be a pretty dynamic powerful combination So in answering your question, I guess we recognize that there's a wide range of requirements out there and I think we're developing an organization that is very capable of responding to those requirements and being valued as a real partner on the part of our customers. So we're pretty excited about that.

Thank you. Our next question is coming from Scott Lewis of Lewis Capital Management. Please go ahead.

For 2018, you've talked about some projects that you're hoping to get orders for or expecting to get orders for. But could you talk a little bit about maybe some of the programs that are kind of built in for 2018, I’m thinking of a couple of business jet programs like PC-24 and Bel-505 and maybe the exterior lighting on the 737 MAX. Are this is going to kind of add up to anything material in 2018?

They’ll begin to, I mean PC-24 should be in production certainly in the second half of the year. The 505 is a small aircraft, less volume to it. And the MAX should also start to ramp next year. So yes, I'd expect those to continue. And Scott I can always count on you to bring up our flight critical or electrical power distribution capabilities for GA and smaller aircraft. And I think it's something we don't talk a whole lot about, but we're really making a lot of progress and becoming kind of the key industry provider to those types of aircraft. I don't think it happens anymore where an airplane gets developed without our involvement at least in the bidding stage. And in some cases we may opt not to pursue it, in some cases an OEM may decide that they don’t want to go a more traditional route than what our higher tech solution entails. There was a time when we had to knock on all the doors just introduce ourselves. Now they call us and I think we're really on our way to becoming kind of the preeminent supplier to that business. And unfortunately as you know the gestation period for a new aircraft can be really, really long. So it's one of those things where you work today for an airplane that might give you a contribution in five years, but I think there's going to be a sneaky fast kind of snowball effect. If we get enough airplanes down and the science is getting better and better, the architecture is getting more and more reliable and as we go around the block every time we go on the block we learn a new trick that we can apply. Putting our tool box for the next airplane and I think you know I'm not sure 2018 is going to be one it's going to bring a whole lot of headlines, but certainly that's an area that we've invested heavily in and I think it's one that's going to pay off over the long term by creating a real strong market position for us. And as a pilot myself, like you, I'm pretty excited about it.

Thank you. At this time I'd like to turn the floor back over to management for any additional or closing comments.

Very good, thanks for your attention, we're hoping the second half is stronger than the first half, but we're pretty confident again overall that we've got some pretty good trajectories and we just need to get through the current period. And I am expecting we're going to see substantially better results in the near future. Thanks for your attention, talk to you next quarter. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.