Greetings, and welcome to Astronics Corporation 4th Quarter and Full Year 2018 Financial Results. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations for Assonics Corporation.
Thanks, Dana, and good morning, everyone. We appreciate you joining us here today. I've got Pete Gunderman, our President and CEO and Dave Berney, our Chief Financial Officer on the call. You should have the news release that's been across the wires earlier this morning. And if not, it is available on our website atastronics.com.
As you are aware, we may make some forward looking statements during this teleconference, including during the Q and A portion. 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 where we are today. These factors are outlined in the earnings release as well as in documents filed by the company with Securities and Exchange Commission. You can find these documents both at our website and atsec.gov. So with that, let me turn it over to the call, to Pete to begin.
Peter?
Thanks, Debbie, and good morning, everybody. And before we get going, I should assure you that I am in fact Pete, and my voice doesn't sound normal. I've been assured that whatever I have, you can't catch over the phone. So I apologize in advance. I may get hit with a cough attack here sometime over the course of the call and I've got a mute button ready to go.
I'm not afraid to use it. So if I go silent for a minute, that's what that's all about. But everything being equal on that, we'll talk about our Q4 results, which we feel pretty good about and do a postmortem on 2018, which we feel was a pretty strong year for the company. And then we'll turn our attention to 2019. As usual, there are some issues to talk about there, primarily relating to the sale of the Sunlightest business that we announced on 13th of this month and or didn't announce but closed on the 13th of this month.
And also some of the issues that are likely to affect our 2019, including primarily the 3 businesses that we've dedicated some space to over the last couple of calls. We'll continue to do that today. So with that as a backdrop, our 4th quarter ended up pretty strong. Revenue of 203,000,000 dollars was our consolidated was our 3rd highest ever after only the previous two quarters, the second and third quarter of 2018. Our 4th quarter results were up 18% over the comparator period of a year ago.
That's about $32,000,000 of growth. Acquisitions contributed 12 of the $32,000,000 of growth. And organic was the rest, dollars 20,000,000 or about 12% organic growth year over year. Our Aerospace segment had a particularly strong quarter. We set another revenue record of $175,000,000 in the 4th quarter.
That's our 4th record quarter in a row and up 25% over the comparator period at the end of 2017. Our Test business was relatively light, revenue of 27 point $7,000,000 That was pretty much what we expected and predicted at the end of our last press release or last quarterly conference call. That result of 27.7% was below both the comparator period of a year ago and well below the 2nd and third periods of this of last year. The 2nd and third quarters of 2018 were relatively strong for our test business. Net income in the quarter was strong at $12,500,000 or 6.2 percent of sales.
That's up dramatically from the comparator period when we had a large impairment charge at our Armstrong business at the end of 2017 of $16,200,000 During the year over year comparisons, that colors the comparisons substantially. Got to keep that in mind as we look at the older numbers. Aerospace, again, was a solid contributor with operating margins of 12.7%. That's not where we want it to be, but it's the highest we've had in quite a while, and it shows signs of improvement. Our 3 struggling businesses that we've talked about, CCC, AeroSat, Armstrong, we've talked about them collectively as a group now for about 9 months.
And they turned in a combined operating loss in the Q4 of 6,400,000 dollars We're not particularly happy with that. That's below where we thought we would be, but it's down substantially from the 3rd quarter when the 3 turned in an operating loss of $11,200,000 So $11,200,000 to $6,400,000 we think is pretty good improvement. We expect continued improvement from here. We'll talk about that more specifically at the end of the call. Diluted earnings per share in the Q4 were $0.37 versus a loss of $0.18 in the comparative period a year ago, again, because of that impairment charge at Armstrong.
Not only good shipments and margins, but bookings were pretty strong. We ended up with bookings in the Q4 of $220,000,000 consolidated, that's a book to bill of 1.09 Aerospace bookings were right there with shipments even on an all time record shipping quarter book to bill of 1. Test had a pretty strong booking quarter of $45,000,000 a book to bill of 1.62. Dollars The star in that arsenal has to do with a number of things, but some progress we made with the New York City program for $30,000,000 is a chief part of that. Backlog at the end of the year was $415,000,000 a record high.
Included in that total is $12,000,000 of backlog that was essentially sold with the semi test business in February to our friends at Advantest. Year to date or year to date year to conclude, I guess, at the end of 2018, we ended up with revenues of 803,000,000 dollars That was up pretty substantially, 28 percent from $624,000,000 in 2017. That's total growth of $179,000,000 and roughly split equally between acquisitions and organic growth. Acquisitions contributed $85,000,000 of the $179,000,000 of growth. Organically, we generated $94,000,000 of growth.
Net income for the year ended up at $46,900,000 or 5.8 percent of sales, up 138% from $19,700,000 in 20 17 or $1.41 per diluted share versus $0.58 per diluted share in 2017. Net income for the year was positively impacted by the lower federal tax rate and a change in our in a state tax position that we talked about on the last call and negatively affected again by the combined operating losses of 34.7% of the struggling 3 businesses. Again, we're not happy with $34,700,000 It compares about the same as 2017 when those 3 businesses combined for $47,100,000 inclusive of the impairment charge at Armstrong. So $47,100,000 in 'seventeen and $34,700,000 in 'eighteen. We're looking for substantial improvement in 'nineteen as we'll get to that in a minute.
Total bookings for 2018 came in at $837,000,000 That's vesting shipments by about 4%. Aerospace bookings were up about 5%. Test bookings were down about 2%. Looking more specifically at our segments. Our Aerospace quarter, as I said, was a really strong quarter, record revenues of 175 point $2,000,000 up 25%, 26% compared to $140,000,000 in the comparator period.
That's our 4th new record in a row for our Aerospace segment. Operating profit came in at $2,200,000 or 12.7 percent of sales, not exactly where we are striving to be, but it is the highest we have achieved in 3 years. If one were inclined to run the exercise and back out the losses from the 3 stragglers of 6.4 $1,000,000 or assume that we could get those businesses to breakeven, operating profit in the quarter would have been 16.4%. So we continue to believe that our best margin improvement opportunity is to continue to focus on reducing the operating losses of those three businesses, And we think we're making progress. Bookings, as I mentioned moments ago, for the Aerospace segment in the Q4 were $175,500,000 slightly ahead of shipments book to bill of 1 And our Aerospace ending backlog of $326,000,000 is our highest ever and sets us well sets us up well for entry in 2019.
Looking back at the whole year for Aerospace segment, revenues of 6 $76,000,000 was were up 26% from 2017. They made up 84% of our consolidated total. With the sale of our semi test business, that 84% in the future will increase. It will increase over 90% of our total. Operating profit for the year was $70,000,000 or 10.3 percent of sales compared with $39,000,000 in 2017.
Again, for the year, the 3 troubled businesses that we're working with had an operating loss of $34,700,000 If you were to do the exercise to assume they were breakeven, our Aerospace segment operating profit would have come in at about 16.4%. Bookings year to date were $712,000,000 So even with the record shipments, bookings exceeded shipments by 5% over the course of the year. Looking at some of the tables that we put in our press release and specifically at the sales by product line table on the bottom of Page 10 of our press release. Our Aerospace business these days continues to be well balanced, in my opinion. Our Electrical Power and Motion product line makes up about 38% of our consolidated sales.
Our lighting and safety product line makes up about 22% and avionics adds in about 16%. And they're all doing pretty well. Electrical Power and Motion was up almost 15% for the year and 29% for the quarter. That's a combination of a couple of things. Primarily in that grouping is our in seat power product, which continues to do very well.
But the other big contributor there increasingly is a seat motion capability that we have where we have picked up quite a bit of market share over the last 1.5 years, and it's becoming a pretty good contributor to our overall consolidated results, certainly, helping to explain that growth. Our avionics product line is chart shows up 144% for the year. That is largely because that's where the revenues that come from our Telefonix acquisition of December of 'seventeen ends up being categorized mostly in our avionics product line. And Lighting and Safety is up 10% a year. So obviously, a good indicator when your 3 biggest product groupings are up strongly.
It's nice to be able to report that at the end of the year. Switching over to our Test business. In the quarter, revenues, as I mentioned, were light as expected, came in at $27,700,000 That's down about 13% from last year and well off the pace from the 2nd quarter and the 3rd quarter. The volume was pretty much dictated by schedules, which are dictated by customers. So we knew it was coming.
We were not surprised. Our operating profit for the segment in the 4th quarter on that lower volume was pretty meager, dollars 600,000 2 percent of sales. However, Test had a pretty strong 2018. Revenue for the year was 127 $700,000 That's up 42 percent from $90,000,000 in 20 17. Operating profit on that volume was $10,700,000 8.4 percent of sales.
If you look at the charts again on Page 10 of our press release, you can see pretty easily that the year was driven by relatively strong semiconductor demand. Semiconductor demand more than doubled, going from $32,000,000 in revenues in 2017 up to $84,000,000 in 2018. We'll come back to Semiconductor in just a minute. Bookings for the quarter were $45,000,000 to book to bill of $1,620,000 As I mentioned, very strong. And year to date, bookings were $125,000,000 versus shipments of $127,000,000 and that's a book to bill of $0.98 It ends our quarter with a test backlog of $90,000,000 So a few words on the sale of the semiconductor product line.
No doubt people remember that in December, we announced a planned transaction to sell the business, the product line to a company called Advantest for $185,000,000 cash at closing, an earn out opportunity of 30,000,000 dollars and a contract manufacturing arrangement, which was to last for approximately 4 years. Last week, on February 14, I guess, we issued a press release saying we had closed but under substantially different terms. It was $100,000,000 cash at closing with an earnout opportunity of $35,000,000 and no contract manufacturing arrangement. And the simple explanation for what happened there is we, at the end of the year, were badly surprised by some changes in expectations on the part of some programs that we had been working towards, and they had a material change on the value of the business. Excuse me.
I'm happy to get this far through the script actually. And the change in forecast was substantial enough to cause a change in the valuation of the business. If I bring you back to Page 10 again, those product line charts or tables that we put in the press release, you again can see in 2017, we had semiconductor revenue of about $32,000,000 In 2018, it was $84,000,000 We had been expecting a 2019 that was roughly at that same elevated level and we expected based on visibility that 2020 would be a step change above that and instead learned in late December that for us, if the business stayed in our hands, 2019 was likely to revert back to 2017 more than anything else. So that was disappointing for us. Not it was a surprise to us also, but it was also when you look at it in context of what's going on in the world with trade tensions and semiconductor industry trends in general and consumer electronics trends in general, in retrospect, maybe not such a surprise.
So we weren't happy going down from $185,000,000 cash at closing to 100, dollars But at the end of the day, we decided that was a better thing to do. 1st of all, the business, we think, is frankly better off with Advantest than us. They have a global reach. They're not a U. S.
Company, which has some benefit in today's world. And they have a much more comprehensive product line, which and presence in a wider array of customers around the world. What it allows for us to do is to focus more specifically on our primary aerospace business That's focusing both in our internal operations and also in our external communications and dealing with the investor community in general. And the contract manufacturing thing means that we will have a little bit more of an abrupt change, but we believe that we're ready for that and we think we can make it work. And we think that when we get to the forecast section, you look at the backlog that we have in place for our Aerospace and Defense Test Business that we're in pretty good shape to have this event happen today.
I think I'm going to go on mute for a second, Dave, and let you talk about balance sheet as we've generated some cash now only with the sale, both our results in the Q4.
Okay. Thanks. Yes, Pete just finished talking about the sale of the semi business that was certainly a big event for us in February. But going back to the Q4, we had very strong cash flow generating about $40,000,000 of cash flow from operations in the quarter that brought our year to date cash flow from operations up to about $55,000,000 which is a very strong year for us and one that we've been waiting a while for to get back on track to where we think we should be in terms of cash flow generation. Outstanding debt at the end of the year was about $234,000,000 down from $272,000,000 at the end of last year.
Our current borrowing rate on our senior credit facility is at LIBOR plus 125 basis points. And I expect that could go down somewhat when we conclude the Q1, as I expect our debt load to be a little bit lower again by the end of the first quarter. As we use the proceeds from the sale of the semiconductor business sale, which were about $100,000,000 pre tax to further reduce our revolver down to about $134,000,000 right now. We do have a $500,000,000 senior credit facility and we have about $250,000,000 available on that based on our trailing 4 quarter adjusted EBITDA. And we expect to have another strong year of cash flow from operations.
So there's plenty of flexibility in our capital structure to fund continued growth. And our capital deployment will continue to be as it has been over the last several years to be focused on growth and acquisitions. We do have a authorization to buy back shares that if they present the right opportunity and when measured against other opportunities, we could exercise on. But our focus continues to be based on growing the business. We had getting off the balance sheet a little bit because I know somebody will ask the We had 2 10% customers for the year, 1 in the Aerospace segment that was about 14% of our full year sales and the other one also in the Aerospace segment, which was about another 14% of our year to date sales.
That was all I had, Pete, if you're ready to speak again.
I'm done coughing. Thank you. So switching to look at 2019. Last in December, we issued initial Aerospace guidance of $710,000,000 to $745,000,000 for 20 19. That, at the midpoint, would represent 8% growth, and we are sticking with that forecast for today.
And we are initiating test guidance now that the shoes have aligned themselves up, dollars 50,000,000 to $60,000,000 in 2019. If you were to back out semiconductor proceeds that we sold from the 2018 base, that guidance would represent at the midpoint about 14% growth for 2019. So consolidated, we're looking at revenue guidance for 2019 of the range of $760,000,000 to 805,000,000 dollars Again, consolidated at the midpoint of that range, we'd be seeing about 8% growth. We don't issue bottom line guidance, but I do want to talk about a couple of things that you might be curious about and be thinking about as we move into 2019. The first is the potential for increased tariff costs.
We talk about these from time to time recently in our company, and I learned the new technical term from my CFO on this subject. It's a wild to ask guess, but he's talking about incremental tariff expense for us in 2019 based on a whole set of possible assumptions of about $10,000,000 compared to $2,600,000 in 'eighteen. So that's our best guess at this point. And a lot of things could happen. The tariffs could go away.
Suppliers could resource production. There could be other hidden tariffs that we're not aware of. So but $10,000,000 is kind of the number we're looking at. And to spend a few more words talking about our 3 troubled businesses, AeroSat, CCC, Armstrong. We're not happy with the progress to date, but there is progress to date.
In the Q3 of last year, we had combined operating losses of about 11,200,000 $28,300,000 through 3 quarters. So through 3 quarters, we've been averaging about 9,000,000 dollars a little more than $9,000,000 operating loss per quarter. Our 4th quarter was $6,400,000 So we're starting to see some predictability as to where we think things should settle out. Dollars 6,400,000 obviously annualized would be $24,000,000 $25,000,000 which would be down from our 2018 total of 35, but we think we're going to do quite a bit better than that. In fact, we think the Q1 will be about 6.4% similar to the 4th quarter.
We expect it to drop from there as a few things happen to a rough range of about $2,500,000 in the 4th quarter. We originally talked about being breakeven in the 4th quarter. We think that's less likely now for a number of reasons, but we think we're going to go from $6,400,000 in the Q1. We're going to end up about $2,500,000 in the Q4, and that would be a pretty dramatic improvement over the $35,000,000 dollars year to date losses we saw in 2018. So how is that going to happen?
Well, one thing that's going to happen by our plan is that revenues for those 3 companies will substantially uptick in 2019. They collectively ended up in 2018 at about $45,000,000 in revenue. We believe they're going to be somewhere in the neighborhood of $80,000,000 and there's substantial upside potential in the future on that. But obviously, when you're dealing with the year, you're dealing with a firm cutoff. So we think second half of this year, we're going to be seeing some ramps that are going to get us into that range, and that's critical for a bunch of things, but it's critical for seeing that operating loss start to be manageable by the end of the year.
So why are we sticking with it? That's part of the reason we're sticking with it. We see that there are substantial opportunities in the market. We think we have some competitive offerings that we think are advantageous and desired by customers, and there's some inherent demand. And our goal is not to operate these businesses at losses indefinitely.
Our goal is to make them profitable, contributing members of the company just like everything most other businesses. But we got to get them to breakeven before we can do that. So that continues to be our goal. And we think we will continue to make progress and obviously draw attention to it as needed on calls like this going forward. So we're pretty excited.
We think the semi test move was a good move. We think it's good for us. We think it's good for our employees that went with the business and a fair number of them did. Pretty much all the engineers and program managers and professional people that drove that business are now employees of Advantest. We think that it's a good time for our A and D business to stand on its own.
And we think our Aerospace business, which is 90% of our total or 90% plus, has never been better situated than it is right now, and we're looking forward to another strong year in 2019. So with that, Dana, I think we'll open it up for questions.
Thank you. Our first question comes from the line of George Godfrey with CL King and Associates. Please proceed with your question.
Thank you. Good morning, Dave and Pete.
Good morning.
Pete, on the 3 businesses, can you talk about what is holding up the ramp on each one? And what I mean by that is, do you have to have product ready? Do you have to sell the customer on buying the product? Or do you need partners to fulfill their obligations in order for you to then be able to sell your product? If you could just shed light on what holds or how that revenue ramp goes up on each of the 3 businesses?
Thanks.
Sure. That's a good question. And there are different answers for each of the 3. Maybe I'll move from West to East. CCC, the big issue with CCC that they've been struggling with really since we bought the company is a development program for a pretty high profile customer that they've struggled with mightily.
And we've had to incur substantially greater investment to make the program work than we thought we would. And a smaller company or a less involved company might walk away from it. We did not feel like that was even the slightest option given that this is our industry and it's a pretty core customer and a pretty core market. And so we want to make it work. And the key there is to get that technology proven out and get it functional and then get it delivered.
And the major milestone for them for the over the course of this year is to get that done. From a revenue expectation standpoint, we're looking at well more than doubling revenues at CCC based on based in part on the successful execution of this program. Armstrong, it's a little bit of a different deal. Armstrong is a certification company, engineering company, 1st and foremost. We merged it into Telephonics.
Those I think, George, you were at our Investor Day in December. You met a guy named Mike Keane who's running both those businesses. And the and they've done a really good job of integrating the skills back and forth that they need to be more successful in their business. So it's been a kind of a 1, 2 punch of building up competency and strengthening weaknesses and going out to the market to find new opportunities to apply those capabilities. And they're well underway.
I'd say of the 3, Armstrong is actually in the best shape right now in terms of its low risk and a bigger opportunity. So if we were to start this discussion today, instead of talking about 3 troubled businesses and I talk about 2, then they would not be on the list. That leaves us with AeroSat on the East Coast. And AeroSat is an antenna company. And we have been stuck at the starting line, it seems, for about 1.5 years now on a few programs, most prominently a tail mount program that we call it tail mount.
It's basically a smaller antenna that sits up in the tail of bigger business jets for transoceanic primarily transoceanic type of services for Wi Fi access. And we've been partnered with different companies or came up with a partnership group to bring that program to life a year and a half ago or so. I think it was one of those things everybody thought it'd be about a 6 month development effort and 6 months turned into 9 months, turned into 12 months, turned into 15 months. And eventually, the teaming structure kind of fell apart and a new teaming structure came together. That new teaming structure is, by our account, way above where the old one was.
And we've got a handful of airplanes flying, and they're doing quite well from our perspective. And a plan is that, that program is going to get kicked off from a sales perspective in earnest early in the second quarter. So we think we're wrapping up kind of the test sequence of it. And with our partners, we're ready to go. And we think that as the year ramps, that will become more and more of a significant program.
That was part of my comment earlier that whether we're going to get to double sales or 90% of sales or 110% of sales is little bit arbitrary based on some of these things getting kicked off in time. But that gives you hopefully a little bit of a flavor of the 3 companies. We think we've got a good plan in place for the 3. We think that, that plan, if we come close to the revenue expectations, should bring those operating losses down to a much more manageable level in short order.
Got it. Thank you, Steve, for that. And Dave, just one question for you is, what does the margin look like in the Aerospace and Defense Test portion of the business if we take out semiconductor just to get an idea for 2019 what that business is going to look like? Thank you for taking my questions.
Yes. So our expectation, I think Pete mentioned in the for 2019 is to be in the ballpark of breakeven on the test business. Absent any structural changes in it that we'll be looking at throughout the year. But that's our forecast right now is to be within spitting distance of breakeven, a little above or a little below, but that's where we think it'll be.
And that includes the New York City deal, correct?
Yes. Yes.
Our next question comes from the line of Ken Herbert with Please proceed with your question.
Hi, good morning.
Good morning.
Pete, just to maybe take it one step further. It sounds like then the loss you expect this year from the 3 businesses, CCC, Armstrong and AeroSat sort of maybe half of what it was in 2018, give or take $17,000,000 $18,000,000 Is that as I think about a cadence from the 1st and the 4th quarter numbers you provided, is that a realistic assumption?
I would hope that's conservative.
Okay. So it sounds like you see a bit of a maybe a step improvement from sort of the first to the second or second to the third quarter as you get into the back half of the year?
Correct.
Okay. And as I look at those businesses specifically on AeroSat, is that I know you've always or historically talked about this as a retrofit opportunity, but is there a forward fit opportunity for this antenna? And is that a part of the mix? Or is that meaningful in sort of the 'nineteen opportunity? Or is that really something that could kick in at a later date?
Well, it's a very good question. There certainly are forward fit opportunities. Connectivity is a hot topic, as you might imagine, for anybody buying an airplane new or used. We think our best quickest bang for the buck, so to speak, is the retrofit opportunity because there's this installed base of airplanes that needs to do something. And that's the biggest initial target for us to go after.
But as you might expect also, the OEMs in that space are very observant and very interested in what's going on in the aftermarket. And if they find an aftermarket trend or product that they really like, there certainly is a pull to the line fit side of the house. So we're pursuing both with our partners and doing what we can to be ready and attentive. But we think to begin with, it's primarily an aftermarket opportunity.
Okay. All right. That's helpful. And just a couple of points of clarification. You highlighted the tariff impact.
I think you said an incremental 10,000,000 dollars versus sort of a $2,600,000 incremental in 2018. Is that sort of is the headwind $8,000,000 or sort of 7 point 5 $1,000,000 this year? Or is the headwind really sort of $10,000,000 versus the $2,600,000 last year?
Yes. What I meant to say was it would be incremental $7,400,000 versus the $2,600,000 last year. So $10,000,000 of tariff expense total.
Okay, great. That's helpful. And then you didn't or you haven't talked about sort of the E and D spend for the year. I'm just wondering maybe with sort of where that ended in 2018 and any commentary or how we should think about that here in 2019, either on an absolute level or percent of sales or Herbie likes to talk about it?
Yes, I can do that one. We ended up at about $114,000,000 for the year. We began talking about E and D spend about 10 or more years ago when it was an important driver in understanding the fluctuations period over period or year over year. The last couple of years, it's kind of leveled out absent acquired E and D costs when we buy businesses. So the plan going forward is we'll talk about it when there's some significant change to the run rate for the spend.
We're at about $114,000,000 in 2018. I would expect going forward, we would see some inflationary type of change to it, maybe a couple of percentage points. A lot of it is dependent on salaries. And looking out in 2019, it looks like kind of the run rate we expect in 2019 will be similar to what we saw in 2018.
Okay, very helpful. And then just finally, I know you we haven't we don't really get to talk about sort of the in seat power much in seat power segment much with everything else going on in the other businesses, but really nice growth there. It sounds like you're taking share. It sounds like Pete with a seat motion product. Can you just high level maybe talk about some of what you're seeing at your airline customers around discretionary spend in terms of interiors and sort of modification efforts and maybe how that's growing as part of the backlog growth in Aerospace?
Sure. We, in general, see continued strong demand for in seat power. I mean, it's been a very obviously, a strong platform for us for a long time and it continues to be so. I would say that the trend towards stand alone power systems, in other words, power systems without feedback, IFE, in flight entertainment, continues to gain in prominence in narrow body airplanes around the world. So in wide our general approach is that in wide bodies, most wide bodies do get and will continue to get seatback IFE.
And our approach to getting on those airplanes continues to be through the IFE providers who are very large customers of ours. The narrow body airplanes increasingly are more of a streaming content type of application in terms of IFE, so no seatback displays. And our approach to them is to go directly to the airlines. So we work with some 220, 250 airplanes around the world. And in general, people maybe aren't buying as many cell phones as they used to, but they all have them.
And same with iPads and same with computers and the increasing prominence of connectivity on airplanes in the narrow body world, in particular, means that demand for our product continues to grow and we're doing really well with
it. Great. Thank you very much. Sure.
Our next question comes from the line of Michael Ciarmoli with SunTrust. Please proceed with your question.
Hey, good morning guys. Thanks for taking the questions here.
Can we just go back the
if you're assuming that those the three businesses go from $45,000,000 to $80,000,000 I mean is that growth embedded in the guidance? I mean if I assume $80,000,000 for those 3 companies at the midpoint, it sort of implies that the rest of your aerospace business only grows at something like 3%. So can you give us sort of what you're thinking? Or is that type of growth baked into the guidance?
It is baked into the guidance, not exactly the way you're doing the math. We put some we put that guidance in there at the higher end of the range, and we discounted it for risk as we move to the lower end of the range.
Okay. Okay. Fair enough. And then just I mean, if you're going to get that kind of growth, 77% growth, I mean, but being less confident or less likely to see breakeven, What are some of those puts and takes? And are we going to see antenna sales in 2019?
I know I think when you last gave us the update, we were waiting maybe to see how the antenna performed on the network. Is there any broad update you can give about the antenna? Is it in the marketplace yet? Or what's the status there?
It's out it's in the marketplace in the sense that it's flying around on a bunch of airplanes. You might remember we had a handful of airplanes flying into the old network. And those systems have, I believe, all been swapped out at this point. So the airplane those airplanes are essentially acting as test nodes for the new network, and we believe that, that's all going very well. As for expectations, we prefer not to get too granular in terms of what company is doing what.
But I can tell you, we're not going to come anywhere near to that $80,000,000 $85,000,000 level without substantial antenna sales.
Okay. Do you anticipate what the timing would be for the first sales? I mean is there significant testing left that has to be accomplished?
No. I think it's more getting the sales cycle warmed up, getting the contract structure established, kind of things that are actually kind of beyond our scope. I mean, we've kind of done what we need to do, we think. I mean, there might be incremental things here and there. But we think we're kind of ready to go.
Okay.
And then just if you could just educate me on this. I mean, if I'm a business jet owner, if I'm a corporation and I'm already flying transoceanic in my business jet, I mean, I probably already have connectivity. There's a lot of players out there, whether it's Viasat, Honeywell, Collins. What's going to create the retrofit? Why am I going to say we need to go out and retrofit our existing solution?
I mean, obviously, bandwidth, but is I'm just trying to figure out what drives this sales cycle against all those other established players.
Well, they would be competitors to some extent. I mean, there's a whole debate. Most of the competitors you listed there are Ka versus Ku. So there's a whole lengthy debate as to pros and cons there. Our belief, frankly, is that Ku offers better global coverage and with high throughput satellites coming online offer the competitive differentiators between Ka and Ku tend to disappear.
So we think that there's not an overly intimidating field of competitors out there at this point. The other thing is the starting assumption there that most airplanes flying over the ocean are already connected. That is kind of true, but a lot of it is much older technology, not Ka, not Ku, even lower levels. So we think that there's pent up demand basically for these older airplanes to be brought up to modern standards, and that's where we're kind of targeting. It could be that Ka right now is line offerable.
I think getting back to Ken's questions earlier or maybe George's, but at the OEMs, I mean, there's a Ka presence there. Part of the reason we want to go aftermarket to begin with is we think that's where the bigger volume is. That's where we think we can make more of a splash. We believe that as Ku proves itself with HTS satellites, the price point becomes apparent and the user community starts talking, we think we've got a good opportunity to move upward and displace Ka with Ku.
Got it. Okay. No, that's helpful. And then just one more on the just sort of on an operating income bridge here, if I can. You talked about the 3 businesses.
So maybe those losses get cut in half. I think you also had earlier this year a range of legal and some other one time items maybe in the $9 ish $10,000,000 Can you is that the right way to think about sort of bridging operating income growth from 2018 into 2019, adding back not only or cutting those losses in half, adding back some of those legal and other one timers? And then can you just give us what the amortization might be in 2019?
Yes, this is Dave. The amortization rate that we saw in the 4th quarter is going to run through most of 2019. And I can get that for you in a second here, Mike. But as far as the one time cost that you're thinking of, I know in the Q1 we talked about $1,000,000 accrual for a legal issue. Important when you're looking at 1 quarter, kind of rounding when you look at a full year worth of expenses.
So I mean, other than that, I'm not sure we had throughout the 1st three quarters some increased loss accruals each quarter relating to that one long term program at CCC. We did not have that in the 4th quarter.
Okay.
So we don't expect that to continue into next year.
Okay.
So those were the big things. So I'll get I don't have it at my fingertips right now for the amortization expense, but I'll get back to you before we're done with the call.
Got it. All right. I'll jump back in the queue, guys. Thank you.
Yes. I got it. It's about $16,500,000 for
2019. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning and nice quarter. Do you expect that 16.5% roughly core Aerospace margin ex the problem businesses is likely to hold up through 2019? And if not, or if it would be better, what are the puts and takes for that as you go through the quarters?
Well, I'm not sure I understand what you're say that again, John.
Yes. So you had 16.4 percent operating margins ex the problem business in Q4.
Right, right.
Do you expect that to hold up through the next year?
Yes. I mean, I think we're pretty comfortable with our margin profile in general. If I back up the clock, the whole reason we started talking about these 3 verticals is that there was some concern and pressure basically in the investor community about what was happening to our business in general. We have these 2 or 3 things that are dragging us down that we need to fix. We still feel that way.
And I don't think we expect anything else to bottom out on us here. I think we're pretty comfortable with kind of where we are. I mean, it's a competitive world, and we've got some difficult customers and all that. But in general, our hope is not only to get the 3 struggling ones to breakeven but to have them become part of the contributing crowd. And if we do that and the contributing crowd continues to maintain itself, I mean, 16.4% or whatever it was, is low.
It should be higher.
Okay, great. And then just going back to another question and what you disclosed in the press release about the test business being flatter or modestly profitable this year. Was that on an EBIT basis that you were describing that? And secondly, what do you want those target margins to be and kind of what revenue or cost cutting efforts do you have to make to get there?
Yes. It's a very good question, and we're hedging a little bit. We think we can get to kind of a breakeven EBIT basis over the course of the year. I mean, there is going to be a little bit of I should maybe mention this for clarity. In our Q1 press release, you're going to see some semiconductor revenue, well, I guess, in part because we didn't close till February 13, but also we've got some service obligations that we're going to continue to have really over the next couple of years.
So there will be some residual semiconductor involvement and revenue there, nothing that's market related. It's more contractual service based on past sales. So you will see that, but it's definitely a turning point for our business. I mean semiconductor has it's been lumpy and it's been stressful at times. When it's good, it's really good.
When it's bad, it's we've had to adjust. And one of the things that we've learned to appreciate, I've learned to appreciate, is that the crew that we have in our test business is pretty resourceful, and they tend to do pretty well at responding to a challenge. And this is a challenge. This is a changing of the structure of the business. On the one hand, a lot of the overhead structure that was dedicated to semiconductor has gone with the sale.
So we our headcount is way, way down and our Irvine, California operation related to that. But there's a lot of the structure that was shared that did not go. We've got that still. So we have to do an analysis of kind of where this transaction leaves us and what our prospects are going forward in other businesses and other things that we might do to diversify ourselves and bring in more volume. But we're pretty pleased with the plan we have in place.
I mean, if this again, we didn't go out trying to instigate this sale. It kind of came to us. But given that it did and we thought we should pursue it, our remainder business, looking at 14% organic growth in a year like this, it's a good time to have it. So we're pretty pleased with that. And obviously, we'll be updating on the test business as the year goes on.
We don't pretend to have all the answers at this point, but we certainly don't think it's a crisis. We're not going to be talking about our test business like we've been talking about our 3 struggling businesses on the aerospace side.
Okay, great. But from a margin perspective, is it going to start off pretty rough and then it progressively improves? Or how do you see that going through the year?
Well, it's going to show a pretty substantial gain in the Q1, I can tell you that. But it's going to it's probably going to start off weaker and then you back out the proceeds of the revenue of the sale and then it'll stabilize and normalize towards the end of the year.
Okay, great. Thank you.
Yes. And we expect the revenue relating to that rail program to pick up as the year goes on.
Our next question comes from the line of Dick Ryan with Dougherty and Company. Please proceed with your question.
Thank you. So, Deep, maybe to follow-up on some of your comment, latest commentary there. On the A and D test, you got 2 facilities supporting $50,000,000 $60,000,000 in revenue. Obviously, maybe some rationalization going on there. But a broader question, how does the pipeline of opportunity look there?
I know when you're striving to get kind of into a prime position versus a supplier position. Can you just kind of talk about the pipeline of opportunity for that business?
Yes. We think it's as strong or stronger than it's been in quite a while. We have been waiting for more of a robust market maybe in response to regime change in Washington than has happened over the last couple of years. But it appears to us that there are certainly more opportunities happening, and our bookings have been reasonably strong. Our quoting activities have been reasonably strong.
So I'd say we're more and more comfortable. It's going to be a lumpy business. So it's got to be a business where when we are when the times are good, they have to be good because there are going to be times when the volume is lower and the margins are worse. So we have to kind of keep that in mind as we restructure the business. But it's going to be it's not 50% of our overall business.
It's going to be about 7% or 8%, at least this year. And barring substantial growth or acquisition or something like that, I expect it will kind of stay in that range. We do have the 2 facilities that you talked about. We're going in with eyes wide open as to how we navigate this. The 2 facilities are not plug replaceable.
We do different things in different places. So it's really not a kind of a slam dunk kind of go forward option. We've got some people right now trying to figure that out and trying to decide kind of where we go from here. As you can imagine, where we thought we were going to be with the semiconductor sale up until late December was very different than where we ended up. And that was not a trivial exercise in and of itself.
So our primary focus has been to bring that sale to a successful conclusion. We think we've done that actually. So now the exercise is to figure out what we have left and where we go from here. So more on that as it comes. And I expect we'll certainly know more by the end of the Q1 when we release Q1 results.
Okay, great. Any updates on ETDS opportunities, the current contracts you have and any potential wins down the road?
EPDS, electronic power distribution. It's a I don't have anything specific for you, Dick. But maybe one of these days, we should start to do kind of an overview because it is certainly an active part of the business, and we have established ourselves, in my humble opinion, as the go to people for that kind of flight critical power in smaller aircraft. And there was a time when we had to look long and hard to find people willing to even consider us. I think we've established ourselves as the people such that now, I would dare say that in the industry around the world, an airplane doesn't get developed without us being invited to at least consider participation.
We don't jump at everything. We don't do everything. But we do pretty much we have a very, very high hit rate when we decide to pursue something. And it's because we've got the scars to prove it. We've got the capabilities and the maturity of the architecture to do it well, and the industry knows that.
So and it's we're about at the point, now that you bring it up, in 2019, maybe a little bit more in 2020, 2021 where this is going to be more and more of a meaningful part of our financial results. So why don't you let me have the homework of maybe doing a little side expose of that on one of these calls over the next coming quarters and we'll revisit the topic.
Sounds good. Thanks, Pete.
Thank you.
Our next question is a follow-up question from Ken Herbert with Canaccord. Please proceed with your question.
Thanks. Hi, Pete. Just one quick follow-up. You've got on the Aerospace business, another one to 2 quarters here, the first half of twenty nineteen with much easier comparisons than in the second half. As we think about the organic growth, is there anything from a cadence standpoint across 2019 we should be aware of, just considering the comps and how 2018 progressed?
It's a good question. We expect the first half the way it looks right now, we expect the first half of the year to be stronger than the second half. But I'm not sure that's there's a bunch of moving parts in there, and part of it is just by the time you get to the second half of the year, we don't have the there are a lot of orders that could pop up between now and then that aren't in the books yet. So we were a little bit I was intentionally vague there because I don't think we really know. But at this point, it looks like the first half is going to be a little bit stronger.
Okay, great. Thank you.
Sure.
Our next question comes from the line of Michael Ciarmoli with SunTrust.
Pete, just on the test business, on the subway program, should we expect, I guess, just how are you thinking about that program? Are there going to be any startup costs or learning curves associated with that? Just trying to think about how that program ramps up.
It's another good question. It's a substantial award, we feel, in part because it's a little bit of outside the bounds of what we've done in the past. At least it would look that way to the outside observer. On the other hand, it's kind of right up our alley in that the philosophy of test that the customer, in this case, wants to drive towards is remarkably similar to what we've done in certain other arenas, including defense arenas like with the Marines or the Navy or whatever. So we're bringing in a skill set to a new customer, and I'm sure there will be learning curves.
And we think we've got it pretty well circled in terms of what the risks are. But definitely, there it's a little bit different. Anytime you do something different, I don't care what it is or who you are, there's some risk of things, risk of learning opportunities. How's that? At the same time, let me just say that our sense is that there's really a substantial body of demand in this arena.
I'm talking about rail and subways and specifically around the world. And there are lots of cities that use rail and subways. So our feeling is that the way things have been done prior to this award and prior to our involvement are a little bit different than the way they're going to be done in the future. And if the world kind of shifts towards New York City model, we could have a pretty good opportunity here. And we are involved in various other discussions and conversations that could lead to bidding activity, that could lead to other awards.
And this is going to be an interesting thing. Obviously, as developments go over the course of the year, we'll know how our engineering efforts, which are already well underway, are proceeding and we'll know how the market is responding. You might imagine that if you were responsible for the subway system, I'm just going to pick a city, DC maybe. I'm just guessing. I'm just picking them at random.
But pretty much every city in the U. S. Anyway that has a rail system will pay attention to what New York City is doing. And New York City made a big statement going in our direction on this program. So we think that if we do it right and we do it well, we can solve some of the problems New York City historically had.
And if we do that right, it could lead to other opportunities in other cities. So who knows? We're pretty excited about it though.
Perfect. Thanks a lot guys.
Our next question comes from the line of Mike Wallace with White Pine Capital. Please proceed with your question.
Good morning, Peter. Good morning.
How are you?
Good. How are you?
Good. Couple of questions. Nice job on generating some good cash flow from the business this year and paying down some of the debt, and that's despite the receivable balance at $47,000,000 at the end of the year. We're going
to get $100,000,000 from the
test business in cash. Can you talk a little bit about what you plan to do with that? Looks like we reduced some debt over the year and just give us some thoughts on that. Thank you.
Well, when those kinds of checks show up, Dave doesn't let me have them. So Dave, do you want to answer this question? Yes.
I mentioned earlier that we took the $100,000,000 and paid down debt initially. There will be a tax bill due on it probably later this quarter or beginning of the second quarter that will be about $25,000,000 I think our estimate is on the cash taxes on that. But the short term plan is, as we did, we paid down 1 $100,000,000 on our revolver.
Okay. Good. And there wasn't really any share repurchase activity for the last year. What's your thoughts on that?
Again, the focus is on growing the business and reinvesting and continuing to look at acquisitions as the priority.
Okay.
Operating margins in the Aerospace business, I saw some nice improvement year over year as the 3 troubled companies started to show a little bit of improvement in some other volumes. How should we think about operating margins as we look out into 2019
Or is
it for the Aerospace business?
Yes, I think the Q4 was a good example of some nice improvement in the Aerospace operating margins. If we operate at that level of revenue, I expect that that's a continued achievable number there. We continue to look at opportunities to expand that. As Pete mentioned earlier, we're facing a $10,000,000 headwind, mainly in our Aerospace segment relating to increased costs for the tariffs, I should say incremental $7,500,000 there. So that presents a little bit of a challenge to us as we continue to explore alternatives to buying some of those electronics from China.
So yes, my comment is the Q4 was a good solid aerospace quarter with no real strange muddiness to it.
Okay. So would that be a good base to think about as we build off of for 2019?
Yes. Yes, for Aerospace, certainly. Again, there was unfortunately, for the last year or 2, we've continued to have a lot of muddiness in one off things that have happened, we didn't have any of that in the Q4. So it is a good representative quarter for us.
Yes, it's probably one of the cleaner quarters we've seen in the last several of them. And could we see a lift of 100 to 200 points over the next 12 months in that as you look through your backlog and think about converting it to revenues and running it through the business? How should we think about improvements from the 12.7%?
Yes, a lot of it will depend on sales mix. And we intentionally stay away from providing specific guidance on operating margins. But I would say that there is opportunity to expand margins. But as Pete said, when you carve out the 3 problem businesses, the remaining operating margins for the rest of the Aerospace segment is really strong. So the challenge and the big opportunity for us to increase our margins is to improve those 3 or probably more appropriately those 2 real problem areas that are dropping our aerospace margins down and that's what we expect to happen.
We mentioned earlier that with regard to CCC and AeroSat, it's a top line thing there. We need to get top line growth there to see the margin improvement. And CCC, we had a really strong booking quarter. We don't generally call out specific bookings for our different business units, but the bookings were good. Best bookings we had at CCC since we bought the business were in the Q4.
Our last question comes from the line of George Godfrey with C. L. King and Associates. Please proceed with your question.
Thank you. Just a quick one. Dave, what is the remaining share authorization? And then I heard you say you're focused on M and A activity with the proceeds, But is safe to assume we get those 3 businesses fully fixed and functioning where you want them before we see any more M and A activity? Thanks.
Yes, there's a $50,000,000 share repurchase authorization. And I wouldn't say that the fixing of the 2 problem businesses that remain is mutually exclusive from continuing to look at acquisition opportunities. We have a solid team behind us with the people that are running those businesses now that are the primary focus and the people with the broad shoulders doing most of the work at those two businesses. And we have others that continue to look at acquisition opportunities. So there I don't view fixing those two businesses as diluting our ability to continue to look at acquisitions.
I would add that if you could script the world perfectly, that might be the way to do it, but you can't script the world perfectly. So if and when you find things that are good acquisition candidates, whether you're ideally ready for them with other things going on in your business and that you got to take them. And the best case in point is our last acquisition, which was the Telefonix acquisition of a year 2 months ago, which was just has worked out to be super. So that was in the face of all these other three things working their way out. And most people who are involved in the acquisition game will tell you that you need to have the big hits every once in a while to compensate for the ones that are more of a struggle.
And Telefonica is one of those big hits. We've had a few of them, but we're really pleased with that acquisition. That's one of the better ones in recent history. Understood. Thank you very much.
Sure.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Peter for closing remarks.
Okay. Well, thanks for your attention today. And we're, again, we're pretty pleased with how 2018 worked out. There were struggles. There are always struggles.
But overall, we felt it was a really good year, and we think we're really well positioned going into 2019. So thanks for your attention. We look forward to talking to you again at the end of the Q1. Have a good day.