Greetings, and welcome to the Astronics Corporation Second 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. As a reminder, this conference is being recorded. 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 Extronics. Joining me on the call are Pete Dungerman, our President and CEO and Dave Berney, our Chief Financial Officer. You should have a copy of the Q2 2019 financial results, which were released earlier this morning. If not, you can find them on our website at www.astronics.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 and 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 release as well as filed with the Securities and Exchange Commission. These documents can be found on our website or sec.gov. 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 as additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non GAAP measures to comparable GAAP measures in the table for the company in today's release. With that, let me turn it over to Pete to begin.
Peter?
Thank you, Debbie, and good morning, everybody. Thanks for tuning into our call. Our agenda, as usual, we'll start off with a summary on our quarter and some of the developments that we're seeing in the market.
With the Securities and Exchange Commission, these documents can be found on our website or atsec.gov. 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 GAAP measures to comparable GAAP measures in the tables that accompany today's release.
With that, let me turn it over to Pete to begin. Peter?
Thank you, Debbie, and good morning, everybody. Thanks for tuning into our call. Our agenda as usual, we'll start off with a summary on our quarter and some of the developments that we're seeing in the market. Dave will plow through the numbers both on the income statement and the balance sheet. And then I'll take it back and talk about our revised forecast for the top line for the second half of the year and then we'll close with Q and A as usual.
So a summary of the quarter. Revenue was later than our Q1. It was about where we actually expected it to be. It compared well to last year with adjusted sales up 5.4%. The adjustment, of course, I'm assuming some knowledge here, but in the Q1, we sold our semiconductor test business.
So most of the numbers that we're going to be talking about today are adjusted numbers excluding the effects of that semiconductor test business both from the current periods and from the comparative periods. We'll try to make that clear as we go through, but that is a good assumption as you listen to the call. So revenue adjusted was about $187,000,000 up 5% from last year's Q2 and both segments contributed to the growth. It is down sequentially from Q1 when we had very strong revenue of $205,000,000 For the year, our adjusted sales are up 12% to $392,000,000 again, both segments contributing. The lower volume from the Q1 to the 2nd quarter will put pressure on margins.
Our adjusted net income for the 2nd quarter was similar to last year at 3.4 percent of sales, but well down from 1st quarter's 7.9%. For the year so far, our adjusted net income is 5.7%, double what it was last year for the 1st 6 months. Dave's going to go through the numbers in more detail, but I thought I'd spend some time on the major issues that we're seeing and facing that are influencing our perspective and influencing our numbers. 1 is we continue to see pretty strong tariff costs, unfortunately. The 2nd quarter, our tariff charges were $2,300,000 Year to date through 6 months, they come to $4,000,000 In the second quarter also, we faced some pretty strong restructuring costs, especially in our Test segment.
As the Test segment adjusted to life after semiconductor test. The total charge for that restructuring cost in the quarter was 2,200,000 dollars That restructuring, we expect, will save somewhere around $8,000,000 to $9,000,000 on an annual basis going forward beginning in the current quarter, Q3 of 2019. We've talked quite a bit in recent periods about our 3 stragglers or 3 struggling businesses. In the Q2, those businesses had a collective operating loss of $7,700,000 That is well above the $5,000,000 that we predicted. And there's some good news here and some unexpected bad news.
The good news is that 2 of the 3 businesses, we have very strong line of sight to resolution. Resolution in this case is getting them at or near in the neighborhood of breakeven. And those 2 are CCC and Armstrong. Both had predictable quarters and both have a path we feel forward to get to approaching breakeven by year end such that we won't plan on talking about these 2 in this context afterwards. The third one, AeroSat, had a setback in the quarter and that is our ambitions for our tail mount business jet connectivity system, which we are taking to market with a couple of partners, had a setback when one of the critical satellites used to make up the system failed and went out of orbit and has basically been lost.
And that in turn has resulted in the team deciding to put sales on hold until replacement capacity that's suitable in nature, both from a cost and a performance standpoint, can be developed. Realistically, we don't expect that to happen towards the very end of the year at the earliest. So AeroSat did not go down the path that we expected. Of the $7,700,000 collective loss for the group, AeroSat drove 70% of it. And with this delay in the tail mount program, our path towards breakeven is significantly complicated.
Basically, we are on hold till we get later this year and figure out what the options are with the satellite network that we're going to use for the system going forward. Additionally, we've seen some program slides in the market, including the 7 37 MAX, which is a favorite topic for everybody in the industry these days. It's become clear as the quarter wore on that the reduced production rate would be continued longer than we originally expected. We started the year at 52 units a month. We thought we were going to be down around 40 to 40 2 starting, say, in April till about June or July, and then we go back to 52 and then up to the goal of 58 kind of towards the end of the year.
But as of now, it appears that that lower production rate will go on indefinitely with the hope of going up towards the end of the year. We have about $85,000 direct to Boeing on the 37 and another $10,000 that goes other customers to get on the airplane. And so very cumulative drop in production estimates as we understand it right now comes to about a $10,000,000 revenue drop over the course of the year. With all that on us, our bookings for the quarter were $170,000,000 That's a relatively low level compared to what we've seen in recent years. To some extent, that maybe shouldn't be a surprise because we've had very strong quarters for the last 3 or 4 quarters leading up to this quarter.
So maybe it was just a break in the action. But there is some evidence that with the MAX grounding, the airline industry in general has tight capacity. Tight capacity means that the airlines are very reluctant to take their aircraft down for upgrades. And upgrades are essentially what much of our IFE and IFEC sales are all about. So we've seen some evidence of some airlines that are particularly MAX dependent that they want to delay their programs until the MAX situation is resolved.
And we obviously don't have any information on that beyond what everybody else has in the industry. But at this point, the MAX situation is clearly an evolving scenario. Those are my overall color comments to begin the summary of the quarter. I'll turn it on turn it over to Dave now to talk through some of the numbers.
Okay. Thanks, Pete. As expected, heading into the quarter, sales in the Q2 were light compared with the trailing Q1 of the year. It's still up about 5.4% on an adjusted basis from 2018 Q2 when you exclude from both periods the sales of the semiconductor test business that divested in the Q1 of this year. Aerospace segment sales were up $8,100,000 or 4.9% compared with the last year's Q2.
The increase was broad based across most product lines driven by higher OEM build rates, increased content and airline retrofit programs. In particular, electrical power and motion sales were strong, up 16,400,000 or 24 percent driven by strong in seat power sales. Lighting and Safety was also strong, up $2,600,000 or 6% with all of that increase coming from the lighting products, partially offset by lower PSU sales. Avionics was our weakest point in the quarter, down $10,600,000 or 29% from the prior year's comparator quarter, primarily due to a decrease in sales of IFEC hardware. Test segment sales, excluding the divested semiconductor test business, were up 14% to $12,600,000 compared to the Q2 of 2018.
The increase was driven broadly by an increase in volume from multiple A and D customers. Going to our margins. On consolidated margins, our consolidated operating income decreased from $20,100,000 to $10,600,000 due primarily to the divestment of the semiconductor test business, which accounted for $10,200,000 of operating income last year and $2,100,000 this year. Adjusted income from operations, excluding the semiconductor activity from both periods, calculates to $8,500,000 or 4.6 percent of adjusted sales compared with $9,900,000 or 5 point 6% on adjusted sales of $186,900,000 $177,200,000 for 20 19, 20 18 18 second quarters, respectively. Still talking to consolidated margins.
Items affecting the quarter this year included tariff costs of $2,300,000 an inventory reserve of $1,600,000 and workforce reduction costs of $2,200,000 All told, about $6,100,000 or about 300 basis points of margin. Absent these charges, consolidated operating margin would have been roughly 8 point 6%. Regarding the tariffs, our supply chain management continues to work with our suppliers to reduce the impact of tariffs. Several of our suppliers are actively relocating or moving production from China to other low cost countries, but the process doesn't happen quickly. In the long run, we expect to be able to reduce the impacts of tariffs, but it will not happen this year.
As we had said going into the year, we're anticipating tariff costs to be in the ballpark of $10,000,000 this year, and we saw $2,300,000 in the Q2 this year, which was up from what we saw in the Q1. Timing of tariffs really depends on the cadence with which we're importing some of our electrical components and cables from China. So looking to the segment operations. Aerospace operating margins were 8.3% versus 11% in 2018 Q2. Lower operating margin is attributable to several factors.
2 of the factors I spoke about affected the Aerospace segment. The impact of tariffs during the quarter was $2,300,000 and the $1,600,000 inventory reserve. Absent these factors, Aerospace operating margin would have been about 10.4%. Also affecting the margins was a somewhat unfavorable sales mix with a larger mix of slightly lower margin sales in the quarter. We initiated a restructuring effort in our antenna business that we talked about on the last quarterly call.
With that restructuring, we expect we will reduce annual fixed costs by more than $3,000,000 The restructuring costs in the quarter were minimal, and we'll begin to see the benefits in the 3rd quarter. We're making headway regarding the operations of our 3 problem businesses. The losses for those 3 during the quarter, as Pete mentioned, totaled $7,700,000 with AeroSat accounting for about 70% of the loss. As we said before, our goals this year is to move those 3 to breakeven, and we think we're getting there with 2 of the 3. AeroSat will struggle a bit longer for the reasons Pete had mentioned with the satellite failure, but we're still waiting for alternatives and we expect the situation will evolve as we move through the year.
Additionally, we begin we will begin co locating certain aspects of the Armstrong business from Itasca into a newly leased facility that CSC occupies in Waukegan. This will provide additional savings and synergies once the process is complete over the next 12 months or so. On to Test Systems, Test segment operated at roughly breakeven for the quarter. Adjusting out the estimated impact of the semiconductor test business, the segment would have had an operating loss of about $2,000,000 compared with an adjusted operating loss in 2018 Q2 of $3,900,000 However, the quarter ended a $2,000,000 charge included a $2,000,000 charge related to severance as we resize the test organization after the sale of the semiconductor test business. The resizing will result in annual savings of about $6,000,000 in that segment, which we expect to see in the Q3.
In July, we signed a deal to sell our non core airfield lighting business. Proceeds for that will be roughly $1,000,000 and we expect in the 3rd quarter will result in a non cash charge of about $1,500,000 primarily relating to the removal of the goodwill related to that business that was on our balance sheet. On to our balance sheet. The balance sheet continues to be strong. At the end of the Q2, we had $122,000,000 of long term debt outstanding, which translates to a multiple of about 1.2x EBITDA if you exclude the gain on the sale of the semiconductor business.
Including the gain, we are levered for debt covenant purposes at about 1.5x adjusted EBITDA. This gives us a great deal of flexibility in working capital deployment. We do have a $50,000,000 share buyback plan in place and a 10b5 plan filed to repurchase shares at predetermined quantities based on market prices. We've not disclosed the details of the plan and we did not purchase any shares during the quarter. In addition to the share repurchase plan, our focus for capital deployment continues to be on M and A opportunities in both Aerospace and Test segments.
I think, Pete, that concludes my comments.
Okay. Turning to our sales forecast for the rest of the year. You saw in the press release that we are adjusting down our cumulative sales expectations. Aerospace, in particular, test actually goes up a little bit. Aerospace is now predicted to be $680,000,000 to $700,000,000 for the year.
Last year in 2018, we came in at $676,000,000 So the midpoint of that range would represent about $15,000,000 of growth. Test is now predicted to be 60 $1,000,000 to $75,000,000 Last year without semiconductor, it was $48,000,000 So that's pretty substantial growth. Part of that growth will come from our new Freedom Communication Technologies acquisition as a smaller company that we bought in the quarter. Freedom represents a nice tack on addition to our technical capabilities and our market reach. They operate out of Texas and we expect to continue operating that facility and that organization with those people going forward.
So we're happy to have Freedom as part of the business. That would bring our total adjusted sales for the year forecast to be somewhere around between $740,000,000 $775,000,000 Last year, excluding semiconductor, we did $719,000,000 So the midpoint of the new range suggests 5% growth. The reason for the reductions are based on my earlier comments. If you assume tail mount antennas move out of this year, the $10,000,000 for 7 30 7, our lighter booking performance in the second quarter pretty much explains the drop in the expectations over the next 6 months. We obviously believe that our business is very well positioned and we're in some very nice markets for the long term.
It will be nice when 737 gets resolved. It will be nice when the airlines can more reliably count on what kind of fleet they're going to have and what they're going to do going forward and it will be nice when we can develop satellites that can somehow dodge year rates. I think that's the end of our prepared comments. Christina, let's open it up for questions.
Thank you. We will now be conducting a question and answer Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, gentlemen. Thanks for taking my questions. Pete, can you first provide an update on the operating income loss you're expecting from the three businesses over the next couple of quarters given the issues with Aerosat and the satellite into 2020?
What if I could? It's a little bit we're kind of moving as we go here with respect to AeroSat in particular. I previously said, I think in our last quarterly announcement that we expected the 3 combined to be at $5,000,000 in the second quarter $2,500,000 in the third quarter. That obviously was based on certain revenue assumptions out of AeroSat, which are now seriously essentially in the current quarter onward. I'll give you essentially in the current quarter onward.
I'll give you an update as we get there, but I think we're down to one struggling business for practical purposes. And the other 2 are null and void at this point. And AeroSat, if you I think we said 70% of the $7,700,000 cumulative operating loss was responsible to AeroSat this quarter. I don't think it's going to be any worse than that. I don't know if we're going to get it to be a whole lot better.
That's what we're trying to assess and trying to figure out. And obviously, there are costs that need to be managed. There's also the opportunity that you don't want to flush away in the short term. So we're balancing that and we'll provide updates as soon as we can. But at this point, that's about the best we can do.
Okay. But you are expecting reduced costs in AeroSat by $3,000,000 a year. What is the cost associated with that?
Well, it's just you've got an organization that's staffed for a certain level of volume and the volume has taken some big hits. So that's the challenge.
Okay. Got it. And then just on the core Aerospace margins, you gave us color last quarter. I think they were 19% ex the Deepgram businesses and the chargers they incurred. It looks like this quarter they stepped down significantly.
What was the reason for that? Dave mentioned a lighter sales mix, obviously you have a little higher tariffs, but what else is going on in there?
I think it's mostly driven by volume. And we didn't actually prepare the comparable number, at least I don't have it in front of me. But if you were to reallocate back tariffs and material reserve and assume that the struggling businesses get to breakeven, all three of those are aerospace businesses, I think you get up in that same kind of neighborhood, not 19%, but I think you're in the 15%, 16%.
Okay, got it. And as you go forward into the rest of the year, should we use that same 15% to 16% of the base rate given that volumes aren't likely to be a size Q1?
Well, that's the problem. I think that big assumption has to do with AeroSat and our plan with AeroSat is being reformulated in the current situation.
Yes, John, And if you look at the midpoint of our guidance for the year, subtract out the first half sales, you can see the expected run rate for the last half of the year. And it's not nearly where we were in the Q1.
Okay, great. And then just any color on the accretion from the acquisitions that you did for the rest of the year?
I think it will have a minor impact. We'll have the usual early amortization costs for some of the short term intangibles. So I don't expect it to have a significant impact on GAAP income. I do expect it to contribute positively to EBITDA. It's a business that typically has been growing over the last couple of years and has had an EBITDA run rate that's mid to upper teens.
Is that an absolute level or margin? I believe margin, right?
I didn't hear what you said.
That made the upper case on a margin basis, right?
EBITDA percentage. Yes, percentage.
Got it. Thank you. I'll jump back in queue.
Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.
Hi, good morning, Pete and Dave.
Good morning.
I just wanted to first ask about the restructuring. Do you start to see expected sort of $2,000,000 to $2,500,000 in benefit this quarter? Or is that does that have any sort of ramp as
we go from 3rd to 4th quarter?
Yes. We should start seeing it immediately in the Q3. Most of the adjustments largely related to severance and most of the moves all the moves I believe were made in the Q2. So we incurred the cost there and the people that were involved were terminated in the second quarter or retired.
So it sounds like with the exception of AeroSat then, all the restructuring activity, at least as you've identified it, is essentially
complete? Yes. I mean except I mentioned the we're starting to co locate some of the business that's in Itasca up to Waukegan. We haven't seen any of the synergies yet that we expect to see from that and that's going to be a process that will probably take 12 months to do. But But that's going to be a slow move to help get some more synergies out
of those businesses that are
all located in the Chicago area.
Okay. Okay. That's helpful. And Pete, on the it sounds like for the legacy sort of connectivity or in flight entertainment product line, the MAX is clearly having an impact as it pushes maybe some modification work to the right, just to your comments around capacity constraints there. But are you seeing anything else on wide bodies or any other platforms that may be contributing some of your cautious comments in that outlook or anything else in the market dynamics on that market that we should be thinking about?
It's a technically dynamic marketplace, so there are always all kinds of things happening. And I don't I'm a little cautious about overplaying these comments, Ken, because I don't want to make too much out of it. I mean, we had really great booking quarters for the 3, 4 quarters right up to this quarter. So 1 quarter does not a trend make. I want to be a little bit cautious there.
I mean there are certain dynamics in the market. There's Ku connectivity systems yielding to some extent to Ka based systems and now the industries abuzz about low earth orbit type of constructs or satellite constellations and how those work and how they play is kind of up in the air. There's the trend in the narrow body world towards streaming content and away from seatback systems and so on and so forth. And then at the aircraft level, the 777 being wound down and the 777X not here yet probably has an impact. But these are all kind of the punches that we roll with every day.
The reason that I brought a little bit of a comment to the 737 situation is that we have become aware of a couple of situations where airlines that are dependent or had been expecting to be flying the 37 MAX in higher quantities have pushed progress off. And it kind of makes sense when you think about it because IFE is generally an after sudden their capacity shrinks and when sudden their capacity shrinks and their capacity shrinks, the last thing they want to do is take airplanes out of service if they don't have to. So we I wish I knew how long the 3.7 MAX is going to be grounded. We all obviously do. The longer it goes, the more this dynamic could be an influencer.
And we don't know what to do other than kind of wait see and stay in touch with our customers. But it is a conversation that we have not had up until recently. It's something that we did not sense up until recently.
Okay. No, that's very helpful. And if I could, just finally on AeroSat, as we look at maybe a couple of the next key milestones between now and sort of the end of the year, anything you could specifically highlight in terms of how we should think about the satellite capacity or what we should watch out for in terms of the next sort of key signpost there to get that obviously the business back on track?
Yes. I mean it's a little bit beyond our scope unfortunately. I mean this was from our partners again as you know are Satcom Direct and Intelsat and Intelsat flies and owns the satellites. And Intelsat is the one who's really got the big problem here. The satellite in question was a pretty important one and it was in a pretty critical region over North America and over the Atlantic.
And our tail mount business was kind of an incremental add on kind of initiative from their perspective relative to what they otherwise have going on, on that satellite. So they've got to figure out and they've got other satellites in orbit that they can offload some of that work to. Our sense is that at this point, they have not been able or willing to give us the capacity that we would need to make our system competitive technically and price wise on the market. And we may not like that, but we kind of understand it. They've got a bunch of initiatives underway and I can't speak for them.
But long story short, they either put up a new satellite, which isn't something you can do very quickly unless you were otherwise planning to do it anyway, or you got to move a satellite you got to offload traffic to some other satellite and that may involve borrowing capacity from somebody else or it may moving a satellite and all those things are I've told you more than I know about satellites right there. But obviously, we're an interested observer. We've spent a lot of time and money on this as has Intelsat and Satcom Direct. And all I can say is we'll break the news when we have the news. And at this point, we just don't have anything yet.
All right. Well, thank you very much for the update. Thanks, Pete.
Sure.
Our next question comes from the line of Michael Ciarmoli with SunTrust. Please proceed with your question.
Pete, just on the revenue bridge, you took $40,000,000 out on Aerospace. And I think last quarter, you talked about AeroSat being down from $85,000,000 to $70,000,000 You presumably contemplated the max at a 42 per month run rate. So what were the other bridges to that 40,000,000 dollars reduction, assuming that you took out the $25,000,000 that you called out last quarter?
Well, last quarter, we left it as it was. And you're right, we saw some of the reductions last quarter, but we felt we had enough positives offsetting the negatives that we didn't need to move the range. So this quarter as we get within 5 or 6 months of year end, we're taking into account and as the situation comes clear with the MAX. I mean, when we closed the Q1, we thought MAX would be MAX production would be kind of back up to its original plan as of now actually. We're moving in that direction.
But basically, we've got, to give you a rough order of magnitude, dollars 20,000,000 or $25,000,000 coming out antenna systems. We've got $10,000,000 coming out of 7 37 line fit. And then we've got about another $5,000,000 to $10,000,000 of other kind of related kind of programs kind of across the business, some of which might be linked to the capacity issues that I've been talking about. But it's kind of a broad based set of things. Obviously, it's disappointing relative to our original expectation for the year.
The good news is most of it's moving to the right. And actually, if we hit the midpoint of our revised range, we still have a year of 5% growth over our adjusted non semiconductor 2018 numbers. So we're disappointed with the reset, but we still think we've got pretty good momentum and potential in the business at the same time.
Got it. I mean, you mentioned the 7 37 line fit. What about the buyer furnished equipment that would presumably be getting purchased from the airlines? I mean, I'm just trying to get a sense, I guess, you guys would be just in time with Boeing on some of the interiors. We've seen other suppliers call out weakness.
Do you guys have any idea what kind of inventory is in the channel at United Technologies or Safran or Panasonic? I mean, the bookings were down, but I'm assuming that all of those suppliers had been ordering at a rate of 57 per month. So the bookings weakness, I don't know if you guys can provide any color on what you think is in the channel there and even potential revenue headwinds. I mean, if you look at the airlines who should have been taking MAXs, Air Canada, United, I don't know, Copa, I mean, there were certainly a lot that would have had full power and connectivity in there.
Yes. We don't really think that that's a big headwind. Most of our hardware is pretty highly modular. It's not dedicated to a certain type of airframe. So if people buy it and United is a good example, they're a customer of ours that have been for a really long time.
A lot of the things we sell to them that could be fitted on a 37 can also go on an 8.7 or a 6.7 or a 5.7 or whatever or a 3.20. So I don't think there's a whole lot of 737 specific hardware in the distribution channel waiting for Boeing to start building airplanes. Our aftermarket sales are more fleet sales to airlines. And I think the airlines are hedging maybe a little bit just because of busy summer travel and they don't have the airplanes that they thought they'd have. So why buy something that they don't want to put on right now?
I think it's more driven by that. But we'll find out. I would expect when the 37 gets released that there's going to be a big rush to get a lot of things reestablished and we're looking forward to that day. But I don't think there'll be a terrible lag once that happens while built up inventory gets stressed.
Got it. And then just last one, I mean, I'll get
No, I was just going to ask Dave if he had anything to add to that. He doesn't.
Yes. And then just the last one, I'll get it away. Can you just talk about, I mean, the passing of your Board of Director, your Chairman to your Board, Kevin Kane, how is that situation evolving from, I guess, an estate planning, owns 25% of the B shares with the stronger voting rights? How do you guys thinking about managing that situation? Or because I think when those B shares are sold, I think they convert into A shares and lose the voting rights.
So any color on what's happening with that is a state and that large holder?
No, I don't really have any perspective on that. It's obviously a family decision. And we miss Kevin terribly in many respects. He loves the company and his family does too. I wouldn't expect anything rash or anything damaging to happen, but I can't speak for them as to what their intentions are.
Got it. All right. Thanks, guys. I'll jump back in the queue.
Our next question comes from the line of George Godfrey with CL King.
Just two questions. One is, you said AeroSat is about 70% of the operating loss. So if I back out the inventory charge, is the operating loss of that business you think over the next two quarters about $4,000,000 $4,500,000 Is that a right operating loss to assume?
That would be a baseline assumption assuming we don't do anything different to the business and that's part of what we're trying to figure
out. Got it. And then Pete, you said you wouldn't expect the satellite capacity issue to be resolved any earlier than the end of next year.
What is the long term? End of this year, George.
Yes. If we took a more conservative or less optimistic, could this extend into a 2021 type of thing? Or is this something that likely gets resolved in calendar 2020?
That's a good question. I sure hope it's resolved. It's been an incredibly frustrating process, as you can imagine. We've been at this now, I got to think, but it's probably been a year and a half, 2 years and we've been around the horn with 1 satellite provider already. And here we were in the starting blocks waiting for the gun to go off and actually the gun did go off.
And then we In April. And then it was a false start. So everybody got back in the blocks and then this thing happens. And so it's a little I don't want to tempt fate by saying there's absolutely no way it will wait till 2021, but I sure hope not. Got it.
Okay. 2 years ago, I wouldn't dream that we'd be in the spot right now either. So who knows? Understood. Thank you for taking my question.
Sure.
Our next question comes from the line of Josh Sullivan with Seaport Global. Please proceed with your question.
Hey, good morning.
Just following up on the AeroSat question here. I understand loss of satellite coverage, the impact has got on hold right now. But is there a point where the AeroSat assets might be better suited in an external portfolio? How much more investment just that you are you thinking you're going to endure just to pursue the opportunity or kind of when that changes over I understand that's
hard to Well, it's a good question. I guess I would answer it this way. We have a number of opportunities and pursuits with that business for antennas that collectively could be very meaningful to the company. It's been a tough road and it's really been an amazing set of circumstances that have led us to where we are. But remarkably, the opportunities that we have been seeing still exist.
So the question isn't whether there are opportunities to pursue. The question is what is the best way to pursue them. And I don't I'm not sure if your question was do we could we or should we sell the business. I'm not sure if it's salable right now in its current situation, frankly. I think it's more a situation of how we best organize ourselves and manage ourselves to execute the opportunities that we see in front of us and do it in a cost efficient or cost effective kind of manner.
And we have some efforts underway to try to figure that out. It's obviously a little bit of a moving picture when we don't know what some of our best near term opportunities look like exactly. But your question gets to the right issue which is what do we do going forward. I don't think we're necessarily committed to maintaining the exact same path we had in the past.
That's helpful. And then on the Delta piloting some free WiFi here, can you talk about how Astronics might fit into that opportunity or where that market might develop?
Yes. So for those who don't know, Delta, obviously, a major influential airline for the entire world and a long term customer of ours has a couple of interesting initiatives underway. One of them is to basically develop much more of a customized kind of homegrown IFE type system. And that IFE system is needs a lot of the same components that any other IFE system needs and we're heavily involved with them on this effort. Your question specifically, Josh, was an experiment that they're running or a trial that they're running where they want to basically allow their customers free WiFi, free Internet access.
And the issue there from a technical standpoint is that the take rate on any particular airplane, as you might expect, will probably go through the roof, instead of it being somewhere in the 4% to 15% of passengers range. I would expect to be somewhere closer to 75% to 85% to 95% just like it is in restaurants and hotels and conference centers and everywhere else in the world. And what happens to the system when you have that kind of loading on board? From our perspective, Astronics, this is a big deal because an airplane is one of the last places these days where people are expected to pay for WiFi and they're kind of being taught that they don't shouldn't have to pay for it because fewer and fewer hotels these days charge for that kind of service, for example, at one time they did. And it's expected to be free.
Now getting Wi Fi on an airplane is technically much more of a challenge than the average person is aware of or can think about. They just think they should be able to log on like they do in their bedroom or wherever. But for us, if this march towards lower cost and higher connectivity continues, if Delta decides that this is something they want to offer, it's going to put a lot of competitive pressure on everybody else to kind of do something similar. And if that starts happening, we would expect a big increase in wired airplanes, connected airplanes and better capacity airplanes. A lot of the airplanes that are out there, even though they have relatively new connectivity systems that have been put on in the last 3 or 4 or 5 years, those systems are not going to be able to handle 95% take rates as well as they handle the current 10% take rates.
So we would expect this to be a major propelling move so that airplanes that are not connected now will become connected and airplanes, even those that are connected, will have to be upgraded substantially. We're obviously involved in this test and we're watching it very closely.
Our next question comes from the line of Dick Ryan with Dougherty. Please proceed with your question.
Thank you. So Pete, a couple of questions on the other two businesses. Armstrong was just over breakeven I think in Q1. How did that perform in Q2? Did it stay in the profitable range?
And on CCC, I think you were supposed to have some key deliveries in July or August. Have they occurred that has given you the kind of better line of sight for their outlook?
Yes. Neither of them are profitable at this point, but both of them are close enough that it's not worthy of a whole lot of discussion going forward. I think that's the way I'd paraphrase it. As Dave said, we have 3 facilities in the Chicago area. We're going down to 2.
Percent. And the Armstrong organization is going to be absorbed in the CSC, mostly up in Waukegan over the next year or so. So that will be, I think, a helpful set of developments for that operation. CCC continues to make pretty good progress on its big development program, which has been a source of frustration for the last year and a half. You're correct in that there are some buyoffs expected in the kind of the actually about now, July, August, September.
It turns out that one of them has been moved to a little bit later like November. But the organization is increasingly confident that we'll be able to get through that without an increase in the estimate to complete, which has been what's been driving a lot of the cost overruns in that business and driving a lot of the losses. At the same time, kind of the better news picture is that demand for VVIP airplanes continues to look pretty positive. And we think we're going to come out of the other side here with a technically superior program capability at a time when the market is returning to normal levels of health. The market is returning to normal levels of health in part because there are more airplanes available to modify, 7 37 MAX excluded at this point.
But the A320neo is there, the A350 is there, the 87 is there, the 777X is getting close. So there are more airplanes for customers to choose from. And despite certain tensions around the world, the geopolitical situation is such that wealthy individuals in various countries around the world are more comfortable buying these airplanes today than maybe they were over the last couple of years. So the combination is pretty positive. And competitively, again, once we get this program developed, we think we're going to have something that's going to be hard for others to match.
So it's a good combination. And as such, we expect shooting from the hip here a little bit, but we expect sales at CCC to almost double this year versus last year, heavily weighted for the second half. And the bookings we expect will drive further growth going into next year. So it's a reasonably positive picture.
Great. One last one on test. Your increased expectations on that, is that business you already have in house? Or is that still some business needed to book? And what's driving your visibility there?
Yes. Part of the increase there is the acquisition of Freedom included in the sales guidance. And just some further refining of kind of we're halfway through the year now and where we see the backlog shaping up for the balance of the
Was your question specific to cash? Cash. Oh, sorry. Okay. That's all right.
Yes. Okay, great. Thank you, guys.
All right. Thanks.
Our next question is a follow-up question from Jon Tanwanteng with CJS Securities. Please proceed with your question.
Hi. Yes. Just a quick one for me. What are your tariff expectations for the rest of the year?
Well, we still think it will be about I think what we saw in the second quarter is what we built into our internal models. $2,500,000 ish a quarter. It could change though. Like I said, the Q1 was a little bit late. But if we take delivery of a bunch of imported raw materials from China, it could be a higher quarter.
But for overall for the year, we're still looking at about $2,500,000 a quarter.
Okay. And does that contemplate all the round of that have come out from the White House in the past week or so?
We don't upgrade our update our forecast on a tweet by tweet basis. We should though.
Okay. Understood. Thanks.
But I will say in the long run, I think when we get into next year, if the tariffs stay at this 25% rate, I think we will see some reduction in the tariff cost for us as our suppliers are able to relocate some of their facilities and we can source things to countries outside of China.
Okay, great. Just one more follow-up. Corporate expenses were lower quarter on quarter. Is that run rate the right one to use going forward? Or how should we think about
it? Yes. I think if you take a blended Q1 and Q2 run rate, that's what I'd use.
Okay. Thank you.
We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
Thanks for your attention. We look forward to the drama this year as we work through some of these issues and get better results. Thanks for your time today and have a good day. Thanks.
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.