Q3 2019 Earnings Call
Greetings and welcome to the Astronics Corporation third quarter 2019 financial results Conference call.
At this time, all participants will listen only mode.
Brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Deborah Pawlowski Investor Relations. Thank you you may begin.
Thanks, Christine and good morning, everyone. We appreciate your time today and your interest in electronics.
Joining me on the call our Pete Gundermann, our chairman, President and CEO and Dave Barney Our Chief Financial Officer, you should have a copy of the third quarter 20, <unk> financial results, which were released earlier. This morning, if not you can find on our website at www Dot Astronics Dot com.
Let me mention first if you were likely aware that we may make some forward looking statements. During this formal discussion as well during the Q wage pressure.
It was quite a future events that are subject to risks and uncertainties as well as other factors could cause actual results could differ materially from what I've stated here today.
These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with Securities Exchange Commission.
Doctors can be found on our website for it S. P C topical.
During today's call. We will also discuss 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 gap.
We have provided reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release.
When you turn it over to keep again Peter.
Thank you Debbie and good morning, everybody, thanks for tuning into our coal.
Our agenda. This morning, I'll make some comments on kind of the major themes and trust affecting our corridor.
Yeah and affecting our business.
They want their Bonnie will play out through some of the specifics on our income statement and balance sheet and then we're going to turn attention to the future both.
To wrap up to 2019 in the fourth quarter that we're currently.
And early look what our expectations are for 2020.
And as Debbie or kind of him to that.
We're going to Ah often refer to adjusted numbers when we're talking about.
Persons to last year for those not as familiar with the story we sold.
Hey.
Someone conductor test business in February of this year, which was a pretty major contributor to our revenue and income in the middle of last year, the second and third quarter in particular so.
Persons backwards, one needs to be careful what they're looking at adjusted numbers or Oh as reported numbers.
Those are year over year comparisons will get simpler going forward.
In the fourth quarter and certainly in 2020.
Summary of our third quarter, a topline was about where we were we expected 175 million.
Was actually our lightest quarter in over two years.
Since 2017.
Down sequentially from our second quarter of a 187.
As we have to that and feel more convicted about so.
We are being affected pretty significantly by the 737 Maxim grounding specifically we've put.
Certain amount of product on the airplane line fit.
And that revenue, obviously is not too much affected because boys continuing to build at 42 ships a month.
But.
A lot of our sales thrust goes to the aftermarket through the airlines and the airlines essentially worldwide are down about 800 aircraft from where they thought they would be at the beginning of the year. So it's a capacity crunch.
And it affects different companies different ways.
One of the things that were being affected by is that the airlines are very reluctant to take airplanes down.
To put unnecessarily to put on a you know passenger amenities, which is largely what we put on commercial airplanes. So.
It's hard to quantify the impact of that but programs in various parts of our business are slipping to the right and it's playing out in our bookings and playing out in our shipments.
Segment Wise aerospace in particular, obviously, a majority of our business was 158 million again, our latest than a couple of years.
Sounds sequentially from 174 in the second quarter and 189 in the first quarter. So that trend. Obviously is disturbing 189 to 100 somebody four to 158.
We think the third quarter, there's a low watermark and we'll talk about fourth quarter in a bit here at the end of the call, but the fourth quarter, we expect to see a rebound based on schedules.
That are in place.
[noise] or test segment in the third quarter.
As a little bit of a different story 17.1 million adjusted revenue almost double the comparator period from a year ago that shows some strikes and our aerospace and defense markets.
Also shows the impact of one of our two recent past acquisitions.
Freedom communication technologies.
Early in the quarter.
For the year or just in sales were up 7% still even with the weakness in the third quarter two 566 million.
We faced significant headwinds in the quarter and I want to what's some of them talk about them going a little bit of detail.
We've talked in the past about our three stragglers or three struggling companies and they again had a pretty big negative impact on our quarter of 9.2 million.
27 million operating loss year to date.
Well get into the details in a moment, but we see a path to reduce that number's substantially or eliminated and the new year, we'll talk about that in the second.
Terrific sponsors are also on the increase in the third quarter, we had terrific spends of 3.2 million.
Tariff expense has been increasing as the years progressed about a million a coordinated that's the bad news, but again, we have a plan where we think.
You know everything else being equal we think we can reduce tariffs roughly and Uh huh.
In 2020.
We also had a small loss on the sale of a product line. That's part of our ongoing restructuring efforts, we actually have a large number of restructuring efforts underway. It's turned out 2019 to be a Europe restructuring.
That loss was 1.3 million in the quarter not expected to continue or which Pete obviously.
We also took a legal reserve of 1.7 million related to an ongoing patent litigation suit that's been going on for almost a decade now started in late 2010.
I'll give you some details on that we tend not to talk about a too much but it's something that is affecting our third quarter may affect our fourth quarter.
And you know may well not be resolved for who knows how long could be another indefinite number of years.
So let me take these headwind this kind of.
In order or maybe some pause to hurt us, but somewhat of a terrific sponsoring one of the efforts we have underway is restructuring our supply chain.
We get hit with tariffs out of components that we source basically in China with the ongoing trade war and we're adjusting our supply chain, where we can to minimize.
Things that we buy from China, and we're moving them the elsewhere.
In the world and those efforts or are you know advanced stage and if nothing changes in terms of tariff structure.
And tariff topics.
As we project in the 2020, our tariff exposure should be half of what it is this year.
So we think that's pretty good progress or it's not obvious we'll be able to do much more than that in the course of a year, but we think that's going to be a positive you know moving a headwind to a tailwind when you're looking at your to your comparisons 2020 versus 29 thing.
The three stragglers are probably the most important topic.
And in order of simplest discussion to hardest discussion. The Armstrong is a certification company that we've been talking about for a couple of years, we moved it organizationally into.
Our CSC organization in Chicago, CST stands for conductivity systems and certification.
And then.
The current a moment or basically physically relocating Armstrong.
From its itasca operations into our C. <unk> C. One of our CSC facilities in Waukegan, Illinois, So we're basically taking our footprint in Chicago from three organizations down the too.
And we have kinda restructured and really redefined Armstrong's business mission.
And it's basically out of the woodlands operating slightly below breakeven, but nowhere near the losses that we had seen.
And what's more so because we have some reason to be hopeful that it could become a very significant contributor to 2020 based on some pieces of work that our outstanding if we're successful.
Winning those pieces of business this will actually become a positive topic.
Perhaps in our next phone call.
CCC custom control concepts is the second of our three stragglers it has to be.
Seattle based company that does cabin to management systems for what we called VIP aircraft. These are private aircraft.
Commercial aircraft basically converted private aircraft.
Like seven three sevens, or Athree hundred twentys or Athree hundred thirtys or.
Triple Sevens for example.
On CCC is been struggling with a development program, which they won right about the time, we bought the company 18 months ago.
And [noise].
That development program has turned out to be a real challenge and then the source of continual losses and heavy engineering expenditures trying to get it under control even as we essentially rebuilt the company as the thing progressed and the message today.
Okay is that this development program is on track.
We believe to conclude and read you ended the fourth quarter and the middle of December .
And if it concludes that will.
Open the door for a reduction in engineering expenses as we enter into 2020, it'll still be reasonably heavy in the first quarter, but a lot of the efforts in terms of outside consultants and.
Qualification and certification expenses should drop and we expect.
You see seem to be a profitable.
Or right at breakeven in ER and the for the year and especially in the second half.
Brings us to our third straggler Arrow said or sets or Internet company, we've talked about aerospace quite a bit.
Our strategy has been to try to grow arrows that into critical mass that strategy has resulted in significant losses, and we're basically reversing course and have made the decision.
To reorganize the company and consolidate much of its operations also into CSC and Chicago Aerostats.
Located in New Hampshire.
And by doing that we think we'll be able to more efficiently leverage the technical and manufacturing resources required to pursue the arrow set pieces of business and we're not sure. We're gonna pursue all of aerostats pieces of business. There are about three or four major thrust did.
I think on how your health them and we're reviewing which of those we want to continue in which ones we don't.
And.
We're doing bad in conjunction with customers.
But to the extent, we can and we're expecting by the ended the quarter to publish a or take a reserve in the fourth quarter related to that refocusing and the relocation and move of that business. The move itself is expected to happen over the first half from 20 Twond.
<unk>.
Perhaps in the second quarter.
The quote from me in the press release as we expect that reserve will be at least somewhere in the neighborhood of 5 million and could be over 10 million, depending on which pieces of business, we pursue and which ones we decide to walk away from.
So the goal with the three stragglers.
As to a turn what has been essentially a 27 million dollar operating loss. So far this year into breakeven in 2020 that sounds aggressive, but we really believe that were on the verge of.
Oh being able to achieve that given the concluding development program at.
But CCC.
And the pending consolidation on the reserve, we're going to take in the fourth quarter four arrows side.
[noise] as an aside and we don't we don't talk about this too much.
On these calls, but if you looked back over 2019, we have done a number of restructuring efforts to become a year of restructuring as I said earlier and it's been pretty comprehensive and touched many parts of our business. It started early in the year with the sale of the semi test business that was $100 million sale.
Prompted a pretty major restructuring of our test segment in terms of reducing cost and reallocating costs.
We also added a couple of acquisitions smaller acquisitions to our test business freedom in the second quarter, a company called diagnosis and the most recent quarter.
And we think that the combination of the sale of the semi test and the addition of the two companies is good so our test business up for a nice rebound or away from semiconductor and more towards traditional our traditional aerospace and defense lines of testing and 20 Twond.
Encouraged that the prospects there.
I mentioned that we're consolidating Armstrong to see us see that's happening right now taking three Chicago operations down the too.
We're also now moving arose set into CSC that will.
Downsize significantly in operation in Manchester, New Hampshire too.
Again, Waukegan, Illinois, we'll still have a sales office that will I guess I didn't mention this but then they have you're going to retain a an engineering sales program management office. So we keep the critical intellectual.
Property and experts critical to making the technology go.
But the but the manufacturing operation itself with all the overhead and support systems will be moved to watch you again.
The other thing that happened was the in the third quarter was we sold on airfield product line airfield lighting product line.
We incurred a small loss on that but it helps us again refocus on the pieces of the aerospace world that we want to continue with.
Into 20 twice so the goal of all this is to position the company for significantly improved margins in 2020.
Let me say a word about the the litigation charge. This was a a patent infringement suit or series of suits that was brought against us by Lufthansa Technik a way back in late 2010, it's largely been a a debate in the U.S. and in Germany.
Now it has recently been expanded into France, and the UK.
In the U.S., we were successful in basically defeating the patent and the case is over and no charges against our company in Germany.
The goal is seems to be going the other way it's a.
We've got some indications from the core that have led us to a incurred charges.
Including the charge in the third quarter.
Our total accruals or 2.7 million.
Our legal advisors on the ground in Germany.
Suggests that the range of eventual awards could be somewhere in the neighborhood of two of between 2.7 6.3 million. So we're expecting the court to speak some more in the fourth quarter, we're expecting that we could have an increased accrual based in that way.
Range.
We also expect that an appeal is likely a whether the decisions in that range or.
Or outside of it we expect that the an appeal will be filed by one side or the other perhaps both sides and that this could go on for a number of years, there's no real obvious end in sight.
The technology in question I guess I would add is not something we consider critical its not something that's important really to our product line and in fact, once we became aware of the situation we basically designed.
The technology out and had Boeing and Airbus approval within like three months, which is amazing for any kind of change.
But it's one of those things we have to deal with.
And have been dealing with for about a decade now.
So given all that I think I'll turn it over to Dave talked through the income statement on balance sheet, and we'll come back and talk about the future.
Thanks Pete.
I'm Gonna go right to the segment discussion Pete covered a lot on the yeah I'm on the consolidated side of things.
In the third quarter operating in the Aerospace segment will start with and the third quarter operating margins contracted.
In the quarter from lower sales volume as Pete discussed earlier.
We had $3.2 million of terrorists tariffs, which was.
2.4 million dollar increase from last year.
We also had a $1.7 million increase to the litigation reserve as Pete just discussed.
[noise] losses from the three challenged businesses all in the aerospace segment were reduced by 2 million to $9.2 million, including a program reserve of 2.2 million for the VIP program.
Pete mentioned.
Hi.
Tariffs impacted the segment by $3.2 million.
The vast majority if not all of our terrorists or exposure is in the aerospace segment.
Year to date aerospace operating profit increased slightly to 48.9 million.
As a percent of sales operating profit was down 10 basis points to 9.4%.
Aerospace operating profit in the first nine months of 2019 benefited from higher volume.
Amortization expense related to acquired intangible assets was $2.3 million lower than the year before.
And we had slightly reduced operating losses from the challenge business compared to the prior year.
These benefits were offset by higher tariffs. If you remember last year. The tariffs began in the third quarter. So we really hadnt seen much in the way of tariff tariff costs last year until we hit the fourth quarter.
Moving over to the test segment third quarter.
In February this year, we divested our semiconductor test business. So for comparative purposes, it's important to keep that in mind.
Unadjusted test system sales were $19.3 million as reported down 23.8 million.
The divested test business had sales of $2.2 million and $33.6 million in the current years third quarter in prior years third quarter, respectively.
Excluding the divested business from both periods sales for the ongoing test business increased by $7.6 million of which for the Freedom Communications acquisition added $3 million, while organic sales increased $4.6 million.
The test six segment operating profit was $2.1 million or 10.7% of sales.
During the quarter, we expensed inventory step up cost of $440000 relating to the freedom acquisition.
Step up is is fully amortized at this point and we don't expect to see the headwind from that in the fourth quarter.
Adjusted for the sale the semiconductor business. The test segment had operating income of $133000.
Paired with an operating loss of 4.5 million in the prior year period.
Year to date test segment segment sales decreased $46.2 million to $53.8 million.
Adjusted tests and sales, excluding the semiconductor test business were $46 million up 65% compared with the prior year driven by growth in the aerospace and defense market and the addition of freedom.
Operating profit for the segment was 4.2 million or 7.7% of sales.
Adjusted for the sale of semiconductor business, there was an operating loss for the segment.
Of zero point $8 million, reflecting the impact of a $2 million in restructuring costs that was recorded in the second quarter.
Operating loss in the prior period adjusted for the divestiture of the semiconductor business was $11.1 million.
Moving to the balance sheet and a.
Cash flows a cash from operations in the quarter was very strong at $21.2 million driven by improvements in net working capital.
Hi, it's been our best.
Quarter, we've had in in a while for cash flow generation.
We expect to continue to see solid cash flow generation from operations in the fourth quarter.
During the quarter, we repurchased 1.8 million shares of <expletive> of stock at an average cost of $27.42.
This exhausted our share repurchase program that had been in place since the end of two our 2017.
In September our board approved a new $50 million share repurchase plan.
Our debt increased to $180 million from 122 million at the end of the second quarter.
Due primarily to the $50 million share repurchase.
And the 21.8 million dollar acquisition of freedom.
We continue to be in a comfortable spot with regard to our liquidity and our options we have regarding capital allocation going forward.
Our leverage excluding the $78 million gain on the sale of businesses is below two times funded debt.
Our capital allocation strategy continues to be investing in M&A and Opportunistically, returning capital to shareholders via share buyback programs.
I'll go into our tax rate.
Our tax rate for the year is forecast to be 21% to 25%.
Higher than what we expected going than what we expect going forward.
As the tax on the sale of the semiconductor business had a high state tax component associated with it.
We expect our tax rate next year to be in the range of 18% to 22%.
In 2019, our Capex range for the year has been lowered to 14 million to $19 million, reflecting.
Pushing some programs into next year and cancelling some other capex programs.
So that's a.
That's a significant change from where we were about three months ago I expect.
I expect next year.
Our capex plans are still in and being developed for next year, but I expect it will probably be north of $20 million next year on the capex side of things.
But we'll provide more guidance on that in the fourth quarter earnings release.
Pete that's all ahead.
Okay, turning to the future future being the fourth quarter of 2019 first.
We are expecting fourth quarter sales to be in the range of 175 to 195 million. That's a wide range you might think given that we're well into November already in the year ends at the under next month.
But as always there are a bunch of things that kinda are stacked up.
In the second half a December to ship and.
There's the possibility of some of those slide out into January but the reasonable range is 175 to 195.
That means we should see a little bit of a step up from third quarter volume gives us some confidence to think that the third volume third quarter is the low point here.
This will tighten our 2019 forecast.
To be in the range.
750 to 770 million.
Our 2018 adjusted revenue by comparison was 719 million so the midpoint would suggest 5.7% growth.
We would expect narrowed and up 680 to 690 million last year was 676.
And tests, we now put it to be 70 to 80 million for 2019 in 2018 was 48 million after removing semiconductor so a pretty significant increase their freedom, obviously, helping out in the second half diagnosis, helping out to some extent in the fourth quarter.
Again in the fourth quarter, we expect.
Reserves for the arose.
Consolidation and reorganization.
And perhaps an increased the reserve on the litigation side of things.
2020.
The big assumption, we're making as we initiate revenue guidance for next year is that the 737 Max returned to service happens sometime around year end here or shortly thereafter, we don't pretend to have information that's not generally available.
Out there in the industry, but there are more and more voices.
All kind of saying the same thing, but it's likely to get the green lights sometime in late December or January .
That's a critical assumption to our plans going forward.
And our stated plans in the press release, we expect conduct consolidated sales next year to be somewhere in the neighborhood of 770 820 million.
Midpoint of that range versus the midpoint of our 2019 forecast would suggest 5% growth or so.
We're expecting aerospace sales of 690 to 730 million, so that's a little bit less than the 5% consolidated expectation.
We expect test to be somewhere in the 80 to 90 million that's 13% growth.
As we see the world today and.
Of course, we don't issue bottom line.
Guidance, but the big change from 2019 to 2020 is that we are.
Expecting to reduce or eliminate the observed operating losses from the three stragglers. This year year to date is 27 million.
And we would expect to cut our tariff and a half which in the last quarter.
Was 3.2 million and year to date was 6.8 million.
So it will be a busy year, but we think but those are achievable goals that were.
Dedicated to realizing.
I think that ends our prepared remarks little bit longer than normal Christy well take questions at this point.
Thank you.
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One moment, please while we pull for questions.
Thank you. Our first question comes from the line as Ken Herbert with Canaccord Genuity. Please proceed with your question.
Hi, good morning, Pete and Dave.
Morning.
Good news on on the restructuring effort. It has certainly been busy year I wanted a first ask for.
The revenue guidance in aerospace in 2020. It implies you said just under 5% growth for about 25 million over to increase assuming the midpoint. This year to end the year can you parse that out a bit by maybe how much growth you're you're assuming from the three businesses versus what how much of a tailwind.
The Max is next year versus just maybe what you're seeing organically across some of the parts of the business.
Yeah. There are a lot of moving parts as your is you're getting at let me talk about Max first of all our.
The party line that are most people seem to be working towards.
Is.
Continued production rates of 42 a month.
We expect that to jump up to the high Fortys upon returned to service and we expect it to trend up towards the end of the year.
To the high Fiftys kind of as the year wraps up that all assumes a just a January returned to service.
And and we're making some assumptions that Ah theres or there's a a resumption of normal.
Sales sequences to the aftermarket the way the way our after market sales typically work is something like that so we we come up with a new products or we respond to the demands of airline customers.
There's a series of bidding.
Exercises and proposal exercises.
And then there's usually a flight test or you know some period of time when an airline will take some hardware intellectually put it on a number of their aircraft and they'll observe it no tested and they'll fly it and we'll see what they think and then they go forward and where were.
Getting a little bit sideways here in our aftermarket pursuits is that those those trials those flight trials or are being pushed out.
So we're making some assumptions that those flight trials resumed shortly after the three seven is lifted and it will result in sales, particularly in the second half of the year.
We are not being very aggressive frankly in that range with the three struggling businesses. So I would dare say that from today's perspective, there's upside potential to our forecast there.
We had pretty big revenue increase expectations from the three we were pretty disappointed with the arose results. Just you know we talked earlier about the launch of a pretty well we thought it was going to be a pretty good program back in April .
April 1st, which maybe turns out to be a bad day to launch a program of any type.
April 14th there was a midyear right that hit a satellite that pretty much you know grounded that effort and that grounding continues to today.
And we but we are seeing pretty good growth this year out of.
Out of CCC, we actually are going to come close to doubling revenues there the fourth quarter goes as they think it will go.
We are being more conservative in our growth expectations for the three of the trio next year I mean, the big contribution from the three and our plan will be simply to stop the losses, but there are there there are pieces of business that all three are looking at that could drive growth.
So as always we'll look at you know that range and we'll update it as we can as time goes on and it it it'll be a quarter by quarter kind of thing but today.
Based on what we expect to happen with the three sub than what we'd expect to happen with the three stragglers isn't what we.
Our observing in the rest of our business, we're thinking that's a that's a comfortable range.
Okay. That's helpful. I appreciate all the detail and if I could then just to jump down to the margins.
And who knows exactly how the fourth quarter shakes out, but pre pre any incremental sort of restructuring charge. It looks like on the street businesses. If you if you run a law so.
He just 35 million for the full year in call it.
Eight to eight and a half or so with tariffs you've got.
If you get breakeven next year on the three businesses and tariffs you've got.
35 ish million or so give or take.
Oh margin tailwind heading into 2020.
Did I just want to make sure I got that correctly and and second if there's any other sort of moving pieces specific around margin next year, what should be thinking about.
[laughter].
Yes, Ken I think on an annualized basis.
Your number make sense, but keep in mind, the it's not like a waterfall that you just turn it off on 12, 31, and and everything's restructured and the losses disappear starting on January one so as Pete mentioned the the aerostat.
Restructuring.
We will be occurring as go as we move through the first and into the second quarter.
Certainly we expect by time, we get to the second half a year that those kind of those annualized numbers that you talked about.
Should be realized as we go in into the into the second part of the year, but probably won't start out in the first quarter that way.
But fundamentally a number of fundamentally a numbers on target.
Yeah, Okay now I I can appreciate it is clearly going to be a steady steady gradual improvement with with second half really when you see the benefit of the restructuring and then of course, you'll start to anniversary that.
Obviously 2021 as well so okay I'll pass it back there. Thank you very much.
Our next question comes your line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, Thank you for taking my questions.
The John .
Hey, John Pete can you just talk about the program reserve and CCC, what was that all doubt.
It's a continual effort where [noise].
We.
Essentially the company.
A long time ago about the time, when we bought it.
Bit off a program, which.
Which it was not set up to execute well on so.
Eventually that became pretty clear.
And we've been you know in a struggle basically to get this program executed and.
The reason, we're pursuing it and the reason we didnt abandoned that upfront is we actually think the technology will prove to be quite valuable overtime on a competitive basis, it's something the market seems to one in certain classes of aircraft.
And it's a pretty high profile program with a high profile customer.
And of course in the aerospace industry when you run into trouble.
On a program you can decide to.
Fight it out and executed and keep the customer happier you can turn and walk away. If you turn to walk away chances are you never you might as well never show up at that customer again ever. So so we decided to stick with it and the program charges are basically realizations at certain points in time that we're not quite as far along as we thought.
We would be and.
The estimate to complete the program is higher than we thought it would be in the accounting rules say that you got to take those charges as you recognize them not as you.
Not as you incur them. They go to clarify now, though that's right at a you know this program was crossed into kind of into the interval into the lost contract program.
Year and a half for two years ago. So you continue every quarter to revise your estimated cost to complete and there was a lot on this on this project that there was kind of unknown.
And.
We've got into this year, we every quarter, we we expected that we had a adequately accrued for the cost estimate.
And we continue to run into some stumbling blocks. There now we estimate that the programs about 90% complete.
With a with the finish line insight here and the additional costs really was related to the additional time. It took you know if you remember a couple of quarters ago, we thought we'd be done in September I think it was a 334 months, adding onto this adds adds cost of the program.
Okay got it but that's scheduled to complete mid December you don't see any barriers at this point to getting over the line.
We sure hope not that's the plan, there's a customer review process in mid December and we're working hard to meet our requirements for that review and if we're successful then kind of the engineering phase of this program will be concluded there will be ongoing support.
Requirements and refinements because the hardware is not actually going to fly for little while but you know it will be relatively low level at the moment, we've got a lot of external costs.
I have a lot of you know external consultants, helping us with this development program and it's a major portion and that's part of what so expensive. We expect a lot of those related expenses. Both in terms of outside companies doing work for us and.
And the qualification certification cost to drop significantly as the year as your incomes.
I would add to that to the other piece to this the kind of falls through the cracks are gets hidden is is a distraction from other programs that that organization is so focused on getting this to the finish line.
There are a number of other programs that.
That that will benefit from having the attention of these engineers on them when they can move off of a of this program.
Okay, great. Thank you for that color, Dave what are your total I guess projections for you know problem unit losses legal reserves program charges and restructuring costs in Q4, and maybe into 2020. If you if you get that far out.
Well.
As Pete mentioned, there's a there's a range of potential.
Possibilities with regard to the restructuring and.
Uh huh.
You know at the low end, probably 5 million each but there's there's a lot of moving parts to this yet we're going to get a lot of.
We're going to learn a lot over the next month, or so and and into it to finalize that plan. So at the low end as Pete mentioned, we think it it would be about 5 million for restructuring there.
We actually think the CCC business as Pete mentioned, it will not generate a loss in the fourth quarter.
Lets dependent on sales, which are gonna, but up right against the ended the year, but but there's a good chance CCC is actually positive in the quarter.
And I'm, sorry, what were the other or the other ones Oh, just said that the.
The legal reserve at I think Pete bracketed at 2.7, just six increasing potentially a 6.3 right is that kind of what you're getting yeah.
Okay. I mean, that's that's an unknown number the but the number for the.
For the AEROSURF transition is unknown at this point, we're we're actively reviewing the various business pursuits that the company has been involved with and.
What we decided to go forward with and what we don't more importantly, maybe don't decide to go forward were with will result in various charges from you know specifically inventory and.
Yeah, maybe some goodwill impairment kind of charges. So we're looking at a program by program. Yeah included in those there there were there would be a lot of noncash type charges again, depending on if theres inventory relating to a program.
That we decide we do not want to pursue there could be included in Pete's numbers were where noncash charges as well as a severance and reorganization costs.
Okay got it Pete I'm surprised you didn't talk about the one with Rockwell then as he has introduced a global on for Aerosat, How do you see those ramping through the years and in terms of installed rate and incremental profit from each one.
[noise], yeah, thanks for that John I.
Not mention that we are that's one of the things that were investigating and trying to get better insight into but.
Yes, Rockwell Collins or Collins aerospace has.
Decided to enter the business jet connectivity satellite connectivity market using.
Hey.
Derivative product of ours that we are developing at arrow sat and and yeah. We think it's it's a confirmation, but you know the there's a lot of potential demand there to draw a company like holland's into it.
And we're pleased that they've picked our our antenna to work with.
There's not been a hard launch on that and there was a launch on the program, but they're not actually doing say holes at this point, it's it's more tying up the lose them. So the technology, improving the network and doing those kinds of things. So it's a little premature to.
To know for sure what the expected volume is going to be both for the for 2020 and 2021, but we're expecting purchase order shortly and were expecting kind of the.
The hard launch of the actually putting hardware on airplanes and and initiating the sale process, you know first quarter 2020 or so.
Okay, Great and last one from me how should we think the core aerospace margins outside of the three of Tom business 2020.
I think they're healthy.
Right.
When we can get the the headwinds behind us here going into 2020, and I think we should be able to see the segment operating margins for the aerospace business start to push back into that mid teen range.
We have been there before and the last couple of quarters have been have have been disappointing, but I think we should be able to.
Push back up into that mid teen range and I think its next year.
To add a little bit more color on the way, we expect the year to progress.
Partly due to this 737 situation and partly due to some other programs that we expect the rollout.
The we expect the year to build in terms of the topline growth.
With the second half being a much heavier than the first half and the and actually the first quarter, probably being our weakest quarter.
Okay, great. Thank you so much guys.
Our next question comes from the line of Josh Sullivan with Seaport Global. Please proceed with your question.
Hi, good afternoon.
Good afternoon.
Just on the test growth <unk> can you outline some of the contracts or opportunities you know what you're looking at for for 2020.
Well, we sensed that there is a better funding environment in general in military tough. That's Oh, you know weve a turnaround that we've been waiting for for some time.
Dating back to before the the Trump administration took office so.
Part of it is is better funding along those lines and part of that is some of the recent thrust that we've had.
Both with our acquisition of Freedom, which takes some of our radio test capabilities and expands it into the.
The the governmental market I guess I would call it.
As well as our expectations for diagnosis I.
Maybe we'll talk about diagnosis a little bit.
Earlier this year, we one or program with the New York City Mass Transit organization to provide a test architecture for one of their rail lines one of their new programs and.
And our main competitor there it turns out was this company called diagnosis and.
On the heels of that.
A win.
We ended up in discussion with diagnosis and one of the mutual observations was that.
What they have.
Complements well, what we need [laughter]. So one thing led to another and we explore teaming arrangements and we explored subcontracting arrangements and we ended up deciding with.
With the owners of diagnosis was a privately owned company that the best path forward was an acquisition. So we feel that together, we're a pretty strong force.
In this kind of mass transit train test market, which we think as a growing market and be the logic here is.
A if you think of trains modern trains they're increasingly digitize their increasingly connected they're increasingly complex.
You know mission critical type systems to compare two trains of yesteryear and the operators, which are generally municipalities and government agencies are realizing that they have the basic decision, but maybe you know the army might have to make or the marines.
When they want to.
Develop a testing and verification capability for all of their required equipment.
The the military the Marines lets say have long been in the practice of developing a standardized test test architecture, which can be customized by various add on pieces of equipment or add on you know connectors and.
Boxes.
So that a big test or a standardized test or can be deployed on a number of test the items.
[noise] consecutively, you don't have to dedicated test equipment for each of the items that you want to test maybe say in a forward deployed.
Situation. So the minister capacities are realizing they can use that same logic that same architecture to save space and increased commonality and to decrease costs when they want to test the various components and elements on a train and we think that.
With diagnosis is part of Astronics, we are.
No doubt on the leading edge of this market and.
And if things go the way, we think they're going to go a we could have a other program wins to announce a in the coming months. So the New York City program as a program called our to 11 for those in the <unk> into no.
Could be just the beginning of what we think could be a an interesting you know vein of of business for us to.
To explore.
No. That's helpful and then I mean, I just dovetailing into that.
Has there been any change in the M&A perspective, you went through some of the dynamics behind diagnosis, but just how is the strategy evolved call. It over the last 12 to 18 months.
Oh, well, we've looked at a lot of things.
I can't tell you that we've seen a whole bunch of things that are kind of right down the aisle for us and it seems like Theres a lot of money chasing a few a few items. So the prices have been really high so.
Those are observation things, we've experienced I think you know.
We certainly learned a little bit from our experience. We've stumbled here on a couple of things and you learn every time you stumbled for sure.
The CCC experienced taught us something the arrows that experience certainly taught us something they had some.
Common elements to them, but overall you know acquisitions have been important part of our company's evolved and and in the midst of all that there are other acquisitions that have gone very very well for us and I would say that it's too early to tell for sure how freedom and diagnosis, they're going to work out but I tell.
The phonics was certainly one that we.
Enjoyed pico has been a really big plus for us, we but test business that we bought from U.S. has been a a mainstay of our test business, including the semiconductor capabilities that are brought with it. So you know I I don't think we're a company that's ever going to buy everything that.
Moves or bid on everything that moves and were as we get older and as we collect a battle scars, we're getting a little wiser and we look for certain things, but all that said acquisitions will continue to be be part of what we do in the future for sure.
Got it.
And then is there any update on your position.
Free Wi Fi trend, particularly with delta or any other customers.
Oh I don't think we have anything new to say other than <unk>.
I guess personally speaking my observation is that it's becoming more and more of the discussion in the industry and the industry is.
Again distracted by the whole 737 thing that's really cast a shadow over the entire world even airlines, but don't fly the 737.
We're dealing with you know increased levels of demand.
So.
But I I guess, our assumption our observation is that that's where the world's trending I mean, you know more more and more people expect free wildfire mix, but that continuously and <unk>.
And nobody expects to pay for it anymore, you know maybe in really expensive hotels, but.
Even that's getting a less and less common and it's usually something they give away what asked so.
We're all were fans a you know that's a big thing for US I mean are our ER.
ER conviction is that people are increasingly committed to their personal electronic devices. They they want to use them they carry them everywhere and.
And and they expected for free and the aircraft.
World is a world it's right for continued development and better service and that's kind of our sweet spot. So.
We think free Wi Fi is a is it is a big deal.
Got it appreciate the time.
Thank you.
Our next question comes from the line of my go see I'm only with Suntrust. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions here.
More than just <unk> just to stay on not for a second I mean, if we look got into 2020 organically you've got that's going to 85 million at the midpoint from 75 is that is that just a function of freedom and diagnosis or do you expect any organic revenue growth in there.
Well, it's a little tricky to measure organic just because freedom and diagnosis are largely Uh huh.
That's a poor term, maybe but they're kinda bolt on acquisitions in that their augmenting initiatives that we already have underway. So it's one of those situations, where we're hoping that you know in both cases, one plus one can equal a little bit more than two.
So.
It's hard to answer your question because some of the work that we might otherwise plan to do and our other test locations Orlando and Irvine in particular, we will we might transfer to some of those other businesses.
Somewhat hard to 11 business for example, we're probably move out of Orlando Orlando will subcontract to diagnosis, which is in Boston.
Okay. So I don't view them as it's it's gonna be it's not going to be easy to really measure how much of its acquisition growth and how much of its organic growth, but I would view it more as organic.
Okay.
And then just on Aero and 2020.
77 rate card Triple Sevenx getting delayed the start entering to the forecast next year. It sounds like you're going to have a little bit more strength in the second half, which.
Might be when you start feeling some of those those are especially the rate cuts on.
787, how is that contemplated in the 2020 outlook.
Yeah, that's baked into the numbers with the Triple seven is.
It is something that we have quite a bit line fit content on a eight seven much less so directly to Boeing but yeah. We've got those Ah you know kind of baked into the numbers assuming that the cuts and the extensions the delays don't.
Turning out to be graduates, but.
Okay, and then just the last one for me.
Earnings trajectory and kind of backlog any any kind of you know real time update in terms of how the the bookings are tracking now or maybe how you expect it to end the year in terms of Oh in terms of backlog I mean, I think you called Threeq you sort of the bottom here can we assume that that's maybe the bottom for bookings to an aerospace.
Would hope so we we don't have an update for the fourth quarter, but.
Obviously, we expect the bookings to rebound if you're in order to support those revenue levels for next year I think we're seeing it on test, it's not quite as evident on aerospace or at this point, but based on schedule programs that are in backlog, we're reasonably confident on a step up in revenue in the fourth quarter.
And the first quarter, we would expect to be kind of at that increased level also and then and then expand from there again, assuming about three seven.
Ah gets back to me here at or near year end.
Got it perfect. Thanks, a lot gosh.
Thank you.
Our next question comes the line of George Godfrey with C.L. King. Please proceed with your question.
Thank you and good morning. Thank you for taking my questions. Two questions feed. The first one is you stated very clearly you don't really have any other information on the Boeing 737, getting certified and coming back into service before the end of this year, where January and you're making your best estimates if we take a more pessimistic out.
Look and that continually gets pushed out what can you do it as tronics, specifically to try to mitigate that downside and and do you just have to sit there and kind of just take the punches as they come in.
Yes.
Yeah, I think we're kind of in that position. Unfortunately, it I mean, it if it gets extended.
Significantly at all you know the.
The the odds increase of a production slow down or even a suspension, which would which would have a significant effect on our company of course, you know, we put 95000 or so plus or minus on each new airplane and that assumes that does not assume.
Any passenger power for example, so if you add passenger power to it it can easily double.
So.
That would have if they go up from 42 airplanes, which is where we are today.
<unk> zero that would obviously hurt us and we'd have to scramble around and look at what we can do.
But it would it would be a a uncomfortable development for sure because you know a big part of our cost structure isn't necessarily production related. It's it's all the support and engineering that goes into our products and we would be.
If I put our put our but it's kind of flash forward to that potential reality, I guess I would say that we would be really reluctant.
To.
To a cut costs than that way because those.
Those technical skills are or life blood really so we would be reluctant to cut that so it would it would be a bad development if that were to happen no doubt.
Understood and then my second question as you talked to both the media right hitting the satellite and changing some of the program outlooks for Aero said and what I think about those three business as I always thought the greatest variability in revenue was on the Arrow set piece there other programs for other reasons that may or may not look is it.
Tracked it today due to competition product development costs that are also causing you to want to consolidate that facility beyond the the platform of program issue with the media right. Thanks.
That's a good question I think the best way to to look at it isn't and their program by program review, but rather the overall review or kind of a top level observation and I guess from my perspective, we think that [noise].
Other technologies.
Important and the technology is good and the technologies valuable.
We have had a lot of trouble cracking the code or frankly, I mean, we've we've missed badly on what our revenue expectations were and in some cases, they were clearly things that we could not control I mean.
Some people might think.
I think we should control or be able to control media rights I don't think we can that's something that was just an external factor that.
That affected a program that we were kind of counting on a at that point in time.
But there are other issues, where you know sooner or later when you when it happens kinda over and over and over again, we we have to sit back and look at it was is though is the smart for us continue to.
Spend money like we've been spending money to pursue things that we like I said enough unable to crack the code. So the collection of thinking is that the <unk> again the technologies. Good there are valuable programs to apply it to and there are markets that we want to pursue and certainly that business.
Jet market as one of the ones that we want to continue to pursue but we want to do in such away that.
We don't risk the kind of all or nothing financial impact of executing on the programs in the short term and by by doing that consolidation.
For the reorganization whatever you want to call. It we can leverage you know assets that are otherwise kinda free and clear already paid for and the incremental return on the satellite program or the incentive programs. When we find success will be greater and the downside.
I had risk of you know another media right head for example.
Our greatly reduced.
Understood. Thank you.
Thank you.
We have no further questions at this time I would now ill turn the floor back over to management for closing comments.
Well, thanks, everybody for tuning in we appreciate your time.
We look forward to talking with you again soon 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.