Greetings and welcome to the Astronics Corporation Third Quarter 2018 Financial Results. 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 would now like to turn the conference over to your host today, Debbie Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks Latonya, and good evening, everyone. We certainly appreciate your time and your interest in Astronics. I have with me here today, Pete Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. You should have in hand the news release that crossed the wires little after the market closed, and if you don’t, it is available on our website at astronics.com. As you are aware, we may make some forward-looking statements during this teleconference as well as concluding the Q&A portion. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in the earnings release as well as in documents filed by the Company with the Securities and Exchange Commission. You can find these documents both at our website and at sec.gov. So, with that, let me turn it over to Pete to begin. Peter?

Thank you, Debbie and good evening, everybody and we would first like to thank everybody for tuning in on a Monday night. It's not our favorite time to do it either. We appreciate you making time. So the headlines for our third quarter, which was a colorful quarter in million any respects, first and foremost, we saw very strong topline performance across the company setting a new sales record of $212.7 million. Second headline, bookings were strong also exceeding shipments at $233.8 million up 10% over shipments. Our bottom line was solid, largely aided by a change in our estate tax filing position which we'll talk a little bit more about as we work our way through this call. On the negative side, we continue to see some poor results from three struggling businesses we own that we've talked about before. We'll talk about that also more as we work our way through the call. And finally, we're narrowing and slightly adjusting our final 2018 topline forecast, which now calls for midpoint consolidated sales of $795 million. If we achieve that, we'll be up about 27% over where we were in 2017. So we're going to jump through a summary of the third quarter. We're going to do a year-to-date summary, go through our segment, we're going to go with Dave on a couple of the finer points on the economy [indiscernible] and our balance sheet and on this state tax situation and then I will take it back for a forecast discussion and questions at the end. So third quarter summary, revenue as I said, pretty strong at $212.7 million. It's a new all-time high and up 42% over the comparator period of a year ago. Acquisitions contributed about $21 million of the $63 million growth. Organic growth explained…

Thanks Pete. Pretty quickly the balance sheet remains pretty straightforward. We ended the quarter with about $4.8 million in cash, total debt of about $260 million and net debt of about $255 million. In terms of cash flow, during the quarter was a little weaker than we had expected. If you call back in the previous quarters, we talked about the cash -- free cash flow everything as the year went on with the expectation of the fourth quarter would be our strongest. We still view it that way. We generated about $7.2 million in cash flow from operations during the third quarter. Could have been a little better, we saw a big pickup in our receivables during the quarter of about $20 million. Related to timing we had again a lot of our revenue was toward the latter half of the quarter and additionally it was with some customers that have longer payment terms. So you don't see any issues there with our receivable collectability and buy and large, things are outstanding along with their terms. Covenant leverage in terms of our adjusted debt coverage ratio, we're going to be about 2.7 times when all is done at the end of the third quarter. So we're in really good shape there. Expect with free cash in the fourth quarter we'll be able to pay down about $10 million to $20 million in debt by the end of the year if things go as planned., So that's good. Things are picking up in terms of free cash flow and our inventory growth has actually leveled out and declined a little bit during the quarter again a positive thing. I don't expect any significant changes to the balance sheet going forward here. Again it's pretty straightforward and simple. I do expect…

Thank you, Dave. So looking forward, we issued some revised guidance, we've narrowed the range and adjusted it just a little bit. We're expecting our fourth quarter to be a little bit lighter than the last couple quarters $190 to $200 million total and we're expecting it to be tilted much more heavily towards aerospace. We published an aerospace range of 170 to 175. So obviously if we execute that and we are in that range, it will be yet another record aerospace quarter. That obviously means that Test is going to be quite a bit lighter and that's just a function of schedules and the way the backlog is distributed. So our Test business is expected to have a much lighter fourth quarter than the second or the third quarter and that means that for the year, we're publishing revenue expectations of $790 million to $800 million total the midpoint $795 million to just growth of 27% over 2017. Looking at the segments, we're saying Aerospace is going to be $670 million to $675 million. The midpoint suggest growth of 26% and Test will be $120 million to $125 million. The midpoint suggest growth of 36%. So if we can get all that in the bag, we will I think be pretty pleased with how 2018 turns out from a demand standpoint. Obviously everybody wants to know what we're going to be doing in 2019. We're not prepared at this point to talk about that in too much detail, but we will as we can and we think a lot of the trends that you see in our business this year are going to continue. We don't see things turning to the worst. We see demand staying strong. We see customer enthusiasm staying strong and we expect at this point 2019 will be a very good year for the company, but we'll talk about that in more detail when we get there. So I think that ends our prepared remarks. Latonya, we're going to take questions now, it would be a good time for that.

Thank you. At this time we'll conduct a question-and-answer session. [Operator Instructions] Our first question comes from Jon Tanwanteng from CJS Securities. Please proceed with your question.

Good afternoon, guys. Thank you for taking my questions.

Sure thing. Hi Jon.

You've tried to provide detailed forecast of those two challenged businesses previously. How have the losses evolved over time and kind of where do you see them going down? How much cushion you are giving yourself now and given what's happened?

You're right. They're definitely worse than we originally talked about a couple of quarters ago and we've had some execution issues, no doubt about it. I think we've addressed those. There have been substantial changes made in all of those three operations from a management leadership perspective. I think we're in pretty strong position now and I think the most recent of those changes with just a couple weeks ago, but we're I think on the right course and I think the kind of the drop-dead dates so to speak of things changing next year remains in place via -- the CCC situation if I just go down the list, the CCC situation is a situation where we're struggling to execute on a contract that the company has in place. It had in place when we acquired the company. I don't think anybody at CCC or certainly not on our side realized the difficulties inherent in that contract. But and we are making the progress that we thought we would. So that's what the increase in the estimate to complete is about. We are -- it's an important enough contract that we are substantially investing in terms of bringing an outside resources from outside of Astronics, but also from other Astronics to do whatever we can and we're investing heavily in new leadership across the business. It's a program that's hard for us to talk about at this point because we're not allowed to, but a customer, we think at the end of the day it's going to be a worthwhile thing, even though this is a pretty painful and expensive process. We also think that the VVIP market is evolving from a competitive standpoint and from a customer standpoint in such a way that this is the -- it…

I was just going to ask did you have any timeframe until those three businesses or maybe the two that are in trouble breakeven at all?

Our first priority is just to cut the bleeding frankly, but it's not one of those deals where you can stop the bleeding by cutting cost, that's really not been our approach. We're trying to manage cost. Our real approach to stopping the bleeding is to kind grow through it because we think in both those cases as I described, we got opportunity. I would like to think that towards the end of next year as a group, we're operating at a breakeven basis. We probably won't be absolutely breakeven for the Group when you look at the end of the year consolidated, combined 2019 results, but we expect regular improvement quarter-by-quarter such that I would say, I would hope by the end of 2019 we're there.

Got it. Thanks and then just one more quick one, Dave, corporate expenses dipped a little bit sequentially. Is that the right word to use or was it just more a timing issue there?

No it's just more a timing. No significant change quarter-to-quarter.

Okay. Great. Thank you. I'll get back in queue.

Our next question comes from Michael Ciarmoli with SunTrust. Please proceed with your question.

Hey, good evening, guys. Thanks for taking the questions. Pete, just staying on the topic of the three challenged companies talking about revenues doubling next year, can you give us a sense of what the revenues are today for those collective businesses?

Yeah and the rough rule of thumb, those three will be above $50 million this year.

$50 million this year and so just to calibrator, so we should expect the $100 million then close to it and just keeping things conservative, running at sort of a zero margin business next year that's kind of showing improvements along the way, but grinding towards that breakeven towards the end of next year.

And we'll obviously update as we go, but I would expect that two of the three, I'd be surprised that two out of the three weren’t essentially kind of a breakeven by the end of the year.

Okay. What should we be thinking for normalized margin for these businesses and I know it sounds like with CCC each email program or project could be have its own nuances and own uniqueness, but is there any sort of normalized margin level? When you guys bought the businesses was it a profile in line with the Astronics average or how are we thinking about normalized margins going forward for them once you sort of correct the challenges?

We're dipping in the lessons learned here, which is probably a dangerous place to go on this call, but clearly these three haven't done what we expected when we bought them and there are different reasons and I think we have learned lessons. But I would tell you that the potential profile of all three of them is very consistent with the rest of the business. There is no inherent reason why these companies if they're hitting their stride and executing well can't be contributors like the rest of the aerospace business collectively. Our goal is to get there. There are different issues in different places, but individually and as a Group, there's nothing preventing them from operating at that 15% range that we think we should be at as a Group.

Okay. And then maybe I'll just do one more here on Test and then get out of the way, but on the Test systems we've got the guidance, should we be concerned at all with the test margins next quarter considering it's going to be a pretty big sequential downtick in revenue. Give a lot of sticks cost, should we be thinking about overhead absorption issues just given that quarter-to-quarter volatility. And then I guess maybe just on the booking side of it, can you maybe parse out any color between semiconductor and aero defensive. There's a lot out there in the market about semi-slowdown and just trying to put the pieces together and wonder if the bookings you're not seeing or the bookings weaknesses is related to what's happening in the broader market there?

Okay. A lot of questions there. So jump back on if I don't answer them all, but yes we would expect in the fourth quarter with our test business volume being down that it's contribution will be down also. But I would tell you that I think we expect that we're going to have another record aerospace quarter. We expect -- we hope not to have another increase in the estimate to complete the [indiscernible] numbers there. So it could well that collectively aerospace is able to compensate for Test in Q4. We have to wait and see, but I expect it should be a strong aerospace quarter. I expect it will be a weaker test quarter, but I do not expect it to be as weak as Q1. So that's that. In terms of Test bookings, most of the bookings in Q3 were on the AMD side and so the very solid AMD aerospace and defense booking quarter for Test and again that doesn't include that transportation job that I'm looking forward to being able to talk about, but sometimes these things drag out a little bit and if you add those two together, it's a very, very strong bookings for the AMD side of the business. Our semiconductor side has been quiet, no doubt and we read the paper and we understand the industry trends, but I think we actually have quite an optimistic feeling about our specific positioning in the semiconductor business and it's a little bit of timing and we've got multiple issues going on with multiple customers and certainly we need to get bookings over the next quarter and a half really to have a meaningfully impact 2019, but our intention is to have a very strong 2019 both on A&D and semi and I am kind of laying the groundwork here, if it was in backlog, we might be coming out with revenue guidance now. It's not in backlog as much as we expect it to be. So we're going to try to hold off there as long as we need to, but no, I would say we're not expecting a drop in semiconductor next year.

Got it. That's helpful. I'll jump back in the queue. Thanks guys.

[Operator Instructions] Our next question comes from George Godfrey with C.L. King. Please proceed with your question.

Thank you. Good evening, gentlemen.

Hey George.

Just wanted to normalized the EPS result here. If I get back $3.9 million for the one platform right down in normalize the tax rate, I get $0.47 EPS number at 10.5 EBIT margin versus 9.62 in Q2. Do you think that's a fair way to look at the ongoing business inclusive of the operating losses at the three troubled businesses.

So you did again there?

I am just trying to normalized the EPS results here, $0.52 with your tax credits but I'm thinking there was a $3.9 million charge or one platform, so if I add that back and I am guessing the normalized tax rate should be around 21%. So I am coming out, I just want to get if I quote an operating EPS number with the businesses, I am getting at about $0.47, does that sound reasonable.

Yeah, I think if you do that math and you tax adjust the loss to get an after-tax number and then add back actually subtract the $4 million adjustment we had going through the income tax line, that would get you to a more of a normalized number.

Okay. And then the revenue progression for those three businesses as it doubles next year from $50 million to $100 million, is that a more or less linear progression or evenly throughout the year or is there a step function in Q2 with three, or how does that -- how do those platforms ramp as it goes from $50 million to $100 million just generally speaking?

It'll be a pretty gradual ramp, but weighted in the second half for sure.

Got it. Okay. And so for the full year, you think it can be above breakeven and with that to achieve that goal with the Q4 those three businesses have to be positive then to cumulative?

Let me recalibrate that a little bit. We would trend towards breakeven, but we're not going to be breakeven as a group for the year, but I'm hoping it's nothing like -- it should be -- our plan at least from today's perspective is that the losses won't be anywhere near as noteworthy as they are right now.

Understood. Thank you for taking my questions.

Sure thing.

[Operator Instructions] Our next question comes from Edward Duke with Partner for Business [ph]. Please proceed with your question.

Hi Pete. I've just got a little clarification if you could on this earnings per share issue and what are you looking at with all these adjustments for the fourth quarter?

Well hi Ed, but we don't have -- we have a standing practice of not doing bottom line guidance. We think that it is the fun out of it with the investor community. Exactly, we try to do -- we try to give you enough color. So try not to surprise people too much.

Okay. I'll keep working on the numbers. That's how you would make it easier for us, but thanks again.

Thank you.

No problem.

[Operator Instructions] Our next question comes from [indiscernible]. Please proceed with your question.

Good afternoon, gentlemen. How are you today? Just wanted to zero in on the three underperforming businesses. it. You mentioned that the revenues of approximately $50 million in revenue for the year. How much is that in EBIT loss so on against the aerospace segment?

Do you want to?

Pretax two or three quarters this year at $28 million.

Okay. Great. So if $28 million that business could get back towards breakeven point. We're talking about a pretty significant margin increase and that's not even any additional growth that you're going to see in the rest of the business, correct?

Yes, that's correct.

So when I look at the street model, they're not really factoring in any significant step up in EBIT for 2019. Where do you think the disconnect is? Is this more of a just wait and see type situation?

Well, I'm sure there's some of that. I wouldn't blame people for having that perspective at all and it does look like a big increase, but when you look at the opportunities that are out there in the market, I guess we feel it's pretty reasonable.

All right. Great and if think, what would prevent you from achievement that breakeven level or getting close to it for that matter?

Well, the big thing is if you go again through those companies one by one, the CCC business needs to wrap up and execute a pretty significant development effort that has been struggling with for about a year and half, two years now and we need to get that done and there's pretty intense customer pressure to do so. So that's really got to get done through the first quarter next year as I understand the schedule. And the big -- and obviously if that doesn't happen, then we could have -- then that production of doubling revenues and resolving losses gets very shaky and on the AeroSat side, we got a lot riding on a couple of programs; one in the commercial transport area, one in the business jet area and we need to have those go and both of those have been substantially delayed. When we started 2018, we thought by now, we would be in pretty serious delivery mode on both of those and again for reasons kind of largely outside of AeroSat's control, those just haven't happened yet. We've chosen to maintain the organization. We've chosen to continue to pursue those development efforts and now we're to the point where we have to see the programs happen. So that's what we're planning for 2019.

All right. Great. Well, thank you so much.

Thank you. At this time, I'd like to turn the call back to management for closing comments.

Well, we just again like to thank people for spending time with us on a Monday night. Enjoy the rest of your evening. Talk to you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines this time and thank you for your participation.