Greetings, and welcome to the Astronics Corporation First Quarter 2017 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, Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks, Danielle, and good morning, everyone. We appreciate your time today and your interest in Astronics. We have here with me 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 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. Peter?

Thank you, Debbie, and good morning, everybody. We're going to talk through our Q1 results, which were largely as expected and similar to the preceding 2 quarters. We're going to take a revised look at our 2017 expectations, which have been downgraded somewhat since our initial guidance. And we're going to talk briefly an acquisition we announced in the first -- just after the first quarter closed of Custom Control Concepts, a company that we will refer to regularly as CCC going forward. So first quarter, largely as expected, consistent with the third quarter and fourth quarter of 2016, and we expect at the end of the day, when we look back, it will be our weakest quarter of 2017. Revenue was $152 million, slightly below our comparator quarter of Q1 2016 but above -- about even sequentially with the third quarter last year when we had revenues of $155 million and the fourth quarter when we had revenues of $154 million. Aerospace sales were just under $137 million, which was up from Q3, which was -- and up from Q4, but below our second quarter record from last year when we had sales of $142 million. Test sales were $15.6 million, which represents a low watermark in recent years. Bottom line consolidated for the quarter, net income was $11.6 million, 7.6% of sales, diluted earnings per share of $0.38, about even with our comparator quarter of 2016. The effective tax rate helped our consolidated results at 25.2% for the quarter compared to 30.5% a year ago. E&D expenses were $22.9 million, 15% of sales. We expect that percentage should drop in the coming quarters as the sales volume increases. Bookings consolidated were $147 million, up about $10 million from both of the previous two quarters; a book-to-bill of about…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Dick Ryan with Dougherty & Company.

So if you just circle back into some of the comments on Aero and Test? You talked about the wide-body issues. How does the narrow-body side of the In-Seat Power look? And where are you seeing the price pressure? Is it in PSUs, is it In-Seat Power where you're really seeing that price pressure hit on the Aero side?

Sure, Dick. The narrow-body market continues to look very positive. I mean, production rates are going up, adaption is going up. We are, I talked to the guys who are on the front end of that business, and we're as busy as ever filling out proposals, and the guys have never kind of, never seen it like that. So we think the indications are very positive. But the reality is that a lot of the proposals that we're making right now realistically are going to be more 2018 events than 2017 events. So we think it continues to be very positive, and we're building year-over-year well. But today, narrow bodies are probably not much more than a quarter of our total In-Seat Power sales. So we're still largely driven by what happens on the wide-body side, and that's part of the reality that we are facing. I think over time, that split will become much more even between wide-body and narrow-body, and we continue to have a lot of success protecting our market share on the narrow-body side. So it's not a question of narrow bodies getting weaker. It's just that it's a smaller part of the overall pie. So that's the answer to that question. In terms of price pressures, I guess, I wouldn't narrow it down to specific products as much as an overall trend in the business, in the industry. And I think we've somehow largely escaped it up until now. But we're looking at what the reality is in the market, and the OEMs kind of set the tone. So we got a taste of that a little bit in our business with the OEMs over the last year, year and half. But what happens is that suppliers then who have to face those kinds of…

Okay. You mentioned competition isn't really an issue. But refresh me, when does the patent for In-Seat Power expire?

There's a series of them, but most of them are already expired. And again, on to -- out to talk about the competition element, there are companies out there for sure who look at the success we've had in this segment, in -- of In-Seat Power specifically, we're talking about here. And so again, you walk around trade shows, and I did this just a few weeks ago in Hamburg, Germany, our big interiors show was there. But we continue to enjoy very strong relationships with customers, and we continue to do pretty well, and we are not aware of any substantial programs that haven't gone our way. So that's why I say that the competitive side isn't what's driving our thoughts about our revenue guidance for 2017

Okay. And last one for me on Test. Can you parse your comments on Test [indiscernible] between the commercial and the military side?

Actually, the news today is that we see pretty positive opportunities on both sides. If you look at our revenues for the quarter, we were, let me see what that is. It's, we were largely weighted towards Aerospace & Defense, and we continue to see pretty good growth there. And when we look out at what's available on the market, we see quite a few attractive programs that we're pursuing. So I expect as the year wears on, we will be able to talk about substantial wins on both sides of the business. The schedule aspect is the one item of risk here, I think. I mean, of course, we could lose the programs, but we've had a pretty good win rate. And based on the feedback we get from the market, we think we're very well positioned for some of these programs. It's a question of when they're actually going to be cut loose and whether it'll be early enough in the year for us to do much this year. That's what we have to wait and see. But we're pretty optimistic on both sides. And obviously, if we have revenue of $15 million in Q1 and we're expecting to get to $100 million over the course of the year, we have to win some pretty good programs to get there.

Can you just update what's, or how you're viewing the Apple follow-on or what you're hearing from that side?

I can't really talk specifically about them. But other than to reiterate, in that market in general, we're pretty optimistic. It's certainly an element that we expect to rise. We did $4.6 million in the first quarter. And as we roll forward towards $100 million at the end of the year, we expect that our semiconductor business will be a contributor to that increase.

Our next question comes from George Godfrey with CL King & Associates.

I wanted to ask about the wide-body market specifically and you commented on the aftermarket. Are they flying the planes less in your opinion or keeping cabins older longer and so therefore, that market is soft today but perhaps strengthens down the road? And then the second question, on the narrow-body market, what percentage of planes would you say are produced today with In-Seat Power right there today versus three years ago? I think you said the market is 20% penetrated narrow-body, 65% penetrated wide-body on the electrical side. But I'm just curious, production rates today with the power already there versus where we were three years ago, say.

Okay. Let's do that one first because it's relatively straightforward. Three years ago, if you were to look at, monitor airplanes coming off of the production line, both in Toulouse and, or I guess, Hamburg and Seattle, 370 and 320, you would hardly ever see a seat with In-Seat Power on it. They just weren't that, it wasn't that big a deal 3 years ago, and those airplanes that were getting power were largely getting it an aftermarket modification. In fact, I don't, I'm not sure we were really offerable three years ago. In other words, if airlines wanted to have Boeing do it, they couldn't three years ago. Today, if you were to stand at the end of those production lines and monitor seats coming off on new airplanes, you'd probably see something proportional to our market share, probably somewhere in the 10% and 20% range. It's pretty low. We would -- and in most of the installations these days we think are more aftermarket rather than line-fed. But as we roll forward, we would expect those percentages to increase so that more and more seats coming off the production line have power on them. That's the second question you asked. The first question has to do with the aftermarket, and I think what we're seeing is -- I don't think the airplanes are flying less necessarily. I think there's just a cooling off of modifications from the airlines themselves. And there could be a bunch of different reasons for that. There could be some economic stress involved, although I think it's equally as likely that a lot of the airlines are kind of reconsidering their path forward with respect to providers. And that tends to slow down the state of the business. So one of the realities in the IFE market -- and we're involved in the IFE market, but we're not an IFE provider. It's important to keep that in mind. A few years ago, it was relatively simple. The advent of connectivity, however, has brought in more and more players. So it's a pretty complex market. And airlines have more options today than they did, say, 5, 10 years ago. So part of my thinking is that there's a little bit of a pause going on where airlines are reconsidering their path. And so I would expect the aftermarket to pick up when those paths are reconsidered and they start acting on them. I would expect it also to pick up when new wide-body models get into production, most notably, the 777X and the 350.

Great. And then just one last follow-up. If I look at the bookings number for this quarter, I want to focus on Aerospace, down about 13% year-over-year, and a year ago, it was only down 0.5%. So just trying to gauge how much heavy lifting or real grunt work has to be done here to achieve the midpoint of that Aerospace revenue goal given that we're already in a double-digit hole on the bookings growth.

Yes. That's a very good question and that's one of the things we're watching pretty closely. Obviously, bookings are not where we need them to be. But we believe that we derisked the guidance quite a bit given what we see today. And we think that there are enough programs out there, but we obviously do need to see bookings increase as we roll forward in order to meet at that midpoint. So to the extent that there's risk in our program at this point for 2017 on the Aerospace side, it's schedule. That's the risk.

Our next question comes from Michael Ciarmoli with SunTrust.

Hey good morning guys. Thanks for taking my questions. Maybe just to stay on that bookings topic. How much of the backlog, of your total Aerospace backlog, are you expecting to ship in the remainder of '17? And maybe just given some of the timing here, the scheduling, is there any risk that there could be some of destocking at some of your major customers, like Panasonic, that might have an impact here on bookings as well?

I don't think so, Michael. I think most of our customers carry, are pretty lean and don't carry a whole lot of inventory. So that's not one of the major concerns that we see. I think what we're talking about, part of what we're talking about is as we get through the year, we get forecasts from our major customers, Boeing, all the OEMs and most of our major subsystem customers also. So we think that we are seeing what they're seeing. Are they seeing what they're telling us they're going to need from us. It's not a situation where they built up inventory too much, at least that I can think of them. I'm looking at Dave, and I don't think we see that necessarily. As for the forecast, how much of it's going to be shipped this year, we would probably, we don't really have that here. We probably say it's like 80%, 85%.

Yes, the majority of it.

Vast majority of it.

Okay, okay. And then just, I mean, the wide-body weakness and some of these pressures have been out there. So I guess, did you guys see a material change in this market from when you issued the guidance in mid-February? I mean, 777 weakness was out there, A380. Did anything materially change in that wide-body? I guess, production market maybe not so much, but it sounds like, I guess, on that, that aftermarket side changed, that was the biggest area?

Yes, that's exactly right. The production side has been well publicized, as you say. And it's hard for us to know based on how we get to the wide-body world. It's hard for us to know what portion of our shipments go to line-fit and what portion of our shipments go to aftermarket. And historically, we've seen them somewhat ebb and flow, so that we can kind of 60-40 one way or 60-40 the other. And our assumption has been that we would continue to see stronger aftermarket even in the face of declines in OEM. But again, we get forecast from our major customers. We do work comprehensively in this industry, so we're kind of uniquely positioned to see what everybody's doing with respect to our type of system or the systems that we support. And as the years progressed and as we've looked at those forecasts, it gives us pretty, better clarity as to where we are going to end up. So what's changed is the sense that we have that the aftermarket side is going to be weaker than we thought it was. It's still strong. I mean, it's not as though, just, I guess, I'd just point one thing. We're locking in at a pretty high level. It's a changing growth rate to more of a flat structure. But it's not necessarily the kind of thing where we're expecting declines at all. We're kind of locking in at record highs. And our best guess is that we're going to float around this level plus or minus until the new airplanes start coming out.

Okay. On the pricing side. The margin implications you guys have said you're working the supply base and the cost structure there. I mean, can you give any sort of color? I mean, margin is better than they were the past 2 quarters this quarter, but the Aerospace margins have been sort of on a downward slide since 2011. I mean, does this create even more challenges on the margin side? Do you think your margins in Aerospace could be up year-over-year in '17 versus '16?

I think a lot of that has to do -- the challenges going forward have less to do with the price negotiations because I think -- we think we have strategies in place to correct for that or manage it. Our bigger margin challenges have been with certain of our product lines that have been pretty weak. We've talked about antennas in the past. That continues to be a struggle. So the best way for us to fix our margins and the best way to show improvement is by fixing some of those areas in the business. And that's what we're attempting to do. And if our -- if we can hit our plan for the year, which inherently assumes some improvement in those areas, then the margin situation, from my perspective, will come along with it. It's a top line issue for the most part.

Okay, perfect. Alright, that's it from me. Thanks a lot guys.

Thank you

[Operator Instructions]. Our next question comes from Jon Tanwanteng with CJS Securities.

Good morning guys, thanks for taking my questions. Can you just talk about your pricing power given your market position in In-Seat Power? How much can you actually push back against that pressure there, if at all?

Well, that's a philosophical question. We are the strong market leader there. I think there are a lot of reasons for that. But mostly, it boils down to technical superiority, reliability and performance. With that comes some ability to price. But we're pretty careful with that compared to many other companies that are kind of name brands out there. Our objective is to maintain and grow long-term relationships with our customers. So I think it's -- there is the "what can you do" question and "what do you choose to do" question. And we try to find a balance where the customers feel like they're getting value. We have been able -- our interest often is to extend contracts and make sure that we're in pole position for new opportunities, and we choose to balance and prioritize it that way. So that's probably how I would answer it. We don't look at our market share as a big stick that we can beat our customers with. We look at it more as the reward and results of doing a really good job in our industry and for our customers.

Okay, got it. And then, Pete, going back to something you alluded to earlier with airlines choosing or pausing to choose a path. We've seen a number of disruptions in the commercial cabin and entertainment space over last year whether it's seat supply consolidation, accounting or FCPA issues, customers suing their vendors. Any sense of how might this be directly or indirectly impacting your In-Seat or other Aerospace components at all?

Yes. Well, you named a lot of the factors. I think there's, it's really hard to quantify. But I think my sense of it is that those disruptions, as you call them, have the net effect of slowing down decisions and programs in the industry. And when, and our product is typically purchased or planned for in conjunction with those other IFE-related programs. And so I think that to the extent that those disruptions slowdown decision-making and slowdown the implementation of new programs, we kind of get slowed down with it. Hard to quantify. I'll tell you that even in our company, there's not clear consensus on this issue. But I look at the disruptions that you're talking about, and I know how our product sometimes get bought along with those IFE decisions and sometimes are inherently included in the IFE decisions. It has to have a slowing effect on us also. Hard to quantify though.

Got it. And then just a quick update on the new antenna product that you expect to launch soon. When is that, is that on schedule, number one? And number two, maybe just talk about the potential market opportunity there.

It's largely on schedule. We have some STCs in place. We have some hardware flying, where we believe that we're kind of at the final strokes of getting the system completely in place with our partners, and everybody's got to do their job to make it all work. We think the demand is pretty strong, not only in the aftermarket, which was kind of our original goal, our original focus, but also potentially line-fit at OEMs, at large business jet manufacturers. So we are now pursuing kind of both sides. And I think it's a pretty optimistic picture. To the extent that we look at revenue increase opportunities towards the end of the year, it's largely based on that plan going forward. And we will update as we can. But so far, we think it does what it's supposed to do, and we think there's pretty strong customer interest in it.

Great. And then finally, just on the semi-test side. When you'd say that you're expecting good things out of that program towards the end of the year, are you talking about with an existing customer or was this with new customers or maybe a little bit of both?

Yes. It's, I can't really get too specific there, but it's both. New programs is probably the better way to think about it because a program can, it is important to have program wins regardless of who the customer is. We do have initiatives with a wide range of the industry right now. The one kind of traditional program that we have been working on is more of a dedicated situation for one customer. And we're awaiting news on that one also for this year. But new programs, at this point, given that we're already in May here, are going to be largely geared towards 2018 events, a little bit slower than we originally expected. But we're pursuing a variety of programs with a variety of participants in the industry and we're optimistic. We're getting good feedback.

Ladies and gentlemen, we have reached the end of our Q&A session. I'd like to turn the floor back to management for closing comments.

Thank you for your interest in the company. We think we're on a good track. And we'll look forward to talking to you again after Q2. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.