Astronics (NASDAQ:ATRO) Q1 2020 Earnings Call

0:01 Greetings and welcome to the Astronics Corporation First Quarter 2019 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deb Pulaski, Investor Relations. Thank you. You may begin.

0:33 Thanks, Christine, and good morning, everyone. We certainly appreciate your time today and your interest in astronomy. Joining me on the call are Peter Gundermann, our President and CEO, and Dave Burney, our Chief Financial Officer. You should have a copy of the first quarter 2019 financial results, which were released earlier this morning. and if not you can find them on our website at www.astronix.com. Let me mention first and you're likely aware that we may make some forward-looking statements during the formal discussion as well as during the Q&A session. 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 what is stated here today. These risks and uncertainties and other factors are provided in the earnings relief as well as with other documents filed with Securities and Exchange Commission. These documents can be found on our website, supportfbc.gov.

1:33 During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAP measures to comparable GAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin.

1:57 Pierre? Thank you, Debbie, and good morning, everybody. Thanks for tuning in to our call. We're going to talk through the following agenda. First, we're going to go through, talk about our semiconductor test We're going to talk through some of the consequences of that. And then we're going to talk through first quarter results, both on a consolidated basis and then through our segments. And long story short, first quarter in most respects was a really strong quarter for the company.

2:53 Demand was very strong. Margins with a couple of weak spots were generally strong and improved. We're happy with that as a first start to the year. Dave's going to talk through our balance sheet. on the heels of our semiconductor sale and some of our debt covenants and financial status in those areas. And then I'll take it back and we'll talk about the remainder of our 2019 expectations. So with respect to the semiconductor sale, as previously announced, It closed on February 13th. We sold that business to Advantest Corporation for $104 million cash at closing. There are some other earn out opportunities, but it's a little early to begin to value those things at this point.

3:52 The $104 million turned into a pretty profitable gain on sale of about $80 million. I'm going to try to confuse people first here for a second, and then I'll let Dave unconfuse them in a minute. But that $80 million gain on sale, when all is said and done, we feel will be a net gain of about $58.8 million. But you'll notice if you look through our non-GAAP presentation, at the end of the first quarter, the net value of that transaction was closer to 62 million. And the reason for the disparity between the 58.8 that we will mention frequently and the 62 that is in that table is that the tax treatment here is a little bit progressive in nature over four quarters. So that 62 on the table on page eight of our press release will change in the second quarter release and again in the third quarter release until it kind of trues up at 58.8 million.

5:16 Because of the nature of the sale and the importance of semiconductor test to our test business in particular last year, we are adopting this non-gap presentation where we're going to for the next three quarters expect back out the semiconductor test business both from the comparator period of a year ago and our current results obviously so that we feel given the circumstances that will present a much better understanding of what's going on in the business underneath. We don't expect to do non-GAAP presentations forever.

6:01 I don't think we've ever done them before. But given the circumstance here with the sale of our semiconductor test business, we think that's an appropriate and helpful thing to do. So first quarter overview on a consolidated basis. Revenue was strong at $208 million. It's like our third highest quarter ever. $3.4 million came from our semiconductor test product line prior to the sale, so adjusted consolidated sales were $204.5 million. That's up around 19% over the comparator period and all organic, as we haven't done an acquisition in the last year.

6:46 The results were strongly driven by our aerospace business, which is now 90% of our total or so. had a reasonable quarter. We'll talk about that in a minute. Net income gap was $78.1 million, including the net gain recognized on the semi-sale. Adjusted net income, backing out that gain, was still pretty strong at $16.1 million or 7.8% of sales. That's up dramatically from our comparator period a year ago when we had adjusted net income of 2.8 million or 1.6% of sales. The comparator period a year ago had a number of things going on in it.

7:34 There were relatively high acquisition-related costs from our telephonics acquisition, which was in December of 2017. There was some legal expense in there, and there was pretty light volume, especially on the test side. First quarter of 2018 was not a solid quarter for the company. Our gap diluted earnings per share for the first quarter was $2.35. Adjusting out the effect of our semiconductor test sale, the adjusted diluted earnings per share was $0.47. Consolidated bookings were strong also at 205 million.

8:27 That's about equal to adjusted shipments. Aerospace bookings were relatively strong. That drove the total at 192 million. Test bookings were a little bit lighter. Consolidated backlog at the end of the first quarter was $400 million. Going into the segments, we'll start with aerospace. As I said, aerospace, 90% of our total. Given the way the company's structured right now, our aerospace segment had a really good first quarter. Revenues of $188.5 million. That's are fifth in a row, up 14.5% over the comparator period of a year ago and up 7.6% sequentially over the fourth quarter of last year.

9:24 Operating profit was strong on the volume, 25.8 million or 13.7%. That's our highest operating profit in a couple of years. And that's after operating losses from what we've been referring to over the last year or so, what we call our three stragglers, or our three troubled businesses. Actually, it's down to two now. And those two put in a combined operating loss of $10.7 million, which is a high number. We get the two down to break even just for comparison purposes, and they're not hurting us. Our operating margin for aerospace would have been in excess of 19%.

10:19 Bookings for our aerospace business for the first quarter were $192 million, just shy of that. That's a positive book to bill, even on record numbers. and our ending backlog was 329 million for aerospace business, our highest ever. I want to talk a little bit about these three stragglers and help put the situation there in context and help you understand where we're going, we think. We think we have line of sight for pretty substantial improvement in the immediate quarters, including the current quarter. and the long and the short of it here is that while we had a $10.7 million operating loss in the first quarter, we are expecting the second quarter loss to be less than half of that, $5 million or a little bit less.

11:19 And then we expect it to drop in half again in the third quarter down to $2.5 million or so. So the question is, how do we get from the operating loss that we observed in the first quarter of 10.7 to somewhere in the neighborhood of two and a half million in the third quarter. And to understand the situation in the first quarter in the press release, we detailed out that we had a material reserve or inventory reserve of a couple million dollars, which is not expected to repeat We had an estimate to complete of this development program that we've had going on for about a year now.

12:06 An increase in cost estimate of $1.7 million. That was disappointing, but again, at this point, we don't expect that to repeat either. So between the material write-down and the estimate to complete, that's 3.7 on a total of 10.7. which gets us down to $7 million which is in the range of what we predicted the first quarter operating loss for these businesses would be. I think we said $6.4 million last time we talked. So it was a little bit higher than that net of this estimate to complete increase and the material write down. The estimate to complete, the program that's driving that is largely are going to be coming due in terms of delivery to the customer in various stages in July, August, and September.

13:07 So we're at the trailing edge of that development program. Unless something goes substantially wrong as we get closer to the end, as you might expect, we feel like we have better visibility into where things are going to end up. And We're one month into the second quarter here, and the indications thus far are pretty positive. So we're reasonably confident that we're not going to have another estimate to complete. Things can happen, but at this point, we feel pretty good. We also, in one of those two businesses, had a pretty major restructuring, not in the first quarter, but in the opening days of the second quarter.

13:56 That was at our Aerosat business, and it was a restructuring that we expect will save fixed costs in the neighborhood of $3.5 million on an annual basis. That will bring that business much more in line with the revenue expectations that we have for the remainder of the year. The final thing that's worth mentioning is that both of these two troubled businesses, Aerosat and CCC, are anticipating revenue increases specifically in the third quarter and fourth quarter. for that to happen at CCC, this development program that they've been working on needs to be wrapped up. But they pretty much have the business in backlog to drive those revenue increases.

14:54 So the risk there is getting the program developed on time and within budget. At Arrowsat, we're also expecting revenue increases in the third and fourth quarter. Those orders are not yet in place, so we need to get those orders. And so that's where the risk is there. It's less a development risk, it's more an order risk and a timing risk. We're optimistic about our prospects. It's a question of whether they line up with our expectations for our 2019 year-end results. So that's the issue. we've put in a major restructuring in one of those two businesses and we've chipped away at the development expense we think we have the material reserve cleaned up and if the revenue picks up in both locations towards the end of the year then those predictions I made should be pretty solid which is having the operating loss from those two businesses drop to 5 million or a little bit less in the second quarter and 2.5 million or so in the third quarter on our way to break even.

16:16 Switching over to our test segment, our test business is going through a pretty major adjustment as you might expect. The sale of the semi-business fundamentally reshapes the business. Last year we came in with test revenues of about $128 million. This year, our forecast, our revenue forecast is between $50 and $60 million. You can see that our Q first quarter adjusted segment sales were about 16.3, which is in line with that annual forecast. Our first quarter adjusted operating margin was 7.8% after backing out the semiconductor sale and semiconductor revenues.

17:04 And that 7.8% on inline revenue confirms that our cost structure needed to be adjusted to the lower volume expectations. And we have similarly, as I was just describing in the aerospace side, we've also Thank you for joining us. in that business. A lot of moving parts in test.

18:00 Our best advice for model makers at this point is to anticipate somewhere breakeven or a little bit north for the business and we're obviously keeping a really close eye on it and we'll report regularly as to how we see things shaping up. At this point I think I'll turn it over to Dave to talk through balance sheet related issues.

18:28 Thanks, Pete. I guess for clarification, Pete mentioned when we look at the non-GAAP reconciliation to pull out the activity of the semi-business that we sold. He touched on the $62 million adjustment to net income to remove the effect of semiconductor. The biggest component there is, but not the only component, the biggest component is the gain on the sale. There will be activity going through there to remove the activity, the operating activity of the semi-business from the first quarter and some straggling activity that we'll have through the year potentially there. But when he talked about the net gain there, the difference between the $58 million and roughly $61-plus million non-GAAP adjustment, not to get too technical, because I'm not a tax guy, but our taxes are accrued at the expected annualized tax rate, which in our case is about 22%, including the tax on the gain of the sale of that semi-business, which actually has a higher effective tax rate than what our consolidated rate is. But we don't record that particular

19:59 expense in the quarter it happened. It's part of our blended rate of 22%. But when we talk about the net gain on that particular transaction, we're talking about it, that of the gain on a standalone basis there. So By the end of the year, everything will even out there. But getting to our balance sheet, it was a solid year, a solid quarter. In cash flow generation, we generated about $11 million in cash from operations. Our outstanding debt at the end of the quarter was down to $115 million, down from $232 million at the end of 2018 as we used the proceeds from the semi-sale to reduce leverage.

20:46 We have about $384 million available from our revolving credit facility. And our current borrowing rate is at a low LIBOR plus 100 basis points through the second quarter. So that's a very favorable borrowing rate. We expect to have another strong year of free cash flow and are currently levered fairly conservatively, which gives us many options in terms of capital deployment. Our focus is to continue on organic growth and acquisitions and growing the business. But we do have an authorization to repurchase $50 million worth of our shares. It's fully available at this point.

21:31 And if they present the right opportunity, I expect that we would measure that against other investment alternatives. in terms of capital deployment decisions. And I guess last of all, it's not a balance sheet item. Let me mention too that we've made significant improvements in our working capital management. Our inventory turns and have improved significantly over the last three quarters as a percent of sales, as has our net working capital. I expect that to continue to be strong, included and our networking capital is a significant amount of unbilled receivables, largely related to a handful of military programs that we expect to deliver and complete in the second and third quarters.

22:26 So I expect that unbilled receivable to drop as we move through the second half of the year. Lastly, we have two 10% customers for the quarter. both in our aerospace segment. One represented 14% of sales, the other was 13% of sales.

22:46 And that's all, Pete. Okay, so looking forward, the rest of 2019, we are leaving our revenue guidance intact and unchanged. That has consolidated revenue in the range of $760 to $805 million. at the midpoint. That's about 8% growth on an adjusted basis. Aerospace, we expect to be 710 to 745 million, 8% growth at the midpoint, and test, 50 to 60 million, but actually quite a bit up, 14% on an adjusted basis growth over last year.

23:35 In terms of the sequence, For the flow of the year, we're actually expecting the second quarter to be a little bit lighter. We're expecting revenues somewhere in the $190 million range. It's just timing and the way things are lining up. We also will have some restructuring charges of approximately $2 million based on the initiatives that I described earlier in this call that will hit in the second quarter. And again, we're expecting that our two struggling businesses will improve their operating losses to somewhere in the neighborhood of $5 million or a little bit less.

24:22 So even including the restructuring charges, this should be a pretty big improvement over what we saw in the first quarter. I think that ends our prepared remarks. Christine, I think let's open it up for questions now. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For specific speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of John Tenwantang with CJS Securities.

25:11 Please proceed with your question.

25:14 Good morning, gentlemen. Nice quarter. Thanks for taking my question. Thank you. Pete, can you talk about the real-time progress you're currently seeing at Aeroset? I think you mentioned some order risk for the back half, but if I recall correctly, your distribution partner should have been taking orders for a little over a month by now. What's the update from them? What's the feedback go to bed?

25:37 Well, the feedback is that the system seems to work and work pretty well, and customers seem to be pretty enthusiastic about it. A couple things need to happen for orders to materialize the way we envision, and one of the critical ones is STC, Supplemental Type Certificates, to put the system on airplanes. That's where things are right now. I'd say approximately half of the airplane models that we ultimately want to be targeting have STCs, but half of them don't. So those STCs are getting a lot of attention, and we're watching it really closely.

26:28 And I think by the end of the second quarter, will kind of know where the year's going to shape up. But what we need to do is see those STCs happen and then we need to see, you're right, our partners start accumulating orders and in turn buying things from us.

26:50 Got it. And on the models that do have the STCs now, are you seeing good uptake at all? Or is it too early to tell?

26:57 Reasonably good. I mean, it's a little early to tell. We've put... We have 20 systems or so kind of out there, sold or installed, about to be installed. And so it's one of these things where it's a little bit crawl, walk, run, but we're somewhere between the crawling and the walking. We'd like to be running in the third and fourth quarter. And those are the orders that are materially different than what we've seen so far.

27:24 Okay, great. Thanks. And then just in terms of the comments you made about Q3 and Q4 strengthening. I know you said that these problem businesses would step a little bit. Do you see any strengthening in the core aerospace business as well?

27:39 Well, we would hope to continue to be strong. I mean, you know, we watch our bookings pretty closely, and bookings have been positive even on pretty strong shipments. So, you know, there are some things happening in the industry that that we're mindful of. I mean, all the trade tariffs, all the 737 situation, things like that that are a little bit concerning. But overall, our sense is that we're well positioned. Our customers are enthusiastic about the goods and services that we're offering and we continue to expect to have a really good second half of the year.

28:23 Okay, great. And then you mentioned the 737. I was going to ask if you could break out what kind of impact that's currently having on your business now, if you expect it to be significant in the future, and when do you have it resuming full production in your outlook?

28:38 We don't pretend to know much about the status of the program that others don't know, but our impact so far has been, I would say, pretty modest. At this point, we're thinking it's going to be somewhere in the neighborhood of a $5 to $7 million hit to revenue as best we can tell in 2019. Fortunately for us, we're seeing enough offsetting growth in other areas that we did not feel it necessary to revise down our sales forecast for the rest of the year. So that's part of the thinking as to why we held the plan where it was.

29:24 but it seems to be a pretty fluid environment and our business with the 737 in particular, LineFit 737s that is, we have a forecast and then we get release orders in relatively short order and those release orders don't go out too far so it's a little hard for us to predict past the July time frame but what we've seen is generally consistent with what's been out there in the press in terms of build rates.

29:56 Okay, great. Thank you.

29:58 Sure. Our next question comes from the line of Josh Sullivan with Seaport Global. Please issue your question.

30:06 Hey, good morning. Nice quarter here. Thank you. Just to follow up on that 737 question, just curious if you've seen any dichotomy between supplier furnished equipment versus buyer furnished equipment related to the 737. Maybe you answered that by saying your timeline doesn't go out that far, but just curious if there's any difference between the two at this point.

30:28 I'm not sure I know how to answer that question. Our BFE is usually not line fit. It's usually retrofit or aftermarket. And those are agreements generally with leasing companies or airline operators. And I would not say that we've seen a related slowdown from those people. So that's not really an effect. The effect on us so far has just been line fit and for us that's primarily exterior lighting on the 37 and we do some cockpit work through avionics companies and we most significantly do passenger service units or PSUs in the cabin.

31:29 those things that hang overhead where the reading lights and the audio and oxygen system and things like that are resident. So we've definitely seen an impact on line fit in the short term. I don't feel like we've seen an aftermarket effect yet.

31:49 In terms of timing of that, the biggest impact is going to be on the second quarter. That's part of the reason we're projecting the second quarter to be our weakest quarter. The expected cadences on our deliveries for 737 drops in the second quarter and then throughout the year as you get to the end of the year we expect it to recover and get back to a normal build rate by the end of the year.

32:23 And then just with regard to the three stragglers, so is the total expectation for the year still $18 million as you broke it down, $10, $5, $2.5? So we should be breakeven by Q4? Is that the way to read that?

32:37 I think that's a good plan at this point. We obviously will update it as the quarters go by. I guess I should say that I think based on timing, there's opportunity to do significantly better than that. But we're hedging a little bit just because this has been a little bit of an ugly road. So for now, that's our expectation. But there's room for it to go better. There's also, I suppose, room for it to go worse. I mean, we could have setbacks on our development plan. We could have a slower than desired takeoff, take up in some of the programs that we're expecting to hit in the third and fourth quarter. But on balance for now, that's a reasonable expectation.

33:24 And then just one last one on capital allocation front. What are the thoughts on target acquisition multiples at this point, what you're seeing? What verticals remain attractive? And then I guess, what's the hurdle rate between doing more M&A versus executing on that repurchase authorization at this point?

33:44 Yeah, so typically we don't use a cookie cutter approach in terms of our hurdle rate to the acquisitions. They come with different qualities of earnings, if you will. But I'd say at the low point, we would expect at least a 15% hurdle rate on an acquisition. When we look at it for one that might have a little bit more speculative earnings potential, we would look at a discounted cash flow using a rate probably approaching 20% in some cases. So that's how we approach the acquisition side of it.

34:35 Okay, thank you. We would use a similar approach to looking at a share repurchase probably at the lower end of risk since we tend to know more about our own business there. But There's a lot of academic articles out there that notoriously cite management's inability to predict their stock price in the future. There are a couple of very large companies out there that have had big share buybacks at peaks. Historically, when we did our last share buyback, what we did was we put a 10B5 program in place with different purchase prices where we would buy more shares at lower prices and execute through a 10B5 program. And that ended up being very successful for us. I don't remember the average price we purchased that, but it was significantly lower than where the share prices were a year later.

35:49 Okay, thank you. Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.

36:00 Hi, good morning. Good morning. Pete, I just wanted to first ask you, you had a really nice quarter within aerospace in the electrical power and motion product line and it's clearly sort of reset up here into the low 90s in terms of the contribution. Is that a revenue run rate that's sustainable through 19 and into 20 or... Is there even maybe upside as some of the bigger programs are on with U.S. Airlines pickup speed or how should we think about that?

36:33 Well, we think it's a pretty solid business and it is performing really well as you point out, up 27% over a year ago. A year ago, It was flexing up, I believe, in the first quarter and strengthened over the course of the year. So it's been a nice run. You know, we continue to have a very strong market position there, and we think it continues to be an in-demand kind of product offering, increasingly in narrow bodies, just like it has been for a long time in wide bodies. So, you know, I sure hope it continues to expand like that.

37:19 I'll tell you that one of the lesser product lines, Ken, you probably know, built into that product grouping is our flight critical power distribution primarily for smaller private aircraft, which is something that we have been working on and investing in pretty heavily over the last five years and it's It's taking on a bigger role also. Our expectation is that the end of this year, next year, that product line is going to start having a more material impact, not only on our electrical power and motion product reporting specifically, but in terms of our overall consolidated income statement. It should be a good contributor.

38:10 Okay, no, that's helpful because you did have a nice ramp last year on this product line, and so the comps are going to get tougher. So I imagine the reported growth will slow as you go through the year, but if you're able to maintain that sort of 90 to 95 million run rate, that represents a very nice step up in that business. So that's encouraging.

38:29 Yep, yep.

38:33 on the test systems side of the market you had a really nice military quarter there and I know this business can be very lumpy but are you seeing any sort of catch up it sounds like from a lot of other suppliers that they're finally starting to see some of the money that was authorized in fiscal 17 and 18 flow through are you seeing that as well or are there any particular programs you'd point to there that drove the nice quarter on the military test side

39:03 Well, I think the shipments in the first quarter are a reflection of bookings that we had in the third and fourth quarters, and it's a range of programs. And I would agree with you that we are starting to see money flow a little bit better there. That's part of the reason why we were comfortable selling our semiconductor test business like we did. and the growth that we're expecting, even the adjusted growth that we're expecting on the AMD side of test is in the neighborhood of 14% or so year over year. So yeah, we're pretty optimistic for some prospects. And like is often the case in the test business, there are a few target programs out there that for a company our size could be game changers. And I guess I'd prefer to stay away from naming them at this point, but it's a little bit of a whale hunt and it's nice to have two or three whales that you're pursuing.

40:12 And if things go right, you know, we think that those could be, they won't be necessarily affecting 2019 results, but they could be 2019 awards. driving the next two or three years in a much higher trajectory. I said earlier it's a transition quarter for our test business. It hasn't been easy. We sold off a big chunk of it and we had to right size the organization for the prospects that are immediately in front of it and then we got to turn and execute on those prospects. So there's There's a lot in front of our test business, but it's by no means a doom and gloom scenario.

40:57 It's one which I think has some very worthwhile targets in front of it.

41:05 That's helpful. And if I could just finally, on the struggling businesses, your stragglers, on primarily Eurostat and CSC, is the right way to think about it with the restructuring you've done and with visibility you have on the cost side that the targets you outlined in terms of sort of improvement on the cost side really are not reflective, especially in the case of Aerosat. They're not assuming that substantial revenue ramp in the second half of the year, but you can really... Get this down to the $2.5 million, maybe some help from the top line in volume, but that's really reflective of the improvements on the cost side. Is that the right way to think about it?

41:47 It's both. If we don't get the revenue ramp, then the cost cutting that we did will result in something more than a $2.5 million per quarter loss, I'm guessing. I don't have that in front of me, but but we did what we did with the anticipation of a kind of a middle of the road range of likely outcomes for the revenue ramp. And it's really, it's a similar situation at CCC. You said CSC, just to be clear, it's CCC where there's a cost challenge in terms of that development program and our assumption is that that related cost winds down through the third quarter and that the revenues that are in part being driven by that development program pick up in the third quarter and fourth quarter.

42:50 It's a two-step approach. Manage the cost, get the revenue. If we do that, I think we're much closer to line of sight to you know, kind of reasonable, a reasonable world than we have been over the last year or so with those two in particular.

43:05 Now, it looks like you've significantly de-risked those businesses this year, so really nice work there. Well, great quarter. Thanks for the time.

43:14 All right. Thank you. Our next question comes from the line of Michael Ciamoli with SunTrust. Please proceed with your question.

43:25 Hey, good morning, guys. Thanks for taking the questions. Nice quarter, and I'll have to apologize. I know I had a note that went out earlier today with the wrong consensus number, so that's on me. I apologize for that. We didn't notice. We didn't notice, Michael. I think everybody else did. Just on Ken's questioning, I know you had been looking for Erosat, CCC, and Armstrong to be, I guess, to go from $45 to $80 million. You took some costs out. Where do you see the revenues now this year, just given sort of the revised expectations?

44:03 That's a good question, and it's hedging down a little bit in that when we talk about Erosat in particular, we talk about our tail mount business jet program the most, but our expectations for 2019 were really built on three legs to a stool. One of those legs moved out of 2019 into 2020. So I'm not exactly prepared for your question, but I'm gonna say 85 consolidated is gonna turn into 70 probably. or so for those three. Let me be more prepared next quarter, but I think it's in that range.

44:52 It's down a little bit. It's still an important big improvement.

44:58 Got it. But then to your point, you've got strength in other areas of the business, keeping the guidance the same. and then just maybe a little bit more on the 737. I know you called out the impact, but what sort of scenarios, can you kind of walk us through maybe what you had been thinking? I mean, most of the supply chain was obviously doing 52 a month, prepping for 57. I wouldn't expect you to have any other visibility beyond what we've heard from Boeing, but it seems like this plane's not going to fly until... September, you know, I know Spirit is producing at that 52 a rate, but storing fuselages and presumably none of the interior equipment is going in there. I may be wrong, but I mean, you know, what, you know, what, what sort of sensitivities or, you know, I know you've got a range of content on narrow bodies, but are you kind of thinking, you know, kind of that pole gets back up to 52 a month this year or any more color on that?

46:00 Um, uh, Well, I think our official communication has it going back up to that intended 57 or 58 later in the year. We're taking a pretty big hit in terms of volume in the short term, like May and June. And Dave said that's part of why our second quarter is going to be a little bit lighter. I guess I can offer this. Most of our content comes out of our PICO operation in Portland, Oregon. And and Pico has done a really good job supporting Boeing in its various endeavors and it is a very little inventory, very little float between our facility and Boeing. I think Boeing is highly confident in our ability to meet their requirements and if you stand near the loading dock at that operation, I mean you see the Boeing trucks pull up in the morning and it's on the production floor up in Seattle that afternoon.

47:03 And so I think we're not getting any relief. My sense is, in some cases, Boeing's using the slowdown as an opportunity for some suppliers to get caught up. That's not our case. We're not getting that treatment. I think because we are caught up, if that helps.

47:26 Got it. And last one for me, you called out the operating margin, which was really strong, X the losses. I mean, 19% just to calibrate us going forward. I mean, you're going to have those losses improve, obviously, but is that sort of a margin you guys think is kind of sustainable once you get the challenge businesses kind of up and running to normalized levels?

47:55 I would sure like to think so and that's a pretty handsome margin and it's territory we haven't been in for a really long time but those three stragglers, that 19% kind of assumes they get to break even. We actually think they should be well above break even and especially with the technology and kind of the niche markets that they operate in so you can take a napkin and play around with some numbers assuming they got comparable margins to the rest of our business and it really starts to look like a nice picture. So that's where we want to get to. The first quarter was obviously strong. There was a lot going on.

48:40 We need to make sure our revenue stays up at that level. Second quarter will be a little bit of a hit and we've got the restructuring costs staring us in the face and we're still winding down The operating losses on the two stragglers at this point. But the second half of the year could shape up to be pretty nice. Got it. Perfect. Thanks a lot, guys. Thank you. As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Dick Ryan with Doherty. Please proceed with your question.

49:20 Thank you. So, Pete, you took Armstrong off the list of stragglers. Is that due to better oversight, or are there some changes going on in the certification business, or a combo of both?

49:35 Certainly better oversight. As you know, we acquired Telephonics a year ago, last December, and we're Early middle last year, we kind of moved Armstrong organizationally into the telephonics structure, which led to, I think, much better synergies. And now we have three operations in the greater Chicago area so they can share resources and minimize some costs. So we took them off the list in part because they just weren't hurting us really badly. It's not as though that business by itself is very profitable at this point, but it's in that kind of break-even range. So at that point, if we can get the other two there, we'll stop talking about them also.

50:29 But obviously, $10.7 million operating loss in the first quarter was on the high side of everybody's expectations. And we're just really happy that the rest of the business performed really well so we could kind of swallow it. But we expect that to get better. in the short order here also.

50:49 Sure. Dave, it no longer looks like you're talking about E&D expenses or breaking them out. Is there any reason necessarily to do that or should we kind of consider that they would remain in a 12% sort of range of revenue?

51:10 Yeah, I don't bring them out because there's They're not the explanation to any of the margin changes. It's a pretty consistent run rate that we've been at for the last four quarters or so. So that's the reason that we haven't been breaking that out, running it. On an annualized basis, a little over $100 million or so. Yeah, okay. Great, thank you. Let me clarify, that's on the aerospace side.

51:49 Yeah. Okay. Great, thanks Dave. Our next question comes from the line of Scott Lewis with Lewis Capital Management. Please proceed with your question.

52:04 Hey, good morning guys. Good quarter. Thanks for taking the call. Thank you, good morning. Good morning. Pete, just on the CCC development program, I know there were a lot of kind of technology, high hurdles to get over, kind of tens on the degree of difficulty scale. Are you past all those? In other words, do you just have some kind of basic blocking and tackling things to get done before it's ready, or do you still have some hurdles to get over?

52:39 Well, it's not done yet, so... I guess it would be risky for me to say there are no more hurdles, but we're reasonably confident that there are no architectural showstoppers in front. So it is more execution, blocking and tackling, nothing that we're really nervous about, kind of holding our breath, hoping it works. And again, we're within, in some cases, 8 to 10 weeks of some of the earlier delivery deadlines for the system to be delivered. So there better not be major show staffers at this point or we've got a big problem.

53:24 So we're reasonably optimistic. And I would just take the opportunity, since you bring it up, Scott, that the program that we're working on is substantial and we think will be a... something to brag about in due course. And the system that we're developing, we think the architecture is something that will be the kind of premier program in the industry. So it will enable systems and use cases that otherwise in the state of the art in the industry today is just really not very feasible. So it's not gonna be cheap. but these are designed for pretty expensive airplanes by operators who can generally afford the best.

54:17 So we expect it's going to be a highly considered and highly sought after system in the industry as the industry goes forward.

54:28 Okay, great. And then do you expect to have a press release when you at some point install the first system or have them available for sale?

54:39 It has been an active discussion point, and at this point, our customer has proven to be more than shy. So we haven't been able to do it, but I'd love to do it if I could.

54:52 Okay, great. Thanks for taking the question.

54:55 Sure thing. Our next question comes from the line of Christopher Hillary with Rubai Capital. Please proceed with your question.

55:04 Hi, good morning. Good morning. You made a few comments to this effect already, but I was curious if you could share any other commentary you might have on where you see changes in your product demand out in the marketplace, things that are kind of going up or anything that you'd watch for things that aren't progressing as quickly as you'd like.

55:33 Well, there are two sort of spots we have seen. devoted plenty of airplay to in recent calls, including today. But I think even in those cases, I think we're feeling like the market's turning in our favor. And going back to the CCC VVIP market, for example, it wasn't too long ago that there were geopolitical tensions in the world, and there were oil price pressures in the world, and I mean, severe oil price pressures. And there was this lag between airplane models, which kept the market rather depressed. And the 787 has never been tremendously popular as a VVIP platform.

56:18 The 777 is between life cycles. The 737 MAX wasn't out yet. The A320 NEO wasn't out yet. The A350 wasn't available. And all those things have kind of turned around such that all the airframes are available. The MAX obviously has short-term challenges, but that's going to be a very popular VVIP platform. And as those airplanes become available and as we get through this development program and have kind of what I would claim to be an unrivaled product offering out there, we're going to have a front row seat at that business as it turns around and and that business, I believe, has the potential to be a very solid, profitable contributor.

57:06 I could go through a similar exercise with the business jet world, large business jets, trans-oceanic business jets, with our tail mount assembly. The rest of our business, I feel, is really well positioned. We've largely positioned ourselves to be a a supporter of the in-flight entertainment industry. We're not an in-flight entertainment provider. We don't go out there and sell content and bandwidth and all the ancillary hardware, but rather we sell to the companies that do that and primarily on the hardware side.

57:52 and that's proven to be something that they appreciate and really like. They need hardware. Most of them, many of them, would prefer to focus on the bandwidth and the software. When you think of the airplanes, they're scheduled to fly over the next 10 years and you think of major parts of the world opening up, including China, and you think of the relatively short life cycle of consumer electronics, and the increasing expectations of performance, we think there's an opportunity not only to outfit a lot of airplanes with hardware but to obsolete our own stuff in relatively short order. It's not like a braking system on an airplane that's going to be relatively unchanged for 30 years.

58:42 The wireless access points or the file servers or the antenna systems are all going to need to change with the times. I guess I think we're pretty well positioned, even if the industry were to slow down, the sweet spot of where we're focused is a pretty, it's a rich one. And it's one that rewards good performance. And I think we've got an unrivaled set of product offerings and customer relationships and 250 airlines around the world. It's a good situation. Great. Thank you. Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

59:31 No closing comments. Thank you for your attention. We look forward to talking again at the end of the second quarter. Have a good day. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.