Greetings, and welcome to the Astronics Corporation Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Debbie Pawlowski, Investor Relations for Astronics Corporation. Thank you, Ms. Pawlowski. You may begin.

Thanks, Devon, and good morning, everyone, and thanks for joining us here today. On the call I have with me, Pete Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Peter is going to go through his planned remarks and then will open up the call for questions and answers. You should have in hand a news release that went out this morning, and it's also 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. So you can find those documents both at our website and at sec.gov. With that, let me turn the call over to Pete to begin. Peter?

Thank you, Debbie, and good day, everybody. We are going to do discuss our second quarter results and our outlook for the rest of the year, and then take questions as usual. The headlines for the quarter that we’re reporting today, I guess, are the following. The first is, it's a tough comparator quarter. Obviously those of you who have been following us for a while know that at the beginning of the year we realized our Test sales were going to be down substantially. That shows up strongly in the comparison numbers this quarter. As a sneak preview, it's going to look even worse next quarter because our third quarter last quarter was the high watermark so far for our Test business. But once we get pass that, in many respects, we feel the second quarter was a pretty good quarter, especially for our Aerospace business, which set all kinds of records in terms of revenue and operating profit and bookings. Those are really great quarter for our Aerospace business, and actually on an operational basis, a very good quarter for our Test business also. We'll talk a little bit about that when we go through the segments. Finally a headline, our expectations for the remainder of 2016 have softened a little bit. We feel it’s more a reality based on our scheduling of our backlog and some of our product development plans, rather than a fundamental softening of our markets, and we'll talk about that too. So the quarterly review. Revenue at $164.4 million was our highest in three quarters. On that, our bottom line results we felt were pretty reasonable. Net income of $15 million or 9.1% of sales, that's $0.57 per diluted share, down from $0.67 in the comparator quarter a year ago. Our E&D spending…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, Pete. Thanks for taking my questions. Very nice quarter.

Thanks Jon.

Can you guys talk about which specific business or end-market is actually seeing that booking or scheduling gap in Q3?

I would say it's a little bit across the board. I mean, certainly bigger product - in order to have a lull like that, our bigger products have to have a lull, so we’re seeing some of it drop in - or a temporary reduction in our in-seat power products or seat motion products. But it's kind of across the board. And again, I guess, we kind of view it as just situational, just kind of the way the schedule falls, nothing systematic and how all the markets performing.

Okay, got it. And margins were actually pretty impressive in Aerospace in the quarter. I know you're thinking revenues probably to be down sequentially. Is that margin run rate going to continue? Should we expect to be down significantly compared to historical, what's the sequential expectation?

It's probably reasonable to expect margins to see some pressure with a drop in volume. But thanks for noticing the performance last quarter. There was really no special lifting there. I think that's what our business performs at when we get to those kind of volumes. So we’re hoping to see another couple of quarters of bookings and kind of lock-in at that production level or better even next year, which should be pretty good for the bottom line.

Okay, great. And then can you just revisit the exclusivity agreement that you had on the semiconductor side? Where does that stand now when you think of perhaps the second customer?

It's a little bit of a tricky question but let me answer it, I guess, generally to say that from our perspective there is a code of ethics about protecting customers’ proprietary information and proprietary data even when there are loose arrangements or contracts controlling that kind of information and we've been careful to stay on the right side both legally and ethically. At the same time, we've been able to more accurately or more specifically define what exactly is of concern in that situation, and we think that today we have a very clear understanding of it and we are - we don't view it as a restrictive issue in the sense that we are coming out with a fourth generation product. We've been at this for quite a while. There is system level test, and we think that unique customers have unique needs and certainly we've been able to bring that to bear with our named customer to-date. But we think there are other derivatives and other, I guess, adaptations that may be attracted to other customers. And the restrictions that we face with our named customer, we do not feel inhibit than the derivations of our capabilities that we can bring to market for other people. So that's probably the best way to answer it at this point.

Okay, great. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with your question.

Thank you. Pete on E&D spending, looks like $45 million year-to-date, is that in line with what you had in 2015, $90 million total, or should it stay in that range?

Yes, that's what we are expecting.

Okay. Moving to Test, you said a bump-up in Q3. Is that more typical seasonal pattern we see in back-end and then it would moderate in Q4, or is there something else at play for your Q3?

No, it’s the normal seasonal trend that we've observed with that program over the years. The volumes weighed down this year as you're very well aware and most of the delivery should occur in Q3.

What kind of timing would you think you’d have for follow-on orders to see a ramp in 2017?

Well, our typical expectation is that we would see orders by the end of the year. There is a lead time involved with a lot of this equipment and typically the customers understand that lead time and would expect to place orders towards the - by the end of the year. And going into the New Year, there may be increased expectations even for the existing product line, so that may get off its low volume and get something to a little bit of a higher expectation. That's our hope in addition to new programs which we may bring on board.

Okay, thanks. Say, when you talk about the strong orders for Aerospace - and I missed the first question, so maybe you addressed this already. What markets or products really drove that, and how are you looking at the pipeline for new orders right now?

I think we are - as I walk around our company and I talk to the various business units, I think it's pretty broad-based. We certainly have the weak spots again, but in general, I think we’re pretty enthusiastic about the opportunities that lie in front of us. So there is always a chance of a hiccup in bookings but we certainly like the trend over the last three quarters in Aerospace going $120 million to $140 million to $164 million. So not sure that will continue, but if we could stabilize somewhere around where we are, that would be okay with me for a while.

And real strong performance in in-seat power. Can you talk the retrofit new build, sort of dynamic that you're seeing out there?

No real changes. It’s business as usual. Another strong quarter of growth. A pretty good mix between OEM and field sales, increasing emphasis on narrow bodies. We announced that our China our programs are largely narrow bodies. It continues to be a very good environment.

Now China, is that the direct, or are you with OEMs there even though it's narrow-body versus wide-body platform?

It's a little bit of both, but it’s certainly a lot of direct sales.

Okay. Thank you.

Sure.

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

Thanks. Good morning. Nice quarter guys.

Thank you.

So Pete, just looking at the outlook in Aerospace, it seems like the weaker 3Q is tied to bookings in the back half of last year. I mean, it’s just a little confusing as to why that's driving the lower guidance today versus why you guys wouldn't have baked that into your initial outlook. Any color you can offer there?

Well…

I mean, just given how it’s looking [ph].

Yes, to a large extent that hole has been filled in. And the reason I'm hedging a little bit is compared to a lot of aerospace businesses, we feel that we are weighted a little bit more towards the aftermarket than most companies. So while it's relatively easy to predict production rates at the OEMs, they may change once in a while but they don't change dramatically quarter-by-quarter, aftermarket programs can and do change. So we have that big lull and we were kind of thinking and hoping and expecting that it would get filled in, and it largely has, but it hasn't completely. And so, I guess, that's the answer. Our business is a little bit harder to predict, at least the bigger parts of it to the extent that they are aftermarket-related. Some parts of our business are simply are largely OEM and we can get plus or minus 3% predicting out two or three quarters without much trouble. But unfortunately some of our bigger product lines are much harder to predict that far out, and that's part of why we end up, compared to most companies I suspect, with a wider revenue range at the beginning of the year in terms of forecasting and we narrow it down as we go. But I think our spot - when we had those thin quarters, we didn't see any shift in the market. We thought that the business would come in. It has largely come in, but it's come in with a schedule that is going to make things a little thin in the third quarter. And we don't do a whole lot of management of our revenue stream that way. If our customers want products, we ship them. If they don’t want them, we don’t ship them. So kind of by nature and by personality, that probably serves to accentuate our financial results just a little bit. But you know that. You’ve been following us long enough. But I think the answer is simple. The answer to your question - the short answer is that the aftermarket element of our business is a little harder to predict than the OEM part.

And that was pretty broad-based. That’s helpful. I mean, it was across in-seat power, lighting, kind of, across the board, military, commercial.

Yes, but in those products especially that are aftermarket related.

Okay. All right. Kind of keeping with the outlook, it seems like you guys lowered the CapEx expectations for the year. Were there specific materials or specific projects there that didn’t materialize or just kind of set the bar high to begin with and bring it down?

Yes, I would put it in the category of fine-tuning. We go through a budgeting process at the beginning of the year, and I think we’re pretty accurate generally in this area but certainly there is a tendency to put something on the list thinking we may want to do it and then you get halfway through the year and realize we’re not going to get there. We don't have resources to do it or whatever, and the number tends to get sharpened. And in this case, this year it's coming down a little bit.

Okay, but nothing specific you can call out there?

No, not really. No.

Okay. Last one for me, obviously strong Aero bookings in the quarter, but are you starting to hear anything from, I guess, more specifically the European airlines in terms of the way they are thinking about retrofits going forward? I mean, just given the economic situation we've seen the number of European airlines look at slowing their capacity growth. Just wondering if you're seeing the impact of that at all in terms of cabin retrofits, maybe not right now but are you starting to hear any discussions around that?

No, we are really not, Kevin. I think I hear the discussion about managing capacity, I mean, that's clearly an issue in the industry. But when you start talking about hitting some of our products, what you're talking about is cutting back on amenities and that's a very different discussion. I think there is an onward march, a steady drumbeat towards expectations of the flying public to want more amenities, not less, regardless of what the capacity is of the airplanes in the sky. So we are continuing to see promising market conditions, even if there is some rationalization that potentially could happen on the capacity side. There are two different discussions from our perspective.

Okay. Thanks, Pete. That all I have.

Sure, thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Ken Herbert with Canaccord. Please proceed with your question.

Good morning, guys. It’s actually John [ph] on for Ken. I had a question on Test margins and how we should expect margins to progress through the second of the year as volumes step-up?

That's a good question. The revenue level there has been jumping around enough, that it's pretty hard to predict. I said in my comments that given the drop-off in revenue just to maintain profitability at any level, we think it's actually a pretty good effort. What you don't see there is that even with revenue drop-off, there has been a sharpening and an improvement of skills and capabilities in that business. So it really is a pretty impressive story, but we would expect that with volume increases more so next year than this year. But with volume increases, we should see strong margin increases also. That is basically one of those stories where you cover your fixed costs and the contribution margin on incremental dollars gets very attractive very quickly. So it's been a good business, though we’ve obviously been dealing with the lumpy aspects of it this year, we would expect it to continue to perform pretty well next year.

Great. As far as partnership for success from Boeing, have you guys felt any of the impact? It’s been a call for debate some of your peers, but wanted to know if specifically if you guys have felt any of that?

Not really. We went through it to some extent when we were in our 777 negotiations back a year and a half ago, but we have - when say our peers, I'm guessing in general you're talking about companies that are substantially larger. There aren’t many public companies our size doing business directly with Boeing. So I'm guessing they are focusing their efforts elsewhere because I read about it and we hear about it in the corners in various conferences and things. But for the most part, we are being left alone. I would comment more qualitatively that we continue to enjoin very good relationships with Boeing. Couple of years ago, we did next to nothing with them on an OEM basis. We do quite a bit now primarily through our PECO acquisition and we continue to get - make progress in terms of getting looked at new pieces of business, so we are pretty excited about that. We think we’re on a good track with them.

Great. And then one last question. How do you guys view the impact of some of the wide-body production rate reductions out in ‘17 and ‘18?

Well, they don't help. I mean, more airplanes are better than less airplanes. That’s what I - fewer airplanes, that’s what I would say, especially those big ones. I mean, our products are the kind that scale substantially in those big airplanes, but realistically wide-body - the super wide-body, the A380s and the 747s have been at such a low rate that they never really were all that substantial for us. So I'm guessing that any drop-off will be more than compensated for with increases in other models including 350 and 777X and 787 and so forth. So we don't view that as a substantial challenge to the business.

All right, that's all I had. Thanks.

Sure.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

And our closing comments are simply to say thank you for attending and we look forward to talking to you next quarter. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.