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

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

Thanks, Debbie. Good morning, everybody. I'm going to talk through a quick summary of our fourth quarter and the year just completed, and then spend a few minutes talking about the new year, 2013, and then open it up for questions. We felt the fourth quarter was a fairly strong close to the year. Revenue came in at $67.4 million, which is up 10% over the fourth quarter of 2011 and our second best-ever after the preceding quarter, the third quarter of 2012. Our revenues were 95%, 96% Aerospace and 4% Test Systems. Net profit was $5.7 million, which is 8.4% of sales and $0.37 per diluted share. Some color comments underneath the numbers. Our E&D expenses for the quarter were $11.1 million. That's up $1.6 million over the fourth quarter from last year and pretty much on par with where we expect our investment to be going forward. We'll talk about that a little bit more in a minute. We did have some revenue slides in the quarter of about $3 million to $4 million for various reasons, mostly customer-driven, although we did, at the end of the quarter, move our largest operation, our AES operation, Advanced Electronic Systems from an older facility to a newer facility. That move went real smoothly. We can't put our finger on it, specifically, for some of these revenue slides, but we did have that happen. About $3 million to $4 million, it's safe to say. We also, during the quarter, took a rather large legal expense hit of about $1 million. That was to resolve an ongoing suit that we've been involved with over the course of the year. Over the year, our expenses related to the suit were about $2 million, $1 million of it falling in the fourth quarter. That…

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

Just firstly on the E&D budget, if we go back to 2012 or going into 2012, you provided us some E&D guidance and throughout the year it kind of kept going up every quarter. And I'm just trying to gauge what kind of comfort level you have with the current range, and maybe if you could talk about some of the puts and takes that could push you higher from kind of the current range?

Sure. Well, the things that are -- one of the assumptions is that some of the major programs that we have been working on are going to drop off. And perhaps, the best known one of those would be our Lear 85 program, something we've been working on for a few years now. And the first flight is planned to be in the coming quarter, I believe, although Mark, you might know a later update than I do on that one. So we're expecting -- we're in the final stages of our own development effort and certification effort associated with that program. But at the same time, we have won a handful of other EPDS, electronic power distribution programs, which we're expecting to ramp at a certain rate. Now, our budgeted numbers take into account that expected ramp-down on the Lear 85 and associated programs and ramp-up on the new programs that we have under contract. So the puts and takes are largely amounts to timing because if something were to happen so that these programs that we're expecting to ramp down, get extended or enlarged with a scope change or something similar, that could obviously cost us more. Or conceivably, we could win other programs that we're -- are currently in our plan, that could drive that number higher. But at this point, we're pretty comfortable with that $42 million to $46 million number.

Is there an assumption within the guidance that you do win some incremental work? Or if something new comes on, it's -- the E&D spend is going higher?

There's certainly upward potential there.

Okay. Got it. And moving on to something else, I was just wondering if you could provide us an update on the USB product line. I know you can't specifically speak about customers, but maybe you could give us a sense of how that product's being received and maybe could talk about numbers of customers that have signed on at this point?

Okay. Well, let me -- first, for the benefit of the rest of the audience, do a little bit of background. What Tyler is referring to is a product that we're developing that is ideally lighter weight and a little bit less cost, ideally suited for narrow-body aircraft. The issue being that our product has, for the most part, been used historically on the wide-body, long-haul airplanes and the demand is increasingly being felt by narrow-body operators. And they would like a product that's a little bit lighter and a little bit cheaper to install. So we've come up with this USB power idea, largely driven by the current popularity of new generation smartphones and tablets, which use USB connections for power. And that product is in development and is being enthusiastically received, I would say -- we would say, by our customers. We don't have it installed yet or flying yet. Mark, I don't know if you want to estimate on when you think it might be. And we're not...

Yes.

And I would -- just let me finish. I wouldn't say that we're not at liberty at this point to discuss which airlines are signing on. But I think it's safe to say that it's getting widespread attention, geographically all the way -- all around the world and from both exclusively narrow-body operators, but also mainline operators who operate a range of aircraft, who might have kind of full-service IFE systems on their long-haul airplanes and they're looking to complement that with power and various IFE amenities, in-flight entertainment is IFE, on their short-haul airplane. So Mark?

Yes, I would say on the new product, the new USB higher-powered product that we're offering this year, it usually takes about 6 to 8 months from the time of a contract award to actually get the scheduled installs on the aircraft. So I would say that it will be likely we would it see installed in the fourth quarter of this year.

Just one other comment on that, Tyler, for the narrow-body world. It's important to keep in mind that it's not exclusively a USB market. There are certain airlines who are going to go and who are going, I guess what I'd call more conventional with the 110-volt system. And so that's increasingly common also.

Our next question is coming from Michael Callahan from Topeka Capital Markets.

I guess, first, you mentioned in your prepared remarks that there is some revenue that was pushed out of the fourth quarter into the, I guess, into next year. Can you give us a little color as to, I guess, first off is it first quarter, secondly, what types of customers, what types of products, what segments you might have seen those push-outs related to specifically?

We don't have -- they weren't major program push-outs. So I guess I think I would say is it safe to assume that anything slid out, it slid out from the fourth quarter is going to land in the first quarter, probably already has landed. Some of it may have been customers padding their delivery schedules because we communicated our plan to move in advance. So to create some cushion, people might have had product built and then when they realized everything was kind of smooth, and the team out in Redmond did an excellent job. We transitioned an entire company over a couple of weeks and did it very effectively. So the delays weren't necessarily driven by us, but I think there was some built in expectation there.

Okay. Well, then I guess secondly here, on Cabin Electronics slowed down the growth rate, at least slowed it down a little bit, in the fourth quarter, probably be expected to stay at the same level. But as you go out into next year, revenue guidance up about somewhere around 10% at the midpoint. I guess, where are you guys thinking a lot of that strength comes from, I guess, by segments, presuming that, I guess, Cabin Electronics might have tougher comparisons in '13?

Yes, I think we're expecting continued strength in our Commercial Transport market, I guess, I'd call it, more than anything. Boeing 787 problem is notwithstanding. We expect that there are a number of factors that should propel continued growth in Commercial Transports. We're of the impression that our Military and Business Jet sales by comparison will continue to be difficult simply because there aren't more airplanes being developed -- or being built. There are more airplanes being developed and we are certainly focusing on those. And even in the Military world, there are certain retrofit opportunities that we think are pretty exciting. But at this point, from a 2013 perspective, we're not thinking that that's where the fireworks are going to be. We think it's going to be kind of more of the same from a revenue standpoint. Strength in Commercial Transports and relatively flat in the other areas.

Okay. Is it -- I guess, 2 quick follow-ups on that one. Is it safe to assume that maybe retrofits on the Cabin Electronics side maybe slowed down and a lot of the growth in the fourth quarter came from higher OEM production?

No, I don't think I'd say that. We think, especially as the ENC power continues to gain favor in the narrow-body world, that that's largely, at least to begin with, a retrofit play because there's a lot of narrow-bodies out there who need it. So but again, I would -- I usually answer this kind of question by making the point that, to us, a retrofit sale or a new build sale doesn't really look or feel much different. It's an airline deciding to equip their fleet, both the airplanes they're buying and the airplanes they're currently operating with our product. And so the distinction there to us is not really significant.

Okay, and then just lastly here, on the 787, which you mentioned. How big of a push-out would you need to see as far as a change in rates or just ongoing issues before you guys would really see much impact. I assume that it would kind of take a while.

That would take a while, especially since we haven't seen much of a positive impact at this point to slow us down. Mark, I'll flip it to you again in a second. But we, a few years ago, delivered quite a view ship sets in advance or -- of when Boeing slowed the whole project down. So that inventory has been -- is being little were down. And we are shipping some 787 production, but it's not as big as we certainly expect it to be towards the end of this year. So at this point, we don't have any reason to believe that Boeing is going to cut their production plans. That's a real significant step for them to take. So it would take out -- it would take that kind of decision, we think, for it to affect us. Mark, you want fine-tune that answer at all?

I don't think. I think you said it, Pete. They're -- Boeing's looking at -- I think it's ramping up to 7 a month out in midyear this year on their forecast. And if that got cut significantly, then we might see some effect at the very end of the year. But right now, everything is communicated that they're going full speed ahead.

Our next question is coming from Kevin Ciabattoni from KeyBanc Capital Markets.

Looking at the warranty and inventory reserve in the quarter, I know that hit last quarter as well and you kind of thought that was going to be a one-time thing. Was this related to the same issue you saw last quarter? And could you maybe give us some color around what's driving that?

Dave, you want handle that one?

Sure. The majority of the fourth quarter was more inventory than warranty-related. And it's part of our normal review of our inventory and we do it every quarter, and to a large degree, it was some older inventory items that we don't see a market for relating to our Test Systems. Some of our older designs of our Test Systems products from years gone by, so we decided that there's no more opportunity there or minimal opportunity for those old designs. So we took a reserve on some of those.

Okay, so in 3Q, it was more warranty-related, is that correct? And that issue is largely out of the way?

Yes.

Okay, perfect. And then, Pete, I think you touched on this, but the 787 shipment, I know you -- I think your expectation was that they might start to pick up in 4Q and then start delivering on those in the kind of the January, February timeframe. It sounds like that didn't play out to the degree you expected on the positive side, is that correct?

Well, we are shipping 787s, but it's still at a relatively low rate compared to where we expect it to be when they get in the full rates.

Did that increase at all through the end of the year, though? I mean, are you shipping more -- or were you shipping more at the end of the year than you were midyear, beginning of the year?

Yes, I don't think we were shipping any -- we weren't shipping really anything early midyear. Right, Mark? Is that-- would you agree?

Yes. We went -- we had done some preliminary shipping like you said in 2011, and then there was the delay. And so right now, we're building again and fully expect to be shipping for 2013.

Okay, perfect. And then last for me, what are your expectations around the tax rate for next year? And I guess, specifically or most importantly, next quarter, given the R&D tax credit affecting kind of a look back?

So the 2-part answer. We expect the normalized tax rate to be about 30%. That will be lowered in the first quarter as we recognize 2012 R&D tax credits. The reason we recognize those in the first quarter of this year is the legislation did not get put in place until after year end, so we were not able to recognize the tax credits in 2012 for 2012. Our estimate is that those credits that we will recognize in Q1 for 2012 will be about $700,000. So we think our rate, exclusive of that is about 30% and then adjust that for about $700,000 in the first quarter.

Our next question is coming from Scott Lewis from Lewis Capital Management.

My question is on the electronic power distribution system E&D. As you develop more and more systems, is there a learning curve that you're going to go down and maybe the expense is going to go down when you get to your -- I guess, you probably developed maybe 3 of these, or what's going to happen when you're on number 5, is it going to be cheaper?

It better be, Scott. Yes, there's a significant learning curve. And I think it's safe to say that our cost per system will continue to drop, we believe, fairly substantially. There are kind of 2 sides, though, to the cost associated with developing a system for a particular airframe. One is the cost of the technology itself. Do the basic building blocks of the system work? And -- or do they need to be redesigned and reengineered and modified and retested? And the others part of it is the specific working out of the system, assuming it is all completely engineered to that particular airframe. In other words, customizing the architecture specific to the end-use systems and making sure all the loads are correct and working out all the interactions with the other system suppliers on the airplane. That's all kind of airplane-model specific. And I would venture to say, on a quantifiable basis, we're expecting the first portion of that kind of cost loading to drop from being, say, 75% or 80% of the total cost of a particular development effort down to maybe 10%, 20% of the total cost of a particular development effort. In other words, when we sign a new program up, we try as much as possible to build a system around the building blocks that we've already proven out and have fully engineered, so that portion of task drops in importance, but there's still a fairly significant task in terms of customizing the system for that particular airframe. Does that make sense?

Yes, that makes perfect sense. And then the second, also EPDS question is, with Eclipse, as you know, they are supposed to go back into production, maybe this July, and I was wondering, if you had an idea about the inventory they may have had of your product from prior to the bankruptcy, or if they're going to be ordering kind of fresh right from the start?

Dave, you want to handle that one?

Yes, I can't give you dollar amounts, but we have been delivering parts to Eclipse over the year. I can't tell you -- they're not our -- one of our largest customers. But they have been buying lighting and power distribution parts from us. So I can't tell you what's in their inventory. I don't know that.

Okay, and then you said this is kind of loading up for their new builds, right? Not -- it's not just been spares?

I would guess that most of it has been spares, for spares.

[Operator Instructions] Our next question is coming from Edward Dutch [ph] from Partners For Business.

I'd like to expand -- if you could expand a little bit on the Test Systems area. You mentioned pent-up demand, difficult markets. I assume you're referring to the government issues, but how much do you think is going to come from the Commercial area?

We don't do a whole lot of work in the Commercial area. We do some work with, say, radio systems suppliers for their own factory tests capabilities. But those radio suppliers are largely military suppliers themselves. So we kind of look at it as a Military sale.

So the whole Test Systems business really focuses on the government sector?

Yes, it does.

Our next question is a follow-up from Tyler Hojo from Sidoti & Company.

Just 2 follow-ups. What was Panasonic-related revenue in the quarter? That's the first one.

$25.6 million.

$25.6 million. And the second one, could you maybe just give us the cash flow from ops number for either the fourth quarter or the full year? And more broadly speaking, I'm just kind of wondering what the expectation is for cash generation in 2013?

Dave?

Sure, the cash flow from ops is about $24 million for the year. And as you know, we've spent a fair amount of money building out and completing the facility in Kirkland so our CapEx spending was pretty high during this year. I don't expect that to continue. Our CapEx was approaching $17 million for the year, about $12 million of that -- $12 million, $13 million of that was for the build-out of the new building. So our, what I would call our normalized CapEx was down around the $5 million range. And I expect, going forward in 2013, that we will be somewhere between -- we're still working out the final numbers, but less than $10 million, probably more than $5 million. And I think we'll have a strong cash flow generation year. We had a little buildup of inventory and receivables this year. I think I don't expect that to continue on the same trajectory that it was in 2012. So I think, 2013, we're looking forward to building up some more cash.

Okay, so just on the CapEx front, Dave, you came in a little bit lower than the low end of your CapEx guidance, nothing got pushed into 2013, is that correct?

No, nothing got pushed in, but a lot of the CapEx relates to timing of programs and tooling for programs, and as we talked about earlier, the Lear program, if we looked at it, a year ago, we would have expected to spend some more money, I think on the tooling for the Lear program in 2012 than what we did. So we're not pushing anything out. It's just where the timing is falling on those things.

[Operator Instructions] It appears there are no further question at the time. I'd like to turn the floor back over to management for any further or closing comments.

Okay. No closing comments. Thanks for your attention, and we look forward to talking to you after the first quarter. Have a good day.

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