Astronics Corporation

Deborah K. Pawlowski Peter J.

Gundermann - Chief Executive Officer, President, Director and President of Luminescent Systems Inc Mark A. Peabody - Executive Vice President of Astronics Advanced Electronic Systems David C.

Burney - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Tyler Hojo - Sidoti & Company, LLC Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division Richard A. Ryan - Dougherty & Company LLC, Research Division

Thank you, Jen. And good morning, everyone.

We certainly appreciate your time today and your interest in Astronics. On the call, I have Peter Gundermann, Astronics' President and CEO; Dave Burney, Chief Financial Officer; and Mark Peabody, Executive Vice President.

Pete and Dave will discuss the results of the quarter; our recent acquisition that we just announced last night, PGA Electronics; the AeroSat acquisition that we announced earlier this month -- or in October, I'm sorry; and as well as the company's strategy and outlook. Then we'll open the call for Q&A.

If you don't have the news release that went out this morning, or the one that went out yesterday evening, it is -- they are available on the company's website at astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and the question-and-answer portion of the teleconference.

These statements apply to future events, and are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the earnings release, as well as in documents filed by the company with the Securities and Exchange Commission.

They can be found at our website, or at sec.gov. So with that, let me turn the call over to Peter to begin.

Pete?

Thank you, Deb. Good morning, everybody.

As Debbie said, we'll talk about our third quarter first. It was a pretty good quarter.

And it was the first quarter where we had a pretty prominent impact from our PECO acquisition of July. We will then talk about some subsequent events, specifically the acquisitions of AeroSat, PGA, cover those in order.

And then we'll turn and talk about what our forward expectations are as the dust settles from all this acquisition activity through the fourth quarter and into next year. So the third quarter, from my perspective, was a very exciting quarter for the company.

We reported revenue, as you know by now, of $89.7 million, which was a new record, easily; up 30% over the comparative quarter from 2012, and up 27% over the sequential second quarter of 2013. We were 97%, 98% Aerospace, 2% or 3% Test Systems.

And we had pretty good bottom line contribution, net profit of $7.2 million or 8% of sales, that's $0.39 per diluted share. Net income was up 45% over the comparative quarter in 2012.

Buried in those numbers were some purchasing accounting inventory step-up values of approximately $2 million or $1.3 million net, $0.07 per diluted share. So, without that inventory step-up, our earnings per diluted share would have been $0.46.

We expect in the fourth quarter to have another $3 million of inventory step-up expense related to PECO, and then we should pretty much be finished with that aspect of the purchase accounting. Depreciation and amortization for the quarter was $3.1 million, up from $2.1 million in the comparative quarter in 2012.

Our Engineering and Development expenses were $12.4 million, down slightly from $12.8 million in the third quarter of 2012. A very exciting thing with the quarter had to do with our bookings.

We had bookings of $104 million, which was easily a new record. PECO contributed about $16 million to that.

Year-to-date, revenue through 3 quarters was $234.5 million, up almost 18% from 2012, when we had revenues for the first 3 quarters of $199 million. Net income through the 3 quarters was $20.9 million, or 8.9% of sales.

Our 2012 net income through the 3 quarters was $16.2 million, or 8.1% of sales. For 2013, earnings per diluted share is $114 million, up from $0.89 in 2012.

Our Engineering and Development expense through the 3 quarters was $38.6 million. That's up from $33.9 million in 2012.

You saw in the press release, we revised down slightly our Engineering and Development expense expectations for 2013. We now think it's going to be somewhere in the $52 million to $54 million range.

That's down slightly from our last guidance of $53 million to $56 million. That is mostly just kind of the ebbs and flows of day-to-day life in the sense that some programs get moved up, some get accelerated in, and we have been a little bit, perhaps, more efficient than some of the programs we've taken on than we thought we would be.

So, I wouldn't advise anybody to read too much into that downward adjustment. Although it is a little bit of a surprise, I'm sure, for you to listen and for me to say here, that we're actually revising down our E&D expense.

I don't think we've ever done that before. Our year-to-date bookings are pretty strong at $248.7 million, 6% above sales.

And our backlog at the end of the third quarter, going in the fourth quarter, was a new record at $168 million. Looking at our segments.

Aerospace revenues through the 3 quarters are $228 million, up almost 20% from 2012 and again, 97%, 98% of our total. Aerospace contributed all the margin.

Our markets and product lines remain strong. And you know our -- those of you who have been following us know that we have a standard way of displaying our market and product line sales; it's on Page 8 of our press release.

With the addition of PECO and with the anticipated additions of PGA and AeroSat, we have taken some steps to rearrange slightly how those presentations are made. I wanted to talk through the rearrangements and, I guess, also to advise that, in my view, these tables, from a comparative perspective, aren't very useful, simply because the company is evolving so quickly that looking at how we look today compared to how we looked a year ago, is not going to make a whole lot of sense for a little while.

The market section of those payables, on Page 8, pretty much remains unchanged. We have the 2 segments: Aerospace and Test Systems.

And within Aerospace, we break out sales by Commercial Transport, Military and Business Jet. We do, however, have an Other category, which is quite a bit larger than what it was before.

And the Other category will involve things like airfield lighting and some of the PECO product lines, which are material in terms of revenue and contribution, but are not specifically or easily identified as Aerospace products. So for now, we're showing those as Other within Aerospace.

We may move them out of Aerospace in the future presentations here. In the product line section of that chart down below, you see some new headings.

Electrical Power, we're combining what was Cabin Electronics and Airframe Power. Those are both Electrical Power product lines, and instead of breaking them out separately, from now on, we're going to -- we intend to combine them.

We also intend to present what we call a Lighting & Safety product line, which consists mostly of the Aircraft Lighting that we used to display, plus the PECO PSUs, which are ultimately, Lighting & Safety related in cabins of airplanes. We will maintain the Avionics break out that we did before, which will include, for now, Ballard and Max-Viz, but also in the future, AeroSat and some portions of our PGA acquisitions.

And then we'll have what we call Structures. And Structures is very specifically fuel doors and some environmental control system devices, primarily out of our PECO acquisition.

So, that's how we plan to display ourselves going forward. I think what's useful on this chart is to look specifically at the 3 months we just concluded, because I think it shows you where we're going as a company.

The numbers don't jump off the page. But if you run the math, Commercial Transport in the third quarter was 72% of our total sales.

That's higher than we've ever seen before. I expect it to continue to increase.

Military was 14%. Business Jet, 7.2%.

I expect Business Jet, primarily through PGA and AeroSat, also to increase. And down below in the product line section of that chart, Electrical Power was 53% of sales in the third quarter.

Lighting & Safety 34%. And then Avionics and Structures relatively small at 4% and 3%.

Some specifics that people will probably ask about are what we used to call cabin electronics or passenger power. Third quarter sales were $41.2 million.

That's $118.3 million year-to-date, which is up 13.6% from where we were through the 3 quarters last year, 2012, when we had total sales for Cabin Electronics of $104.1 million. So from $104.1 million to $118.3 million through the 3 quarters.

Our biggest customer is Panasonic. It was $25 million in the third quarter, 27.9% of total.

And Boeing, which is now a significant customer as a result of the PECO acquisition, was $17.8 million, or 19.9% of total. We talked previously about 787 becoming a more important program for us.

We had $8.6 million in shipments in the third quarter, bringing year-to-date shipments of $20.1 million. And I think I'll switch over to our Test Systems segment.

Revenues in Test Systems year-to-date through 3 quarters, $6.6 million, 2.8% of total, down from $8.8 million in 2012. We're not profitable at that level as we have not done previously, but the operating loss is, we feel, relatively manageable given the opportunities, which we still believe to exist.

Some of those opportunities are evident in bookings for the quarter. We had bookings in our Test Systems segment of $8.1 million, which is substantially higher than what we've seen in recent quarters.

There will be a press release coming as soon as we get customer approval explaining some of that increase and primarily as a sneak preview that has to do with the trainer system for F-15 armament and maintenance. Our balance sheet.

This was a little bit outdated given our subsequent events with AeroSat and what we intend to do with PGA. But at the end of the third quarter, we had cash of $68.2 million, and total debt, as we discussed before, of $199 million, bringing us to net debt level of $130 million.

That debt was taken out with the intention of going forward with AeroSat and PGA. And the cash that was on hand at the end of the third quarter, we believe, will be adequate to fund both AeroSat and PGA.

And also, from a capital or expenditure standpoint, we are more and more inclined to make a real estate investment for one of our operations, which could come to about a $15 million expenditure yet this year. I think there was some mention of that in the press release.

$15 million is what we expect to spend to buy a building, and then there will be some build-out and relocation costs that will come in 2014. Looking forward.

Third quarter bookings, as I said, were really strong at $104 million. We also picked up $40 million of backlog with the PECO acquisition in July, leaving us with a backlog, at the end of the third quarter, of $168 million, which, again, is a record.

For 2013, we are increasing and tightening our revenue guidance to somewhere in the range of $335 million to $345 million for the year. The midpoint of that range would suggest that 27% revenue increased over 2012 and assumes fourth quarter revenue of $105 million.

So, we obviously expect the fourth quarter to be a pretty strong quarter. There are some moving parts.

That's why we still have the range. Some of our AeroSat sales will depend on making progress with certain STC efforts that are underway.

And our PGA closing, which we are expecting will happen sometime in early December. Obviously, those things can take on a little bit of a life of their own as we kind of clean up events or work through the events that we have to work through in order to bring about the closing.

But assuming we make some progress on AeroSat, STC is making -- assuming that we get the PGA closing in early December as we anticipate, we think we should very comfortably be in that $335 million to $345 million range. I wanted to talk a little bit about AeroSat because we did not have a specific conference call on that topic when we announced that acquisition on October 1.

And obviously, last night, we announced our intent to acquire PGA, so I want to talk about that a little bit. AeroSat is a company that specializes in antenna systems, primarily in the Ku range for satellite connectivity, providing connectivity to airplanes primarily for Internet access or maintenance reasons or location purposes, or even television purposes.

The company is active primarily in the Commercial Transport area and VVIP. VVIP is not a term that we use very often at Astronics.

For those who don't know, it's very, very important people. There are people who fly business jets, and then there are people who fly customized versions of commercial transports, like, oh, I don't know, 747s or 737s.

And the industry tends to fine tune and refer to business jets, like those made by Gulfstream and Cessna, and does so as business jets, and private aircraft that are customized versions of commercial transports as VVIP aircraft. The AeroSat initiative is best-suited towards the very large business jets and the VVIP market.

The company had 2013 sales, or expects 2013 sales, of $12 million to $14 million. We expect 2014 sales to be somewhere in the $20 million to $40 million range.

The variability, again, is somewhat based on STC efforts, which are currently undergoing the Commercial Transport area, primarily involving some initiatives that AeroSat has underway with Gogo. Gogo is a well-known company that provide satellite connectivity, or I should say, Internet connectivity to passengers in public transport airplanes.

They have a business model, which is well-established in North America, and it primarily consists of air-to-ground communication. And AeroSat is -- has initiatives underway with Gogo to provide air-to-satellite connectivity, which will be useful to Gogo when ground stations are unavailable, like when an airplane is flying over an ocean.

So there are a number of certification efforts underway currently, to prove out those systems to get the FAA's blessing. And when that happens, we expect some pretty substantial sales to Gogo for international use, primarily KU Band connectivity.

PGA -- oh, I should say that there's a substantial earn-out associated with the AeroSat acquisition. We bought the company for $12 million in cash at closing.

There's an earn-out potential over the next 2 years of up to $53 million additional. That sounds like a lot of money.

We would love to pay it because that -- it would -- is based on revenues and assumes the revenue level over the next couple of years that are pretty high, as high as $70 million, $80 million, $90 million a year. There's a floor on earn-out, which basically for 2014, the company has got to exceed $30 million to get into an earn-out situation, or $40 million in 2015.

So it's a little unpredictable as to where AeroSat revenues are going to go. It's also a little unpredictable as to the bottom line contribution because we're going to be moving the company into an operating sphere that hasn't existed in before.

And so we'll just continue to communicate on that as it unfolds. But for the time being, we're expecting 2014 sales to be $20 million to $40 million.

PGA is a company in France. We announced intent to acquire PGA last night.

We expect closing will happen in early December after we go through some rather routine due diligence items. We have an agreement to buy the company for about $28.5 million.

That price will be paid 60% with cash and 40% with stock. The company is located in a town called Chateauroux, France, has 190 employees, is privately owned currently, and we believe has the management team excited to be part of Astronics and qualified to take the company forward.

The company has 90% of its sales in Europe, and only 5% -- or 4% of its sales in North America. So one of our opportunities here is to help PGA expand their footprint out of Europe and into North America.

We also are somewhat excited to have a European footstep -- footprint. We have -- we do a lot of work in Europe and around the world, but we do it from afar.

We have some sales efforts locally run out of Europe, but this will be the first time we put stakes in the ground there, and we think it's an exciting step for our company. PGA is involved in 2 primary lines of business.

The first one is seat motion and lighting for high-end aircraft heating. When you sit in a first-class seat, or increasingly, in the new types of curettements [ph] that modern airplanes are being outfitted with, there are a number of complex actuation systems that are used to drive certain surfaces in the seat or in the pod that the seat is located in.

PGA is a primary factor in that area, again, especially in Europe, making those actuation systems and lighting systems primarily for seat manufacturers. So they are selling these systems to seat manufacturers.

That's about 70 -- 60%, 70% of the business. The remaining 30% to 40% is essentially in-flight entertainment for VVIP airplanes, again the customized version of the commercial transports I was talking about earlier.

And these are airplanes that are not from the industry, that look like nothing you've ever seen. They are just amazing machines with the absolute best of everything.

And what PGA is good at is developing customized IFE solutions for these VVIP airplanes, which are not built in really high quantity, but are, when they do hit, worth quite a bit of money. It's not uncommon for a widebody VVIP airplane to be worth $5 million or $6 million or $7 million in revenue to PGA.

So, why do we like PGA? I already talked about the geographic expansion.

When you think of aircraft seats, we do a lot of work already in the seat power. We are pretty good with power and we've developed power systems that control things like in-seat IFE, in-flight entertainment and passenger power.

It's not too much of a stretch from there to think about incorporating seat motion the same way. So, we could potentially bring our power expertise and reliability and industry context and drive motion at the same time as we're driving IFE and driving passenger power.

And we think that there's a weight reduction there and a reliability improvement for customers. And the customers, in this case, will be both airlines and the seat manufacturers.

We like the IFE portion in part because of our recent activities with AeroSat. You may also notice the press release where AeroSat has developed a connectivity solution, teaming up with Aero's CapRock to provide connectivity to business jets and VVIP airplanes.

PGA does in-flight entertainment for VVIP airplanes. We think that there's an obvious bridge that needs to be crossed between in-flight entertainment and connectivity for that class of airplanes.

And we think that by combining these capabilities, we are uniquely positioned to go out and provide services to this industry in a way that it is not easily done, or easily achieved, today. So with PECO on board, with AeroSat on board, with PGA, we expect to be on board next year and with the momentum in our organic business, it's a little premature, but we're starting to think of 2014 expectations, and at this point, it looks to us like we very well could have revenues in 2014 of somewhere between $450 million and $475 million.

That would be, obviously, a big step from where we're going to end up this year and an even bigger step from where we were last year in 2012. I should add that these acquisitions that we're going through right now don't really represent a change in strategy or a change in approach as much as it might appear.

We have long been a company that is willing to make investments in technologies and market opportunities as we see them. Those have largely been internal, traditionally.

But we have pretty much continuously kept an eye open, and it was kind of circumstantial that early in 2012, we came across these 3 opportunities that we think met very valuable criteria, and we pursued all 3 and we found a way to make all 3 happen. We have, at the same time, we think, been pretty responsible with our balance sheet.

We were very traditionally and conservatively financed before we started these efforts. We think that we are still pretty conservatively set up when we think our balance sheet, actually, in these days with low interest rates, it's much more efficient.

And it gives us an appropriate amount of leverage to take advantage of the opportunities that the market is producing for us. So, I think that's all I have to say in terms of prepared comments.

While we're talking about records, this is a record stretch of comments. So I apologize for that.

We'll get to questions now. Jen, if you want to open up the line.

So Pete, just first question, I guess. I mean, we look at these results, and certainly, it's hard to complain.

But when we look at the top line, I'm just kind of looking at quarterly progressions here, and it looks like this is the third consecutive quarter where Panasonic revenues have been down year-on-year. And just wondering if you could perhaps comment on that.

Is this kind of inventory fluctuations, or how do you see things with that customer?

Well, we think our -- Panasonic is obviously is an important customer of ours. We fully expect Panasonic to continue to be an important customer of ours.

But there are a couple of things going on in this market. First of all, if we were to breakout widebody sales, and we're still trying to figure out how to do this efficiently, break out widebody and narrowbody sales, we think you would still see good growth in widebodies because we're picking up shares of other customers that are more than offsetting some of the decline that we have seen with Panasonic.

That being said, we don't think Panasonic sales are in trouble at all, or destined for long-term decline. We think it's just the way the market is evolving.

And we've talked a lot about narrowbody growth, and we expect that as we continue to develop this in-seat power marketplace, that it will become more and more weighted towards narrow bodies and less and less towards widebodies. So, we don't view this as much of an issue.

I mean, it could just be timing and fluctuation and workloads or jobs that they have won versus their competitors. We think we continue to be pretty well-positioned in terms of widebodies in general.

But we expect narrowbodies to become more and more of the market as we go forward.

Yes. And I mean, I -- go ahead, Pete, I'm sorry.

No, no. Go ahead, if you're going to expound on that.

Yes, I was actually just wondering, because I know they provide you kind of a full year forecast, are they still within the range that they've provided you in terms of shipments, or is it kind of coming a little bit?

No, I think they're in the range. They're in the range.

I've got Mark Peabody online. Mark, I don't know if you want to fill in anything that I talked about here?

Well, I think you're right on. And we get an annual forecast and -- from Panasonic, and they're right on where t where we expected them to be.

Okay, wonderful. And maybe if I could just follow on to that.

When we look at the booking strength in the quarter, I'm just trying to look at how to think about that in terms of narrowbody. Are you starting to see some of the orders that have been announced to kind of hit in your bookings number?

And mainly, I'm talking about JetBlue and Alaska. And I guess the follow-on to that is, I'm just wondering, since those announcements have been made, if kind of the pace of conversations with narrowbody fleet operators has kind of picked up?

Yes. I'll let Mark answer that again, too.

But I want to remind you first that those announcements you're referring to aren't our announcements, and it could just be purely coincidence that those products in the pictures look like ours. But Mark, you want to talk about narrowbody development?

Sure. I can talk about that.

Yes, we've got significant interest from the narrowbody market. And 2 or 3 major operators of over 100 aircraft have announced that they're installing it, and I think these comments are appropriate in that area.

Interestingly though, the installations of those systems are really more in the 2014, '15 timeframe. So as far as revenues, we're not seeing significant numbers right now.

I do expect to see those grow. The backlog for us is more when we get the purchase orders and those we're just starting to see.

As far as interest from other airlines, it's become significantly competitive. And the general feeling is that, now, with the FAA introducing the new, I guess, legislation might be the word, that they are going to allow use of the personal electronic devices on board the aircraft earlier below 10,000 feet, and also later, and the advent of more of the wireless access as more and more airlines, including the narrowbody operators, are putting Internet access on board the aircraft.

There is more and more demand on the narrowbody side for having power to power these electronic devices. So yes, we're getting significant interest as we go there.

Yes.

Looking at the commercial trend for organic growth number in the quarter, if my math's right, it looks like it was right just above 5% or so, 5.5%. Just -- and that's the lowest level we've seen in a while.

Just wondering if you could give some color on some kind of why the growth with was so muted this quarter?

I don't know if there's any really specific reason why. You mean if you backed out PECO and you looked at the organics business?

Yes, I guess I would just say, Kevin, it's just fluctuations over the course of the business. A lot of our revenues, in Commercial Transport in particular, is kind of aftermarket-oriented.

So it can go up and down a little bit. But we don't see anything substantially changing to be concerned about.

Okay. And then on PECO, obviously, last quarter, or following the acquisition, you said you're expecting about $35 million to $40 million from PECO for this year, which obviously, leaves a pretty big fourth quarter number in there.

Is that typical seasonality for that business? And what can we kind of expect going forward, even into next year, in terms of a -- on a quarter-to-quarter basis?

How does that PECO business typically shake out?

Yes. I guess we'd say that it's not really is seasonal business.

It is primarily related to production rates at Boeing, which don't vary a whole lot from period to period. We'd expect to perform kind of in that $1.5 million range.

And we're thinking it's going to come in somewhere in $34 million or so for the year, which is in the range of where we thought it would be. The wildcard there is the aftermarket opportunity, which is something that business hasn't fully pursued in the past.

You may remember me talking about the Boeing Sky Interior, primarily on the triple -- on the 737 and how that interior has been pretty popular, such that operators, 737 operators, are considering, in some cases, retrofitting their older airplanes to have this new interior. And we believe PECO is pretty well-positioned to take advantage of that trend.

And also, operators of 757. It turns out the 757-2 diameter is the same as the 737.

So there could be some lumpiness in the PECO production rates based on aftermarket opportunities. But for the most part, it should be a pretty steady, production-oriented business, moving lockstep with Boeing's production rates.

Okay. And then just one last one for me and then I'll jump back in queue.

It was nice to see a strong bookings quarter from the Test Systems business there. And I know you touched a little bit on it.

Is that -- is there more to the expected there? I mean, was it kind of a first tranche of a larger order?

How should we be looking at that going forward? And maybe if you could talk a little bit about kind of what the break-even for that business looks like at this point?

Okay. Well, the -- we will be issuing a press release on it as soon as we get, kind of, customer okay.

I'm not sure if by itself is an order that has tons of follow-on potential. But it is an area of expertise that the company has developed and done before.

We've -- the company has done some F-22 trainers that are kind of unique in nature. And this F-15 order will be similar to what we've done in the past on the F-22.

And there are, of course, new airplanes being developed, and feel that primarily the Joint Strike Fighter, and there are opportunities that we think we're well-suited for related to that platform. So -- but this order itself, we don't expect to build into something much bigger right away.

Although, I should say that the specs are moving a little bit, as I understand it. So there may be some adjustment to the value of the contract here as the specifications get solidified.

I'm going to guess that the break-even on that business is somewhere in the $15 million, $16 million per year range. And with the things we see on the horizon, we're hoping we can be in that range for 2014, certainly approaching it in the second half of 2014.

But we're currently going through our formal budgeting process for 2014. I made some comments earlier about our expected shipment rates in 2014.

Those are in advance of our formal process. So, we'll come back more definitively on that in our next conference call.

I got disconnected, so I hope I don't repeat my question here, Pete. You got the -- you gave the Panasonic level.

Did you give -- and Boeing. Did you give Thales at all?

We did not. They were under the threshold.

But it's growing nicely. It's doing well.

Okay. And on the E&D level, it looks like you're maybe kind of pointing to 13.5% to 15.5% range for Q4.

Does these all -- is there any expectations for E&D levels in 2014?

We're still working those numbers up, Dick. I would view this more as just kind of an ebb and flow kind of issue, as a minor downward adjustment.

But I would expect -- I wouldn't expect them -- I'd expect the trajectory to remain unchanged next year. I don't think it's going to ramp proportionately with revenues, but we have plenty of opportunities to spend money in various places, no doubt.

Okay. And to stay on kind of the gross margin trend here.

I mean, if we look at non-PECO, it kind of look like COGS went from just under 55% to a little over 57% quarter-over-quarter. When you look at the numbers, PECO had kind of a COGS level in the kind of low- to mid-60% range.

So where should we kind of think about the COGS kind of going forward? Maybe that's one for Dave.

Definitely one for Dave. And going forward is a tricky business these days, that he understands.

There's a lot of moving parts in this. But if we want to normalize the third quarter cost of goods sold, gross margins, we need to add back that $2 million inventory fair value to light up the flush-through in the quarter from the opening inventory for PECO.

I expect, in the fourth quarter, there will be another $3 million that will flush through for the same reason, and then we'll be done with that. So, I would look at the third quarter and normalize that -- and add $2 million to margins -- gross margin for that.

The other 2 moving parts that are going to kick in, though, in the fourth quarter are going to be AeroSat and a little bit of PGA.

Yes. Okay.

Where do you think the FAA certification sits on the first program, Pete? Is that still something that can come up by the end of the year?

I hope so. There are complexities.

As you know, the government took a little holiday there, which didn't help things at all. And one of the things that -- we're not driving this STC process.

We're certainly involved. But the -- Gogo has a number of STC initiatives underway on various aircraft.

We're involved in all of them, and some of them seem to be moving a little bit more quickly than others. Some of them are assuming that they're going to be able to use information generated by others.

It's not clear how that transfer process is going to work with the FAA. We are still hoping that at least 1, and maybe 2, STCs are granted by the end of the year, and the others are kind of done through the first quarter.

But we don't have perfect clarity on that at this point, Dick.

How many are in process?

Well, I want to say 5.

Okay.

4 or 5.

And maybe switching over to Military, that was a little stronger than I was expecting. What was going on in the quarter and kind of the expectation for Q4 for the Military side?

Well, the Military picked up some revenue from the PECO acquisition. So, there's some of the boost there and...

Timing and some of the bigger programs, some engineer NRE charges in there to our customers.

It's probably safe to assume that it's going to continue in that level through the fourth quarter, Dick.

Okay.

Yes, I just had a follow up on the PGA deal. If we look at your commentary in regards to margins, I mean, it would assume that you paid something sub-4x EBITDA.

Is that the right way to think about it? And if so, why so cheap?

Yes. I think you got the numbers right.

The margins may be a little bit lower than that, but we think it's a pretty good value. I think we've talked about this before.

We've known this company for a long time. The primary shareholder, somebody who we have had a relationship with through trade shows and through the industry for a long time.

And when the current group of shareholders, there are 3 of them, primarily, came to -- came time to sell the business, some sellers look for nothing but the best bid, the highest bid, and want to maximize their value in the business. Others take a little bit of a different role, prioritize some other things, including who would be a good parent for the company.

And I think in this case, that factored in, to it. I mean, I can't speak for the sellers exactly.

I know that we were -- they reached out to us very early on in the process directly, and we were involved in at the whole time. I know that there are other bidders.

I know that were other people who wanted to get a hold of this business, but we -- the sellers, decided to look to us. And frankly, from my perspective, that's the kind of business that tends to fit well with us when you have an ownership that is -- has, kind of, more character to it than which you might expect from some sellers.

So -- but I can't speak for the sellers. You must understand.

No, that's very helpful. And then maybe just moving on to something else.

You guys put out a press release, I think, 1 week or 2 ago, in regards to the EPDS product line. I think you're now up to 5 OEM platforms.

I was just hoping that maybe you could just give us an update on where you see that business. And Pete, I think in the past, you've talked about some aftermarket or some retrofit opportunities for EPDS.

Anything hit on that front?

Well, we do have -- we have 3 programs actively in development, 2 of which we're under firm contract or -- and I expect we'll be able to publicly announce, maybe even yet this year. We've got efforts underway to get those statements released.

One of them is a little further behind and it may take a little bit longer. But we remain quite encouraged.

We think that, that technology that we're bringing to market is gaining reputation and gaining acceptance, and we are creating a market niche that we think will be valuable for a long, long time. One of the aspects of it were to tie the loop back to our E&D spending, is that it's a modular system and when we get a new aircraft, to the extent possible, we try to use hardware we've already developed various components, and that minimizes, what I call, the science cost.

And so to the extent that our E&D expenditures next year are driven in part by these new programs, we're assuming a certain level of commonality and efficiency relative to the programs from the past. So as -- and so far, I think we're pretty pleased with how these efficiencies, so to speak, are working out.

As far as aftermarket opportunities, those are specific to starter generator technologies, which we are under contract to do starter generators for the Pilatus PC-24. Our primary focus at this point is being successful on the program and getting through the certification process.

And we will -- as we get towards the other side of that process, start to look at aftermarket opportunities. But, as you can imagine, we -- it takes about as much work to certify a starter generator on a single, older airplane as it does for the beginning stages of a new airplane.

So, we definitely want to prioritize the PC-24 first. But as for the EPDS architecture specifically, it does not really lend itself outside of the starter generator to retrofit opportunities.

It's primarily a new aircraft opportunity.

Yes. Sorry, I misspoke on that.

And then just lastly for me, and this is a follow-up to, I think, Kevin's question. In regards to PECO, I know the bulk of that is Commercial Transport.

But can you just give us the break between Transport and Military in terms of PECO revenues?

Well, I'm going to say 95-5, but I don't know that for sure. David's looking through spreadsheets.

We don't have anybody from PECO on the phone. But I got -- if it's different than 95-5, we'll try to bring that up next.

David's nodding, and -- so I must be right. It must be right, 95-5.

Just a clarification, Pete. You talked about that $450 million to $475 million for next year on the topline.

I just want to clarify, does that include the PGA acquisition?

It does. We don't view that as -- the diligent side instead remaining are not substantial in nature.

We don't view that as a highly risky step.

No closing comments. Thanks for your attention, and we look forward to talking to you, all, after the next quarter.

Have a good day.