Briefing is being webcast today. For my webcast audience, real quickly, I'll tell you that we have three, roughly one-and-a-half-hour blocks today. The first hour and a half, we're going to cover the aerospace business. We are going to break for a tour and lunch. During that time, the webcast will be stalled, basically. We will reconvene after that hour and a half for the remainder of the webcast, which will include the question and answer session. Let me start by providing you with a safe harbor statement. As you may be aware, during this presentation, as well as during the Q&A session, we may make some forward-looking statements. 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 presentation, as well as in documents filed by the company with the Securities and Exchange Commission. You can find these documents both at our website and at sec.gov. I also want to point out that there were two press releases that crossed the wires this morning about 6:30. For my webcast audience, if you have not seen those, they are up posted on our website. Real quickly, let me just tell you about Astronics, if you're not familiar with them. We're about a billion-dollar market cap company with 73% institutional ownership. We IPO'd in 1972, and we became a company, we were incorporated 50 years ago in 1968. With that, I'm going to turn it over to Pete Gundermann to begin.
Thank you, Debbie. Good morning, everybody. Thank you for those of you in the room who traveled all the way to East Aurora for today. East Aurora, for those of us who have familiarity with the town, do not believe we're a suburb of Buffalo. If anything, we're an independent municipality with our own pride, including the home of Astronics Corporation, where you are. A couple things up front. Oh, by the way, the snow is free, in case you were wondering. We pulled that out just for you a couple days ago. It was just green grass. This facility that you're in is our corporate headquarters, and our corporate headquarters basically goes from this wall that way. Most of the facility has dedicated one of our lighting businesses, a business we refer to as LSI or Luminescent Systems. You're going to get a tour of that facility later.
We have, I think, 13 or 14 manufacturing facilities. This is a medium-sized one, but it's representative of how we operate all of our facilities. I hope you enjoy that tour. The presentation, in case you're wondering, is not going to be all me. Many of you have listened to me more than you need to. I appreciate that. I've got most of our executive management team here today who are going to be doing kind of the crux, the nuts and bolts of the presentation. Quickly, if you're tired of me, I'm sure you're also tired of Dave, he's here too. Dave Burney, our CFO, and in the back row is Mark Peabody, raising his left hand. Mark runs a big part of our aerospace business, including a couple things you might find interesting.
One is the Astronics AES operation that we have in Seattle, which is our in-seat power, actually all of our electrical power operations. Mark's going to be here talking about some of that. Next to him is a gentleman named Mike Kuehn, who is new to our team. Mike runs the Telefonix acquisition that we had about a year ago, almost a year ago, and is really leading our connectivity charge in many respects. He'll be doing some presenting today. On the other side of the door is Jim Kramer. Jim has been with Astronics about as long as I have. That's 30 years, for those who are counting. I'm not. It just flies by. Jim runs our lighting business, and he's going to talk about lighting a little bit later. The other dignitary in the audience that I should introduce is Kevin Keane over in the corner.
He is our Chairman, my boss, and he's a very difficult man. When it comes time to question and answers later, I'd like you to keep in mind that my boss is in the room, and I'd appreciate softball questions without nothing awkward or nothing difficult, please. We're going to start with the discussion of the press releases that went out this morning. They are, I think, kind of important for our company, and they'll help set the tone for the day. We'll do question and answer on this as we go. Feel free to pipe in with questions before we get into the presentation. Once we get into the presentation, the protocol, as I understand it, is we're not going to take questions till we get to the end.
The easier press release we put out this morning is specific to aerospace revenue guidance, not only affirming the 2018 guidance we put out a couple of weeks ago with our third quarter release, but also initiating guidance for 2019. To reiterate that, we're expecting this year to end up at $670 million-$675 million in aerospace. That's excluding Test Systems. That's just aerospace. As we've discussed in the recent conference calls and press releases, that represents growth over 2017 of about 26%. When all is said and done, we expect half of that growth will have come from acquisitions, primarily the Telefonix acquisition. Half of it will be organic. From that perspective, 2018's going to be a pretty good year. The news today is launching 2019 aerospace guidance, and we are predicting at this point $710 million-$745 million. That's a pretty wide range. It's still pretty early.
There's lots of room for this to move and eventually tighten. We think we're likely to be in this range, and we have internal plans certainly to be at the higher end of this range. The lower end would represent growth of 6% over 2018. The higher end would represent 11%. Obviously, that's all organic. There's a possibility, since the year isn't even here yet, that there will be acquisitions involved, but we're not calculating those in. The message that I hope you get out of that is, we think 2019's going to be a really good year for our aerospace business in particular. Our bookings have been really strong, our backlog's at a high level, and we've got some pretty good strategic thrust, and that's what you're going to get up close and personal to today, not only in the presentations, but some demonstrations.
We have some product demonstrations planned at the midpoint in the day also. We are not providing test guidance for 2019 at this point, for some obvious reasons. Primarily, the pending sale of the business that was announced this morning. I'll talk about that a little bit more on the next segment or the next slide. For the most part, we feel our test business is shaping up really nicely, even with the sale. We're going to continue to be actively involved as a manufacturer for the company that's buying this product line, a company called Advantest. I'll talk a little bit more about them in a minute. Our backlog is pretty strong, $72 million at the end of the third quarter.
Most of that is A&D related, so to the extent that we're selling the semiconductor business but keeping the A&D business, that backlog is in pretty good shape going into 2019. We are still negotiating a pretty large new program, which we can't say a whole lot about today, expected to be in the $30 million-$50 million range, for our traditional A&D test business. That negotiation is ongoing. I think we issued that press release the first week of October, if I recall, and we said 60 days, we're well within that window. It's just one of those things, like many bigger contracts, that takes time to get everybody to sign. The sale of the semiconductor test business announced this morning, I imagine you will have some questions on this.
The sale is basically an asset sale for intellectual property, contracts, programs, kind of the front end of the business, so to speak, including the engineering resources and the program management resources, the sales resources, the organization that we've built up to pursue our semiconductor test business over the last three or four years. The price is set at $185 million. With the $185 million is an earn-out opportunity based on 2019 sales of another $30 million. It's a little early at this point to predict where we're going to end up in there. I am thinking we're going to be about in the middle, but there's room to vary on that, and we won't really know for another couple of months, realistically. The buyer is a company called Advantest. They are a company that's focused and dedicated to the semiconductor test business.
I am not going to speak a whole lot for them other than they're a company that we got to know over the last few years as we got more and more into this market. We were working with them on a couple of initiatives, and the closer we got to work, the closer we all realized that there was a natural fit here. What we had worked real well with where they were going, and where they are would be good for our business. These discussions have been going on for a long time. You have to trust me that we didn't schedule today with the idea of releasing this press release this morning. That all came together over the last, well, we've been working on this for 10 months, over the last three days, really, and culminating in a deal last night.
One of the interesting things about the arrangement is that Advantest's business model is an outsourcing business model. They do engineering. Again, I caution, I can't really speak for them. Go to their website if you want to know more. In a nutshell, their business is largely based on an outsourcing business model. One of the things that kind of fit well with this is the idea that Astronics would continue manufacturing the products for Advantest. That does a couple of important things. It provides some continuity for our customers, first and foremost. Anytime a sale happens, one of the things customers worry about is continued source of supply. In this case, we'll have the same people building the same products, and I think the customers involved are taking comfort in that, maybe requiring it even.
It also provides some continuity for our employees in our Irvine, California, operation in particular. It's a big part of our business, so we'll continue to have throughput and activity there. To the extent that there's margin involved, and there will be some margin involved, not what we're used to, but contract manufacturing-related volume. It gives us a chance to participate in the future of that business, which we believe is promising. You've heard me talk about that often enough. In a sense, Advantest becomes a customer of ours, and they'll probably be a pretty big customer if the business does what we think it'll do. We're going to continue to report in two segments. We're going to continue to operate our A&D, Aerospace and Defense Test segment.
We'll continue to report a semiconductor test product line, even though it's only going to be a contract manufacturing element. I'm actually kind of ad-libbing that a little bit, but I think that's how we're going to do it. Finally, closing conditions, there's nothing major. There's an obligatory Hart-Scott-Rodino review. We don't expect that to turn up anything. There's no competitive overlap here, so we wouldn't expect any complications. You never know till you know, so we'll see how that all works out as we go through it. I would expect closing by year-end. No hard date. Whenever the HSR review's done, I think we'll be ready to go. Dave, you want to add anything to any of that?
I think that covers it all. Hart-Scott will probably be three or four weeks.
He's not on the mic.
Just a comment regarding Hart-Scott. At most, it should take four weeks, assuming that there's no challenge to it. As Pete said, there's no overlap of the business here, we're not anticipating any legitimate issues with that.
I should add, as I think about it, there is one missing member of our executive team, which is a guy named James Mulato, who runs this business and is based in Irvine. As you can imagine, it was an announcement to our employee base there, too. He's there tending the flock today instead of here. Any questions on that?
I guess this is for you. What hard assets are there? Basically, would this be recorded almost all as a gain of some sort?
Yeah, there's not a whole lot of hard assets here. It's mainly intellectual property. There's some fixed assets. Ballpark is $10 million-$15 million of assets regarding that. Yeah, the accounting treatment, the net of those will be a gain. Yep. Tax rate, we expect to be about 27% on that. It's California, so there's a relatively high state tax rate there.
We obviously don't know what the gain is yet, but that business in Irvine, just obviously all in the records, but we paid, I think, $52 million for that four years ago with a $10 million working capital adjustment. We're selling part of it. The other part of it we're keeping. Some portion of it's gone. It's going to be a substantial taxable gain. Sir.
Hey, Pete, how should we think about the manufacturing agreement and the ongoing revenue stream? Obviously, it's low margin. Is it also low risk? How did you set the terms of that?
It's a pretty thick document, to summarize it in about two sentences, it's a four-year term. It's kind of cost-plus in the sense that it's going to be a markup on manufacturing cost, direct cost. In terms of modeling it, we'll, I imagine, get into this a lot more as the deal closes. If we have a dollar of revenue today, it's safe to think it'll be, let's say, $0.65 of revenue going forward for the products that we manufacture. It's going to be material.
Hey, Pete. Two questions, really. First, on this, the Test Systems business, aside from maybe customer concerns or maybe even limitations, it sounds like, was there a reason you just didn't want to sell the whole business, I guess is the first question.
Well, there were a couple of reasons. One is that customers would strongly prefer that not to happen, just because We weren't ready to vacate the facility, so they would have had to move the production. They didn't have a facility. Now you're outsourcing it to someone, and there's a lot of risk there. We're at a certain point in development on a number of programs where nobody was interested in that risk. Also for continuity for us. I mean, it's an important part of our business. And our thought was, if we can continue it and support it, both the employees and the product line, for some period of time, that would be advantageous.
Are there any guaranteed minimum volumes for you moving forward? Is there the opportunity to maybe do more for this customer beyond, when you think about sort of a contract manufacturer, beyond what you might currently have visibility on?
I don't think that's in the cards at this point. Who knows? This arrangement could work really well for us and for them. It could not. We'll see as we go. We're not used to building parts in this way for other people. There's a little bit to be determined. I think there's definitely room for the volume to go up because we feel, and have felt, that we're pursuing some very worthwhile programs. Obviously, that's why there's a price like there's a price. There's some value here that we've created and we think we're in pursuit of. If those programs come through as expected, this will be a material part of our Test Systems business for a few years, for sure. George?
Thanks, Steve. Two questions. One is, you haven't even gotten the check yet, but do you have target acquisitions in your pipeline that you will use the capital for, or what you're already thinking about is the first question. The second question is, the price is very attractive relative to your purchase price, but what was the change in thinking over the last You said you've been working on this for 10 months, and I've been in many meetings with you and investors asking about this business. What changed on wanting to sell it? Thanks.
First of all, we don't have any immediate uses for the cash. We will pay down debt primarily. We always have acquisition initiatives underway, and we do now, but there's nothing that's so imminent that we had to sell this in order to do that. That's not necessarily where we are. The change in thinking is, I guess twofold. We've been at this for four years, and we've actually experienced quite a bit of success in it. We had $300 some million and $360 million in revenue over the last three or four years. It hasn't exactly been predictable. In terms of modeling the business, understanding the business, it's been a challenge for me and for you. We've had some years where we've shipped product to the tune of $170 million. We've had some years where we've shipped product to the tune of $20 million, and that's hard.
There's that. It's not aerospace. We act like an aerospace company. We feel like an aerospace company. We think like an aerospace company. This business, even though I personally have enjoyed it a lot, and I think we've put together a really good team that's done a pretty good job, it's 10%-15% of the total. It is, to some extent, a 10% or 15% that you look at it, and one of these things is not like the other, and so we get that. The other thing is just we've been very successful with a particular customer, and we continue to be very successful with that particular customer. We have, at the same time, especially in the second half of our tenure here, worked really hard to diversify to other potential customers. We have not been incredibly successful, although we are making progress.
There's some question as to whether a company like Astronics, which is an aerospace company with a small finger in the semiconductor test world, can be successful when there are other companies out there, like Advantest, who are very focused on this space. As we worked with them, we partnered with them on a couple of things, it became apparent that what we do and what we've built and what we're good at fits really well in their product line, and that's how this all got going. It was really a gradual process, not a sudden thing where we woke up one day and thought, "Hey, we should sell this." It kind of evolved. Short answer, long question. Be careful.
Then, i f I could just go back to your aerospace guidance for 2019, how much of the guidance is, or how much have you embedded in when you've talked about the three businesses you've talked about as sort of going from $50 million to potentially $100 million next year in contribution and revenues? What does the guidance assume for those businesses next year?
The high end would assume medium success in those businesses. The low end would assume more than a bad failure.
[inaudible]
At the low end, it's basically we're not assuming much growth from those guys at all.
[okay]
Yeah.
Just to clarify, when you say medium success on the upper end, is that assuming $25 million-$50 million?
You got to say that again now.
Just to clarify, when you say medium success, are you referring to $25 million of the $50 million?
No, that'd be a pretty bad failure. Oh, the incremental. Okay. Yeah. Maybe it's 25, 30, something like that. There's some real open questions about next year yet. That's why when I look at that range, on the one hand, I look at it and I think it's pretty wide. On the other hand, I look at it and I think, given the things that are in front of us, I don't think we're going to be below that range. We could be above that range.
All right. In theory then, if you were to achieve your objectives, then the upper end could, in theory, be as much as $770 million?
Well, in theory. I don't think the high end is much of a stretch. It'd be a real change for part of our business. A big part of it are those three programs.
All right, great.
In particular, one program that we're going to talk about a little bit later, our Tail Mount Business Jet Program. That's a big variable here.
Pete, congratulations on this transaction. My question is sort of a bigger picture. Every management team has a style with the way they do things, and I think investors have sort of come to the conclusion that this business was sort of a distraction for you. I guess my question would be, and I never really viewed it as a distraction, but from the vantage point of the management team here, does this give you sort of much more time and energy and effort to focus on the aerospace business? What's the big picture result of this going forward in terms of your ability to really focus all of your attention on the core business?
That's a good question. It's a little bit like asking what life would be like without one of your children.
You may think about that from time to time, but it's really hard to know. I guess I'd answer it a couple ways. Certainly, from the investor community, and to the extent that Dave and I primarily interact with the investor community, it has been a disproportionate amount of the attention, no doubt about it. I will tell you that from my perspective, it won't change a whole lot because we still have a test business, and that test business is kind of losing a limb. We're going to have to work on that, and we're going to have to address it. If I think through the room, again, this is most of our executive team. Those three guys, it's not going to change one iota for them. I don't know what Dave does all day anyway, so I don't think it's going to change anything for him.
It will change some things for me. We still have a test business, so there's a lot going on there. I guess I should say that given the pending sale and the rest of the open questions, I expect we'll do a deeper dive into tests once the sale closes, once that contract gets negotiated. We can talk more clearly. I think it will help. I don't think it changes things overnight. That's three. I don't know how many opportunities I got.
Say, Pete, does the end customer in the semi-test business need to sign off on the manufacturing handover, the four-year agreement, or has that already happened?
Already done.
Okay.
Yep.
Test Systems agrees and the end customer.
Yep.
Okay, just two more questions on this, please.
Pete, assuming the deal goes through, what's the valuation multiple that you guys are achieving? How do you guys think about accretion or dilution from this deal? I guess there's a question mark on how you put the cash to work. From a returns perspective, is this deal accretive or dilutive to your business?
Is the deal accretive or dilutive? You mean pro forma looking forward into 2019? The margins will obviously be less than they would have been had we continued to operate the business because we're going to operate that piece of it that we're selling under contract manufacturing with lower margins. Having said that, we will have a fair amount of overhead that is going to go to the buyers, engineering, sales, as Pete said, the front end of the business. The margins from that Test Systems business will probably be a little lower than what we've seen in the past. They have to be, right? We're a contract manufacturer now, manufacturing for the buyer.
What would the valuation multiple be?
Valuation based on...
Kind of an EBITDA multiple. Let me think this through, and tell me if you think it differently, but while you were talking, I was thinking.
What were the revenues over that?
Revenues are running right around $80 million, $90 million right now. The EBITDA multiple is a bit complicated based on revenue recognition. Let me explain that. We've done some things historically that complicate the calculation. One of the things we do is we defer a substantial portion of the revenue at the point of sale to cover an obligatory warranty period over the following two years. To get an EBITDA multiple, most people wouldn't do it that way. I think you got to pull that revenue forward. We also have capitalized some development costs, which arguably, if you're going to really value the business, you've got to take into account. I would say the EBITDA multiple is somewhere around 10, 11, somewhere around there.
I was going to say about 12.
As usual, Dave's much more optimistic than I am. Usually Dave is not more optimistic than I am. Okay.
We have a wait.
Pete, will this make a dent in the significant E&D spend you have every year?
Good question. We have been capitalizing development costs on a couple of major programs, those costs have not been showing up in our E&D spend. I would tend to answer, probably not.
Going forward, our E&D on the Test Systems is going to be somewhat lower.
Well, it'll be like nothing.
Yeah.
On the semiconductor business. We got the rest of the test business. Yeah. Okay. All right. Okay. Should we have a break? Oh, no. All right. All right. Now you got to stop asking questions, I understand. That's the protocol. Even though that's not really the way we would like to do it, but that's the way we're going to do it. The first part of the presentation is going to be kind of a summary of who we are and where we are. Many of you people are very familiar with the company, so you know a lot of this. We report in two segments. We've been a growing company. It's been an active decade. You look at it, we were in 2008, $174 million. This year, we expect to close right around $800 million. These two colors represent our two test segments.
There was a big jump here in 2014, which was largely acquisition-related. We've had a bit of a tough slog the last two or three years, most of you know that. If you look at the fine points here, our aerospace business kind of went into a lull. We've talked about that in conference calls and various forums. In my opinion, a lot of that was just based on wide-body slowdown and airline customers, in particular, rethinking how they wanted to entertain their flying passengers. That lull kind of came to a real halt this year with aerospace revenues going from $534 up to this range. Half of that increase is through nine months. No, this is forecast for the year. It is driven by the Telefonix acquisition. Half of it is organic, even without the Telefonix acquisition, that's a big organic increase.
Here's our test business. The semiconductor test business that we know and love has been a little bit of a trial over the last two or three years from an income statement standpoint. We've been shrinking, even though we've been making really good progress in terms of customer development, customer progress. This year has been a growth year for our test business also. This year, pretty strong. When I look at this growth over time, it is both acquisition and internal investment. Our recent acquisitions are listed here. Some of them have gotten quite a bit of discussion recently. CCC in April of last year, Armstrong, and AeroSat are the three smallest ones on the page, and they're three that have given us quite a bit of pain. We've talked about that.
By the way, if you want to ask questions later, Mark Peabody is in charge of CCC. Mike Kuehn is in charge of Armstrong. I don't remember who's in charge of AeroSat. That might be me. The other ones, though, on the page, it's important to keep balance here. PECO, we don't talk a whole lot about. PECO's become a really important part of our company, and it's really worked well. Their claim to fame is building PSUs for passenger service units, the things overhead. You'll see some in the demonstration. You'll see some pictures. If you flew in here on a Boeing airplane, chances are you touched a PECO product right above overhead. PGA is a French company. We don't talk a whole lot about it. It's a little bit smaller, about a $50 million company. They're making really good progress, in particular, in seat motion.
If you fly on a long-haul airplane, and you have mechanically driven surfaces that you recline, you lie flat, maybe a divider comes up, chances are that's PGA these days. We're closing in on 30%-40% market share with them. This is the Irvine test business, which if you like tests or you don't like tests, again, it was a $60 million investment, and we're selling part of it today or this month, next month, for $185 million. Telefonix, it's early. I guess we're coming up on a year already. I will tell you that strategically, of all the ones on the page. This one's been great. I hope that one of the big objectives that I have for today is for you to see how Telefonix fits in, where we're shaping ourselves as a company.
Financially, they've done everything we thought that they would do, and it's been a really good fit. Acquisitions have been important. Acquisitions are going to continue to be important. Under the covers, we also, as you know, most of you, we spend a lot of money on engineering and development. Again, it's E&D, not R&D. The way we capture engineering costs does not differentiate between engineering and research and development. A lot of people like to focus on the dollar spend, and I appreciate that. We tend to think of it more in percentage terms. On a percentage basis, we're coming down a little bit this year over where we were last year. That's more a function of revenues increasing than costs decreasing.
We don't talk a lot about products that come out of our engineering and development processes. Again, today, we're going to dive into some products. The guys are going to introduce things and talk about things, and you will see a bunch of things that we developed, did not come from acquisition. They are things that we developed, and it's an important part of what makes us us and why we're optimistic for the future. Between the acquisitions and the engineering and development, we've built a company with some scale. 2,800 employees, that does not include contract people, I don't think. With contract people, we're about 3,000. We're mostly North American-centric. We have an operation in France. We have an engineering operation in the western part of Ukraine. If we showed you a map with customers, it would be all around the world.
We do work with 280-some airlines. Pretty much any airplane manufacturer anywhere in the world, we're familiar with. One of the nice things about being in the aerospace industry is if you speak English and you work in North America and you count U.S. dollars, it's pretty easy. There's not a lot of global currency risk here. Contracts are pretty much always done in English. Drawings, specifications, FAA approvals carry weight around the world. The aerospace industry, U.S. is a good place to be based. We've built a company that's relatively balanced. Let me start with the chart on the left, though. Some of you who follow our company from way back when, remember a time when our business jet group was probably our biggest target market, and military was second, and commercial transport was almost not even in the pie chart.
Today, one of the things we've learned as we grow up, that there's more money to be made in the commercial transport business. That's where we've migrated, and today that's two-thirds of our sales. Business jet, military are a little bit less. You can see the test portions in the upper left there. This is a thing that I think is pretty interesting on the right. Again, some of you who followed our company for a long time remember a time when seat power, in-seat power, was really the vast majority of the company. It was like 70% of our revenues. We love in-seat power and we're still pretty good at it, and we've got great hopes for it.
From a balance and diversification standpoint, I like it being 36% of the total rather than 70% of the total, especially since we got there not by it shrinking, but by the rest of the company growing. That's an important perspective on us. I think we're a relatively diversified company today compared to what we've ever been before. We've carved out some real interesting niches on pretty much all the prime programs that we've been targeting. This is a list of programs that are maybe a little bit older on the left and newer on the right. If you're in the commercial transport world, the 737 MAX or the 777X or the Airbus A350 are great programs. If you're in business jets, we're doing some really neat things on the Pilatus PC-24, which I know at least a couple of you in here are Pilatus fans.
That's going to be, we think, a great airplane. Cessna's coming out with a new turboprop. This is a turboprop that is related to the King Air, which most people know, but the Denali is a new ground-up design. If you look at military, Joint Strike Fighter, F-35, it's a big program for us. We'll talk a little bit about that as we go on. Then, of course, there's rotary. We're on the full range of the new Bell program. For a little company, as we've grown up, we touch a lot of programs and a lot of customers. This sign says 200, or first thing up there says 240 airlines. I think the official number today is 280. Is that what we say?
Yeah.
Yeah. I guess it's not 280, otherwise Mark would say yeah. It's somewhere in the 240-280 line. Again, pretty much any manufacturer we have contact with. One of the things that's important in this industry, it's like a lot of other industries, but reputations matter. We've set up a reputation that I think allows us to open doors pretty easily. Of course, it helps to be in a growing market. We're not going to spend a lot of time today talking about our markets, but a lot of people are concerned about the cycle in aerospace. We don't see that cycle slowing down, frankly. Our customers are not asking us for less. They're asking us for more. This is a commercial transport production forecast from Forecast International. They do that for a living. The business jet world, this is a Honeywell chart.
Some of you have probably seen this. This one's a little bit interesting or humorous to me because that peak on the left around 2007, 2008 is always there every year when they update the chart. There's a peak on the right, but the right peak seems to keep stretching out a little bit compared to where it was. We think the volumes are going to increase, but our biggest opportunity in business jets is putting more content on airplanes. It's not necessarily quantity driven, it's content driven, and we'll talk about that a little bit as we go forward. This is my last slide. On the left, those are the product line groupings that we report on in our regular quarterly releases. You're familiar with those labels probably. There are a lot of things in there.
We're not going to talk about each and every one today. What we're going to talk about is what I consider to be some of our major thrusts that represent the success of our acquisition initiatives, the success of our product development initiatives, and if I were on the outside looking into this company, what are the things that I would want to be paying attention on about to monitor how we perform? This first one is commercial aircraft in-flight connectivity. I mean, if you ride a commercial airplane and you watch a movie or you open your computer or you plug in your phone or you cruise the internet, that's, in many respects, us. That's where we're going. That's what we do. This topic will be a combination of in-seat power and the connectivity systems that we've acquired and developed.
We're going to look at a specific opportunity in biz jets. Some of you I know are very clued into this one, and we're pretty excited about it. It's one that I was describing it this morning to Dave. It feels like we've been in the starting blocks for about a year, about to run a race. We're ready to go, and we've been stuck, and it's like the guy with the gun took a break and never came back. We think we're about ready to get released from the blocks, and so we'll talk a little bit about that today. We don't talk a whole lot about lighting, but it's an important part of our business, so we're going to talk about our lighting capabilities and resources, and then we're going to flip around and talk Actually, is this the order? This isn't the Is it?
Yeah.
Okay. We'll flight critical power at the end. What's flight critical power? In your mind, I want you to differentiate between in-seat power, which is a passenger amenity, very important to our business from a profits and volume standpoint, but really not that important to the functioning of the airplane. If the in-seat power system doesn't work, the airplane's still going. Nobody dies. This is a different kind of thing. This is flight critical power. This is what drives the avionics, drives the lights, drives the communication, drives all the power systems on the airplane. We have a growing franchise here, which I think someday is going to make a lot of great headlines for the company. It's not quite there yet. It's a long development time, but it's an example of our internal development resources and capabilities. Mark's going to talk through that.
I think I'm done. This first section will be Mark Peabody and Mike Kuehn.
Is my mic on? Good. Thanks, Pete. I want to reiterate a couple things you said. It's been 33 years for me, when it gets to the Q&A at the very end, my boss is in the room, too. Let me talk a little bit about what in-flight entertainment connectivity is. Pete started on it. Many of you flew here. You might have been in a wide body that had a screen in the back of the seat that was tied into a server. It might have been tied into in-flight connectivity to get information off the aircraft and on the aircraft. Hopefully, you plugged into in-seat power. If you were on a narrow body, you might have had a server on board that was providing you movies. Again, you might have had off-aircraft connectivity. That's part of it.
Another big part of it that's happening today is what's happening with the flight crew. The pilot, for example, has got an electronic flight bag, typically today, he might want access to information on where is the aircraft from the aircraft. We provide, I'll show you in a minute, the hardware that actually provides that connectivity for the pilot. The crew might want the manifest, they can get that electronically. That's another form of connectivity. Maintenance is another one.
Environmental control system has fans on board the aircraft. If one of those fans is starting to go, there's now technology that can communicate that can be put off aircraft through the connectivity. Besides the entertainment side of it and ability to do work or watch movies, by the way, Pete's not in here, but I don't watch the movies. I'm always working, right? There's also the crew and the maintenance and all that, and the in-seat power. That's kind of the description. Our customers are the connectivity providers and the in-flight entertainment providers, typically.
There's a list here. You look at Panasonic, Thales, Zodiac, Safran, those are more on the in-flight entertainment, although Panasonic's into connectivity now. The rest of them are either connectivity providers or content providers in way of aggregation of content. What's important here is it doesn't particularly matter to us which of these customers are providing it, because we provide and we enable those customers through the hardware that we make. We've been building a portfolio over time, either through organic or through acquisition, in order to provide more and more of that content. We can look at kind of the four areas.
One is the basically off-aircraft communications to satellite, which would be a radome, adapter plate, the actual electronics that go with it, and the actual antenna. The other one would be the in-seat power, which I think many of you are familiar with, but it's not just in-seat power for the passenger, it's power for the crew in the galley and power for the pilot in the cockpit. Additionally, with the acquisition of Telefonix, now we call the group CSC, we have servers. If you're on a narrow body and you're getting your movie or your off-aircraft connectivity, you might be working through a wireless access point, a server. Those movies were loaded onto that aircraft with a data loader, and we provide those also.
Finally, I talked about the pilot and the crew having access to data, either aircraft data or getting the data off through a maintenance port. That's done through the aircraft data systems. That's what we call the webCS and the WebFB, and Mike will be talking more about that in a minute. If I look at all this hardware I'm going to just stop on this slide for a second. Where is connectivity going? It isn't necessarily matter who's providing it. Valour Consultancy basically monitors all the aircraft and the airlines and what they're doing and what's available. I think this is pretty accurate that, whether it's KU or KA, it's growing, and it's going to more than double by 2026.
If we look at the portfolio we've put together of companies and the products that they provide, you can see that AeroSat is providing the off-aircraft connectivity. Our Ballard group is providing what we call the webCS and WebFB, that's basically an aircraft interface device that allows the crew and including the pilot to have access to data. The servers, data loaders, access points, and passenger control units are all provided by CSC. AES is doing the in-seat power. Really, no matter who the end customer is, we can provide all this hardware and firmware to these customers. A lot of them are moving away from doing the hardware themselves, those that were, and are actually getting it from us.
To get an idea of what the market value is for these, the total available market, narrow body, we've got a list here, kind of. There's a wider range on the antenna and also on the in-seat power, depending on how many seats are installed and what kind of connectivity you have, all the way up to a wide body. The narrow body range is $200,000-$450,000, wide body range, $540,000-$665,000. If we put those numbers into this is solely new aircraft production. If we put those numbers into new aircraft production, kind of assuming that every aircraft installed some portion of each one of those, we have a total availability on the wide body of about $3.28 billion, and on the narrow body, about $4.8 billion. It's a big market over this time period.
Interestingly, not every aircraft's going to have it, we also did not include the existing roughly the same number of aircraft in the existing fleets, which would be the retrofit market. I'm going to touch on in-seat power for a second. Again, it's crew power, galley power, and passenger power. We initiated this whole product line back in 1995 with the win with American Airlines and Delta Air Lines. That was a DC cigarette lighter kind of adapter that we did, later introduced in the 2000 time period, AC. Then kind of grew the business. We mixed or combined the in-seat power with the in-flight entertainment power. That started with Panasonic, Thales, and now Zodiac. We've basically grown substantially in that time period, to the point where now I'd said 1 million seats.
It's closer to about 1.4, 1.5 million seats installed. When we first introduced it brand new, we had a patent on the system, and that patent's since expired. One might say, "Well, what's the barrier to entry into the market?" One of the things is just doing a really good job. What do I mean by that? I'll give you some examples. One way of doing a really good job is we've bought to the tune of about $200,000 worth of commercial products, iPhones, Google phones, iPads, tablets, computers, and test them on our system. We also provide those when one of our customers want to certify a system, they have to test it with all the product. We actually provide that to that customer so they can test the system out.
We go to the interchange meetings, even those with our IFE suppliers, we continually evolve the product. Fundamentally, we started off with a DC power supply, simple 15 volt system, went to AC, USB low power, half an amp was introduced. We introduced that, it's high power. All of a sudden, we have iPads and tablets that are using 10 watts instead of five or four. Now we've got new products we're introducing, which is the USB Type-C and the wireless charging module. I'll show you later on the tour today that we have combinations of all those. I don't know the exact number, we've probably got close to probably 20 different types of power supplies and combination of outlets, which is, we're unique in that area.
Again, trying to provide the customer with a variety of different products that they can use. That's another one of the barriers to entry into it, is the continued investment on different products. As far as the average sales price, I think many of you might be used to this $7.50-$8.50 number that Pete has talked about before. Pete looked at this and said, "What is this $3.50 number? Wait a minute, what's happening?" I will say this. Last year, about 5% of our customer base, basically low-cost carriers, have gone to a USB only, no AC, no USB Type-C, just a simple USB Type-A. That's a very low-cost system. I'll show it to you when I get back there. Again, we want to provide the full spectrum. Again, that's about 5% of our customers have gone to that.
Otherwise, it's typically in the same $7.50-$8.50 range. Penetration, we've separated this out on number of aircraft and number of seats. On the wide bodies, and a lot of this is through our IFE partners that we're supplying to, about 80% of the wide bodies and about 25% of the narrow bodies. As far as seats go, about 60% of the wide bodies and about 20% of the narrow bodies. Obviously from this, what you can see is that the narrow bodies are more typically nose to tail installations these days, and we have a lot of historical wide bodies where it was more first in business. That's changing. We're seeing a lot more in the entire aircraft, but that's kind of historical data. The majority now, it used to be maybe a 40/60 split of new aircraft to retrofit.
We've moved, it's kind of flip-flopped now. The majority, maybe 60/40, roughly, of the deliveries we make are installed on new aircraft versus retrofit. Still a large available market. I think there's maybe 40% in the wide body market, but the biggest market is this 2 million seats in the narrow body market. Roughly of the, like I said, 1.4 or so million seats, about a half a million of those are for narrow body and the rest is wide body, roughly. Mike? Oh, there you are.
I'm right here.
All right.
All right. Do I have to turn this on, or I guess I'm on. Okay. All right. Good morning. I'm Mike Kuehn. I'm the new guy with Astronics because we're celebrating 50 years today, we have been a part of Astronics now just coming up on 1 year, that was the Telefonix PDT acquisition. Pete put his arm around me and said, "Hey, Mike, how about taking Armstrong?" That formed CSC. I love being a part of Astronics because when Telefonix was a family-run, privately held business, it was getting to a point with the product line that we have where it was bigger than the founder was really able to put his arms around. Astronics was the 1 company that I was always hoping that we could become a part of.
A, because they have a fantastic party at Hamburg, if any of you have ever been there at the Aircraft Interiors Expo. Seriously, it's the mantra and the philosophy of the company, customer service, technology, always focused on the market is exactly where personally I've been and where our team at Telefonix and PDT was. Me personally, I've been in this business since 1983. If any of you remember Jack Goeken, the guy that started Airfone, I worked with Jack, right? Jack and I made the first Airfone phone call. It was over Missoula, Montana in a Lear 35 compandered single-sideband. We installed airplanes, like American DC-10s, United DC-10s, TWA L-1011s, which is still one of my all-time favorite airplanes. I love this business.
I've been in the business through Connexion by Boeing, what's the 1 thing I've heard for 35+ years? We're going to make this just like the office, right? Frankly, I've said it myself in meetings, and I chuckle because it's really hard what we do, in essence, and you can never really make it just like the office, right? Especially today with all the video downloading. We get really, really close. Again, it's great being part of Astronics, and the team has really, really come together well. I actually get the fun slides because I get to talk about product. I know this is a really busy slide, but I think as Pete said earlier, I think once I go through these products, you'll see why the Telefonix PDT acquisition, now CSC, was such a good fit into Astronics.
Starting at the bottom here, the Encompass box. The Encompass box is what we call it's in-flight entertainment in a box. It's a portable unit powered by batteries, it also has an option to be powered on the aircraft with the EmPower product that Mark was talking about, where you just plug it in. You can really run it on the airplane 2 ways. On battery power, it goes 12 hours, and if you plug it in, it obviously will go for as long as it's plugged in. Either way, it's a portable device, and then it has the server. It has a smaller server on board. It has an Aruba Wi-Fi access point on board. You put 1 or 2 of these on an airplane, and you have instant wireless IFE, instant wireless in-flight entertainment.
We work with content partners that put the studio content and advertising on this box. This box has been very well received globally by low-cost carriers. If you think about it, you remember the old Sears catalogs, good, better, best? This is a good solution. This is for the airlines that aren't totally sure about putting trays and racks and all these cables on an airplane, but they know they need something for their passenger. In fact, there are theaters of operation where we've now incorporated a wide area network, an LTE module, and it can sense aircraft on ground, and there are people that are doing e-commerce over this box. Just as a point of example, you're in China, it's autumn, and it's Autumn Festival, and the Chinese give mooncakes a lot as gifts.
With this module on board on a low-cost carrier in China, you can order your mooncakes, airplane hits the ground, the LTE module sends that order to the terminal. They fulfill that order. You walk off the airplane, there's someone handing you a bag with mooncakes. There's people that are doing that now. This prepares that market for the next step of embedded systems and so on, and then connectivity. That's the Encompass box. Cabin equipment is really passenger control units, cradles, and cord reels. I brought a cord reel up here just to go like, "What is a cord reel?" This is a cord reel. Now, if any of you have ever seen the movie "The Mousetrap," anybody? If you remember, there's a line in the movie where the Schultz brothers run the twine factory.
There's a line in the movie that says, "A world without twine is a world in chaos." I say that to people sometimes. An airplane without cord reels is an airplane in chaos. We still make, interestingly enough, 80,000 to 100,000 of these cord reels a year. Over 90% of the globe's wide body aircraft have cord reels in business and first class with the passenger control units. We also build a lot of passenger control units. Interestingly enough, this device, even though one would look at it and say, "This is legacy," we're still putting a lot of engineering innovation into this. We have customers, some that were on the slide that Mark showed earlier. They're asking us to go to higher speeds, more critical impedance matching. We now have a unit here that is single cable.
If you could, I could take you through the inner workings of this, but you'd really don't want to do that. We're always innovating. It's an old dog, that's very true, but it still has some new tricks. I'll also tell you that the company that was Telefonix, going karma full circle, I was the company's first customer. In 1990, we developed the GenStar system, which was the digital system that GTE put on the airplanes, if anybody remembers the seat back telephones. 30-second history on that, GTE was the largest local exchange company, and we wanted to beat AT&T at one KPI. Our president at the time, Ken Foster, and the chairman, Rocky, they were just bound and determined because AT&T, they were the big dogs. What we did was we said, "We're going to beat them with Airfone.
We're going to have the first nationwide digital air-to-ground telephone system," and we did. We spent a lot of money developing the system, and the last thing that we couldn't find was a cord reel. Because in the digital system, even in 1990, the system didn't like brushes and commutators. It needed a seamless signal. The gentleman that started Telefonix, where I ended up after I retired from Verizon, had this patent on this cord reel, and his famous line to me was he walked in my office and he said, "I got you. No problem." Three years later and 200 engineers laying in the culverts, we finally had a working cord reel that we had to end up designing. The point is that from this came what then became the GenStar system, and like I said, it's still on 90-plus % of the airplanes today.
That makes up cabin equipment with passenger control units, and I have some examples out there today. With the PDT, with the design part of our company, we have customers that come to us now, and literally, and this is a true story, we had a customer come in with an Apple remote from the new Apple TV, and they said, "Listen, build us a passenger control unit just like this." We did, of course, the follow-through on that sentence is, "And make it for X price." You go like, "Yeah, but Apple makes about 100 million of these, and you're asking us to make 10,000 a year." You got to get really creative in how you do that, and I have an example of that out there on the table.
CabinPinnacle is the next box, and CabinPinnacle is one of our own in-house line replaceable units. It's really what I call the traffic cop of the in-flight entertainment equipment. The server is where the content resides. It really decides who's talking to who in the cabin, what the WAPs are doing, and the server also talks to the bearer system, whether it's air-to-ground or satellite. It's really the heartbeat. Now, we have a line of servers that we build for ourselves, but we also have a line of boxes that we custom design and build specific to customers. For HughesNet that was on the, we do a modem management unit. That's a dual modem, Ku-band, Ka-band modem management unit. We also do other custom boxes for customers like Gogo, et cetera. We have two sides to that.
Our own line of products to the engineering development, and then a line that we do custom for other customers. Once you have a server on board, you need to update the content. Nothing more irritating than flying to Beijing on a Monday, knowing you're coming back a week later and it'd be the same trashy movies again. Other than if you're lucky enough and it's a switch through the month. The content loader is the guy that takes all that content, movies, level-off videos, everything, and updates it. Now, once you have the content loader in there, we're always kind of innovating, thinking ahead. CabinBridge is a gate link solution.
When the airplane touches down, weight on wheels, airplane gets close enough to the infrastructure at the airport to talk Wi-Fi, it starts downloading and uploading both passenger entertainment data and operational data wirelessly versus having sneaker net, having somebody to shove a new hard drive in. That is another box. CabinACe over here, these are the wireless access points. We all have access points in our houses, in our office buildings, right here, hotels, whatever. Our partner in this is Aruba. Aruba's owned by HP. They are out in Mountain View, California. I will tell you, if you have any familiarity with access points, yeah, they are a dime a dozen, they are a commodity. Aruba is a fantastic partner. They are not just a seller of this to us, they have taken us into their technology roadmap. Our engineers now are already working with Aruba on AX.
Everything we are selling now and all of our devices, all your phones and iPads have AC. Unless you have a really old phone and it is some other technology. We are already working with them on AX and what it means to the airlines and security and all those things. They are a real partner to us. We are the only provider that is out there today that is a worldwide value-added reseller. And what does that mean to us? What that allows us to do is as we ship these access points, we can set all of the parameters so that globally, when an airplane touches down in Ukraine or Russia or France or Germany or China, as you know, channelization and power levels allowed are all different. With our VAR agreement with Aruba, we can preset that in. That is a huge advantage to all our customers.
In less than three years, we shipped 10,000 of those units. We are also kind of a top provider of this. The nice thing about WAPs is just like we all get new iPhones or Samsungs or these are renewable. We are already getting RFPs from airlines now that are asking for the AX, even though they write that in and there is no devices that we are buying yet that have AX in them, they are already starting to ask for that. The next unit is kind of what rounds this out, because so far, everything is in the cabin. We have put content into the cabin through partners. We have connected the cabin with access points and servers, we really have not gotten off the airplane.
We do work with people like Gogo that are air to ground, we also make an antenna, a fuselage mount antenna, and a tail mount antenna that works in the Ku-band, both the standard wide beam Ku and the HTS or high throughput. We also have partners that supply the radomes. That kind of stitches the entire airplane together. Once you have all that equipment on the airplane, you got to get a way to get it on the airplane through engineering certification and an installation kit, which is basically a big box of parts that then allows mechanics and R&Es to put it on the airplane. That is what we do at the unit that used to be Armstrong that is now part of CSC.
We can acquire a customer, we can then do the installation engineering, do the certification, and we do the installation kit. When you think about the airplane, all of these services and products drive you to want one thing, and that is power. You're using your iPad, your computer, your telephones to look at things, to get services, and you want to plug in. It really kind of completes the circle of giving people connectivity on the airplane, giving them connectivity off the airplane, and then you also give them power. This is what we call the advanced technology of the Internet of Flight, which is, as corny as that sounds, that's actually a phrase we trademarked a couple of years ago. That's our phrase.
Now switching, and Mark mentioned this briefly, switching from the passenger to the crew, there's two boxes that we have called webCS and webFB that really enable the operational side of the airplane. As many of you know, there are data buses that run on airplanes that we refer to as 429 or 717 that have all the data that you would want off an airplane, airspeed, location, am I on the ground, off the ground? These boxes, to a standard, these aircraft interface devices tap into those buses and feed that data. The webFB feeds it to the pilot and his flight deck, the iPad that he has in his hand. The webCS aggregates all that data, and then we have software partners we work with that make that data really usable information to take action on maintenance, to do predictive maintenance.
The bottom line is it makes the airline more efficient. Interesting thing is we were contracted by a major carrier to do a study, a white paper, kind of greenfield to look at what they would need to do in the future, and they asked us to do this like Switzerland, neutral. How they would segment all their communications on the airplane, off the airplane, operational, passenger. As we looked at this, it came down to we have products to service every one of those channels that this airline needs. Now they're kind of in the phase we're looking at and some of these products on the operational side, they're just a perfect fit. Again, if you look at these customers, and this is the same slide that Mark had up, these are some of our major customers.
There are some other customers that we're working with, because as many of you know, there are some paradigms that are being shifted in this industry, where there are some new players entering this market that we're also working with. There haven't been some announcements, so they're not up here, but we're definitely in all those kind of paradigm-shifting stands of this industry, we're involved in that. The really great thing about this is, Astronics is a manufacturer and engineering company of complex solutions. A lot of these companies that we're working with are looking to divest or kind of eliminate some of their manufacturing, which puts us in a perfect position because that's what we do. As some of these guys, as you know, they want to build less widgets and we're their go-to players to look at that.
This is really the next kind of phase that Pete was talking about on the business jet connectivity. We showed the fuselage mount antenna a few slides ago. This is a tail mount antenna, and this was at NBAA this year, and we made an announcement about a partnership with Satcom Direct and Intelsat. I know that this partnership goes back some time, but this partnership is really kind of focused on this market, whereas, I think Pete made mention that there was some languishing in this, and perhaps there were some people involved that weren't focused properly on the biz jet market. This team is laser focused on the biz jet market. Satcom Direct, I worked with Satcom Direct back when I ran MagnaStar, GTE's version of corporate back in the mid-'90s, and they were a good company then, they're a great provider today.
This partnership is really going to be a driver to sell, install, and then service these tail mount antennas for this HTS Ku-band tail mount. We've got a sample of the antenna out on the table. If you take a look at this, the addressable current fleet is 5,000 aircraft. There's kind of a number of what that would mean revenue wise. Pete showed the slide that Honeywell had produced as far as that up curve. The thing is, if you look at the business aviation market today, most of these, because it's no secret Gogo is a large provider to the business aviation market, and those are all air to ground. There's not many of these aircraft installed with an antenna like this, and more and more of these players are looking to get global coverage versus just air to ground.
They have this really low bandwidth Iridium system. This is a great initiative for the company. With that, I'm going to turn it over to Jim Kramer.
John, We're good with the mic. Great. Good morning, everybody. As Pete said, I've spent multiple decades here at Astronics. I came to the organization as an engineer. Often I've got about a three-hour version of this that dives into all the great details of our products, but I'll spare you that today. Let us know if you want it. I'll spare you that today. What I want to focus on when we talk about lighting is, I'll tell you what products we participate in, what parts of the market we participate in when you talk about lighting on an airplane. I want to talk a little bit about what we're good at, and that'll lead to really who our customers are, who buys these products from us, and why.
When we look at an airplane and when we talk about lighting, oftentimes we'll all use terms in different ways. We like to break it into. There's lighting that goes on the outside of an airplane. Probably pretty self-explanatory. You look up in the sky, you see an airplane flying overhead at night, you see lights. We also look at lighting in what's in the cockpit of an airplane, where the pilots are sitting. I guess I would liken that to when you're sitting in your car and you look at the dashboard, and you're acclimatizing yourself to driving at night, there's a criticality to the illumination of all of those instruments and whatnot. There's lighting where we sit in an airplane. When I mean we, I mean the passengers sitting in the cabin. There's a whole variety of lighting.
A subset of that, which we also participate in, is what we call emergency lighting. If there happens to be, hopefully, most of us never see these lights turn on on an airplane, but when there is some sort of an emergency, maybe just like in a building or in other situations, there's an entire lighting system that's used to make sure we can evacuate the airplane safely. Those are the areas that we participate in. These are just some images here, to make sure what may be obvious to us is clear to you, what some of those lighting examples are. We make products, as I said, that are on the outside of the airplane, in the cabin of the airplane, in the cockpit of the airplane, we provide those through the three major markets in aerospace.
Really the tech, that is military, business aviation, commercial transport. I'll expand on that a little bit. I think what's important is that some of the core, look, lighting is something that may seem obvious, but when undervalued or not taken into account, it often has a major impact. I think a few of you may have noticed this morning when we all sat down, one of the first things folks said to me is, "Jim, that's too much light," or, "It's too bright," or, "We got to adjust the lights." Understanding how to develop a lighting system, whether it's a military aircraft, a business jet aircraft, or a commercial transport aircraft, has obvious benefits. What you see here in this picture, I'll make the comment of my boss sitting here.
While I don't often get to sit in these business class seats on these airplanes, jokes aside, that actually is true. When you sit in one of these seats, I'm sure you have never either, but particularly if it's one of the relatively newer aircraft, there are a lot of, let's call it amenities regarding lighting. You've got some nice reading lights and task lights and a variety of aesthetic lighting that makes your experience sitting in that more comfortable seat that much more pleasurable. That's one of the things that we do, when we talk about lighting, we have a demo out back that you'll get to see where some of those things go and what we mean by that.
Where I get to sit on the airplane most of the time, you may have noticed this yourself if you flew here today, you look over your head, and there's a passenger service unit. There are reading lights built into that passenger service unit. I was on a plane the other day, and yes, it was one of the few passenger service units that we don't manufacture. I turned on the reading light, and it illuminated the pathway, not my tray table. While it may seem simple, quality lighting in that kind of environment is important and is important for the passenger experience. There's also lighting in the signage that tells you to fasten your seat belts or not to use your cell phone, or a variety of things like that.
In the cockpit of an airplane, and I've got a little just example, so we just know what we're talking about, and I realize not everybody listening can see this, but there's instrumentation in a cockpit. This is just an example of a product that we produce, goes on a business jet. We sell this to a major avionics manufacturer. This is a control panel, including a lot of electronics and sometimes software and a lot of intelligence. The front panel of it, this text that's on it, just like in your car at night, this illuminates. You probably can imagine, if you're a pilot and you're flying, the criticality and the quality of that lighting is really important.
It's interesting because when our customers think about that kind of a product, they look to lighting experts to supply that product, not so much the electronics expert or whatnot. The lighting is critical, and so when we talk about in the cockpit, that's a big part of what we do, and you can see here all of that instrumentation. Often, when you look in the cockpit of an airplane, and I make sure when I get in an airplane, I take a peek myself, take a lot of pride in a lot of that product could be manufactured in this facility that you'll get a chance to take a tour of today.
Then on the outside of the airplane, there's all sorts of lights, and I'll give you an example of what we mean, because I think it Can anyone guess what I realize some folks can't see what I'm holding who are listening, but if anyone wants to take a shot at where this goes on an airplane. A wing tip, yes. This is a wing tip anti-collision light for a Boeing 737 MAX airplane. I show this because I think there's a couple things that are important. Number one, when a lighting company in the aerospace business produces a product like this, it's not a light bulb that we just make and get screwed onto the airplane. It's a structural part of the wing tip.
You may be familiar with the 737 MAX in that it's got this, it's a fancy term, a Split Scimitar Winglet, but it's got a fancy winglet on the end of the wing that has a significant impact on extending the range or fuel efficiency of the aircraft. Well, what's really important is there need to be lights in that winglet, and this is just because of a regulation that the FAA has. We don't want to impact the fuel efficient, low drag, highly designed structure of that winglet. You need to somehow to figure out how to put a light in there, and you need to be able to mount that light in some sort of a structure that survives all the requirements of an aircraft. That's one of the things we're good at.
I also want to mention this, in that not only does our company do the lighting, but you heard about the factory here. You'll see where some of the lighting gets done, but some of the structure is done by, Pete talked about our PECO organization in Portland, Oregon. There's collaboration across Astronics with structural parts, lighting parts, to come up with what we think is a really unique solution. I guess if you've got a boat or you all drive cars and you just look at the lights on the outside, there are all sorts of lights, green lights, red lights, white lights. They tell you what part of the plane you're looking at, and whether it's a military aircraft, a business jet, or a commercial transport aircraft, you need these lights, and the technology is all relatively similar.
When we look at our market and we break it down into some sub-segments, so you can get a sense for what the size of this market is. You've got this chart, and I apologize, I know some of the slides are a little bit out of order, but there's four or five, and you'll be able to follow them. Again, cockpit, exterior, and cabin, those are the three areas of the airplane parts go in. We break that down into some subcategories, and we've got panels and keyboards and caution warning lights. I won't go into great detail on that, but you can imagine when you don't have the seatbelt on in your car and that little light comes on the dashboard, that's a warning light, same kind of thing in a car.
When you're trying to control all the buttons around your heating and control system in the car, that's a keyboard or a lighted panel or things like that. There's also utility lights and dome lights. If you happen to have Apple CarPlay or something, you'll notice you've got a little bit of a screen in the car. We call that a display. This column right here talks about the areas where Astronics is currently participating from a lighting standpoint. I talked about exterior lighting. Then in the cabin, as I said, there's emergency signage. You probably notice the flight attendants when you're sitting on a plane will always, as part of their regulations, tell you where the emergency exit lights are, and how to get off the airplane, and things of that nature. We do that.
There's area and mood lighting, which we are not currently a big participator in. Talked about the passenger service units. We have a significant market share in that area. The business and first class seats, which I showed on that previous slide. We have a significant market share in that area as well. This next column talks about the parts of Astronics that provide products that address those subsegments of the lighting market. To continue a little bit on the theme of what Pete talked about, and I think Mark talked about it as well, is you see how some of the acquisitions over the past four or five years have added to the. LSI has been part of Astronics for a long, long time.
Some of these acquisitions have brought other capabilities that are very synergistic to what we were already doing in the aerospace market. A perfect example that is Boeing from a commercial transport standpoint, from a lighting standpoint, that was an area where LSI, that part of Astronics, had not historically been a significant supplier. PECO joined the family five or six years ago. Boeing commercial was a significant customer, and we kind of stitched those two things together. Today, LSI is a supplier of the exterior lighting system, or Astronics is a supplier of the exterior lighting system for that aircraft. We continue to collaborate on those types of things, making the whole greater than the sum of the parts.
These three columns here talk about kind of an average ship set dollar content for these different subsegments of our lighting business on those different kinds of aircraft. You kind of roll this all together, and you get a summary that I'm going to talk about in a minute here, which gives you a sense of how we value the overall addressable market. There's a couple things I want to point out here. Number one, these quantities here, similar to the quantities you saw in a very similar slide earlier on, this is for new build aircraft line-fit equipment. It is not taking into account, which is a market that we do participate in, and there's lots of potential for it, is both retrofit and aftermarket opportunities for lighting. There's a lot of aircraft that exist today that have older legacy lighting.
I said I wasn't going to get too far into the technology, but almost everything we do today utilizes light emitting diodes on aircraft. For probably obvious reasons, like you use them in your house, they use less power, they last a really long time. Those are two things that are just obviously very important on an airplane. The other thing that we don't talk about here is that we participate in the military market. You may have noticed that we don't have a particular note about the size of the military market. It's a little bit difficult to come up with a particular figure because you sometimes have fighter jets that have a cockpit, obviously no cabin. You've got big transport aircraft, but you're not making a lot of those. I'll kind of just order of magnitude.
We're the suppliers, I think you know, of the lighting system, and also importantly, the lighting control system for the F-35, and that's built in this factory as well. Those who get a tour will get to see where we do that. There'll be some 2,000 of those built over the next 10 years or so, and I think you've heard we have significant content on that. Whether it's in the hundreds of millions or closing in on a $1 billion addressable market, there is a significant amount of lighting that goes on military aircraft, and you'll find our stuff on V-22 and the P-8 and the KC-46, et cetera. I think one thing that I wanted to make sure I emphasize regarding what we do with lighting is we participate in, again, it's the cockpit, the cabin, and the outside of the airplane.
We also are well positioned in all the different segments of the aerospace industry, meaning the military market, business jet market, or general aviation market, and the commercial transport market. As you all are very familiar, sometimes parts of those markets ebb and flow at different times and where one is strong, the other might not be as strong. We've been able to leverage a core technological expertise in the lighting area, which really applies across all of these markets and has allowed us to be very successful.
Really, I'm not going to read all of these to you, but you can see that the leading airframe manufacturers in the world, or the avionics systems integrators, when they are thinking about integrating some sort of a lighting into their product or on their airplane, we're one of the first folks that they contact, and we're talking to these folks all the time. That really just brings us to this final slide, which just summarizes kind of who our major customers are. Again, you'll see that those customers are the leading airframe manufacturers, whether it be commercial transport aircraft. You'll find our stuff on the A350, the A380, the 777X, the 737. The Embraer E2 has our passenger service units and our emergency lighting system. The business jets, we've been supplying parts on business jets for decades.
You'll find that in all the Citation jets at Cessna. Honda, the jet will have our lighting systems on it. Then in the military area, whether it's Lockheed or Boeing or any of the major military platforms that are produced today, the Sikorsky Black Hawk helicopter, et cetera, these are customers of ours. Rockwell Collins, I mentioned, and Honeywell, you'll see also the avionic system supplier. When you're putting a cockpit together on an aircraft, there's a lot of lighting equipment that goes in a cockpit that comes from lots of different areas. What we're able to do is, as a supplier to both the folks that put it directly on the airplane, as well as the tier one avionic suppliers, we make that man-machine interface lighted product for all them, and then when it gets into the cockpit, it looks like an integrated, seamless system.
Thanks, Jim. Deb asked, we were supposed to end at 11:30 A.M. It's 11:31 A.M. She said, "Can you gain a minute?" Negative. I can't quite do that, but I'll try and do it fairly quickly in about 10 minutes. What I'm going to talk about briefly is what we call flight critical power, and how that differentiates from other power we've talked about is this is the power that is put on an aircraft when the aircraft is designed. Sometimes a major block change, we put it on there. When I'm talking about aircraft, I'm talking about both fixed wing and I'm talking the business jet area, light to medium and sometimes heavy, rotorcraft, and even UAV drone product line.
When you're designing an aircraft, you look at some major systems, engine system, avionic system, braking system, et cetera, flight controls, but one of the key systems you look at is the power system on the aircraft. An electrical power system on aircraft typically consists of four parts. The first part is how do you generate the power off the engine? That's one, and then there's always the batteries that are considered part of the power generation part. You have your power. Now, how do you distribute it? Typical aircraft, depending on the size of the aircraft, it'll have an emergency bus, which is your battery system. Then it'll typically have at least two other buses. One's a fallback safe for the other one, and large aircraft would have more.
Then you also typically would have a bus that if you want to connect to a ground power cart, you could plug into that, too. There's this, what we call the primary power system, which is how do you switch between these buses. The third part of the system is what we call the secondary power system or the power distribution system. I liken it to in your house when you have the circuit breakers in your house. You bring your main power in, you have a circuit breakers panel that distributes the power to the rest of the house. In a typical system on an airplane, it's the same way. You basically have your power on your buses, you have the buses split out into circuit breakers that then put it out to the rest of the aircraft.
Like in your house, all those wires come to a central point, typically in the cockpit of an aircraft, and crowded with all those wires, and that's your typical power distribution system. What we've introduced, I'll talk about in a minute, is the Electronic Circuit Breaker Units, which eliminates a lot of that wiring. The fourth part of power on an aircraft is usually power conversion. A lot of times you have maybe a 28-volt bus on an aircraft, but you need 115 volts for particular products. Actually, AC power is a form of power conversion. We convert from whatever the frequency and voltage that the aircraft uses to something usable for your tablet or laptop or phone. We do DC to DC, AC to DC, DC to AC, et cetera, I'll talk a little bit more about that.
The key point here is that when we spend a lot of money in the investment of one of these systems for an aircraft, it's on that aircraft for the life of the aircraft, typically, and that's what's really critical. It's very different than the model in some of our other power products. Perfect example, gosh, the Beechcraft, I think, was 1964. The PC-12, I think, was about 20 years ago now. They've been around for a long time, and the platforms we're talking about, we hope or plan on it being around for a long time, too. That's the fundamental basis. Starting with the starter generator. Typically, on a small, light to medium-sized aircraft, you'd have a 28-volt generator system, and historically, it was like in your car. It was a generator and a starter. Call it an alternator in your car.
Those two used to be what was on the aircraft, and then they combined them into what they call a starter generator. It was what's called a brushed starter generator, and the problem with a brushed starter generator is it has a typical life before it needs overhauling of about 500 flight hours, which makes it one of the most unreliable parts of that size aircraft. What we've created is what we call a brushed induction motor starter generator. Brushless, I mean. The brushless part of it gives it a much, much longer life. The issue is it costs about twice as much because the electronics are much more complex than a brushed system. Why would anybody want to do it?
What's changed in the market is the OEMs have moved to power by the hour, and they're responsible for the reliability of the aircraft and the product. All of a sudden, you've got something that's got a 500-hour flight hour life. You say, "Wait a minute. I don't want to have to overhaul this every 500 hours. Is there something that'll last longer?" Our brushless induction starter generator lasts about 10 times as long before it needs an overhaul. That's one reason. Another reason you might want to go to this is a brushed starter generator cannot put full power out at idle at all. If you want to run your aircraft at idle, all the electronics on it, whether it be your galley or air conditioning, whatever it is, you need to run an auxiliary power unit.
A brushless induction starter generator can run almost full power at idle. I can run almost all my electronics, air conditioning, everything, without a power cart, without the APU. I just saved a lot of money on the aircraft, right? The operator. Those are some of the key differences. We are on now the PC-24 and the Denali with this product, and definitely bidding on some more opportunities for that. The second part, primary power distribution, we are working on some technologies that differentiate us. I'm not going to go into details on that particular one yet. I will say that we've got about four different aircraft that we've done the primary power distribution part. I'll skip that, and I'll go on to the third part, which is secondary power distribution. That's why I talked about the circuit breakers.
Let me give you a picture of what a cockpit with traditional thermoelectric circuit breakers, kind of like your house, a whole bunch of circuit breakers, versus one of the newer systems. Skip the glass cockpit for a second, but you can see all those circuit breakers. What's the difference? Obviously there's the space in the cockpit, that's a very visual thing, but all the wiring that goes to and from those, most of that is eliminated because the electronic circuit breaker units that we provide are more localized to the actual loads. There's the labor associated with the wiring, the cost of the wiring, the weight of the wiring, the reliability of the wiring, all that's eliminated. Another feature is a thermal circuit breaker is based on the temperature rise, and it's not that accurate, whereas we do ours electronically.
It can be very accurate, and it can be reprogrammable. The airframe manufacturer said, "Okay, I'm going to change my loads. I can have a more accurate circuit breaker, and I can just reprogram it." A third part is the actual indication. If a circuit breaker goes on the aircraft on the left, you look over and you see, oh, something popped. Maybe you don't even notice it popped, but the cabin lights are out, and that might be an indicator, for example, and you reach over and you say, "Oh, I can just push it back in." That's maybe fine for the cabin lights, but what if it's the fuel pump motor? Maybe I shouldn't push that back in because it might heat it up again, and maybe I don't want that doing it for the fuel pump motor.
There are situations where you might want some instruction on what to do, and if it's a glass cockpit with electronic circuit breakers, this could be brought up for you. Another feature of it is that it could be automated. An example might be, let's say, one of the power generations goes down, and you're only running off of one generator. You want to load shed. Historically, you would go through the manual and say, "Okay, what do I load shed in this situation?" With electronic circuit breaking, it's all automated. It's like, okay, shed this, and this, and this, and this, and by way, I'm informing the pilot that's what I'm doing, but it does it automatically. That's another feature of this.
This is why a lot of the airframes that are coming out now are looking to us in this size for electronic circuit breaker units. This is a picture of our starter generator. This is our latest, the third generation of our electronic circuit breaker unit. It actually can stack one, two, three, four of those cards, AC or DC. The last part is the power generation. A lot of times you need a frequency converter unit or a power conversion, as I mentioned before, different power levels, different voltage levels. What we've done differently in this market, we're just now introducing these products. It's basically, typically, those products were 85% efficient. We're looking at 92%-94% efficient, it basically is half the wasted power and half the heat, and it's also lighter than the systems out there. Here are some of our wins.
TBM's kind of a combination of electronic circuit breakers and primary power distribution, then we have similar on the Bell. PC-24 starter generator and ECBs Denali, same thing, plus in-seat power, then the Global 7000, that's one of our new power conversion units. What sort of differentiates Astronics is, I take the bold statement that we're probably the only company, or close to the only company, that can provide that full suite of power products from generation, primary power, secondary power, and power conversion for this size aircraft. Looking at the market, fundamentally, if we look anywhere from small turbine, like maybe a Denali size, up to something maybe a Dassault or Gulfstream size, we've broken down to the category, the number of aircraft per year.
Assuming you did a starter generator and ECB, depending on how many loads you have, these are the kind of values that we're looking at for each one of those aircraft. This is the total available market. Yeah, covered that. That's it. Did I do it fast enough?
Okay, at this time, we're going to suspend the webcast. We will reconvene at about 1:00 on the webcast. Thank you.
All right, we're going to break down into A, B, and
[Break]
Good afternoon. Welcome back to the third part of Astronics Investor Day. We are going to have Pete get up next and continue. We should be finished. It'll be Pete, Dave, and then we'll open it up for Q&A.
I'm just going to say a few words about our test segment. Again, Jim Mulato runs that business, and he was supposed to be here, and we called him off given the announcement of today. Again, I got a couple questions at the break about our lack of guidance for Test for next year. It's not at all a situation where we're pessimistic about our prospects. I think we're set up for a pretty good year. Given all the questions having to do with the divestiture and a big contract that we're negotiating, we're just not prepared at this point to issue guidance. We will do that in due course. I'm guessing we will do it in December when we should have that contract negotiated, and we will hopefully have this divestiture closed.
Again, on the semiconductor side, we're going to continue to be involved with Advantest as a customer. In terms of modeling, the preview will be that what would've been $1 in revenue is probably going to be closer to $0.60 or $0.70. We'll get that kind of nailed down for you when the time comes. That will likely make Advantest one of our biggest customers going forward for the next few years. Meanwhile, we'll charge ahead with our traditional A&D test business. Most of the existing backlog on the test side is A&D related. The kind of a new big program that we're negotiating is also A&D related.
The idea here is that in a military kind of situation or in a lot of different situations, customers can have a whole range of equipment that they need to verify performance of, and they don't want to take dedicated test equipment for each of the items that they want to test. For example, you got a communication scheme, you've got a night vision scope on this guy. You've got maybe certain radios in the pack, and before these guys go out and do whatever they need to do, they want to make sure all that stuff works. We build equipment that can go with them in a forward deployed situation and can be customized with cables or adapters or whatever to test all of those things all at one time.
That's what we're really good at, and we think we're doing pretty well in the market. We'll do a deep dive on a phone call in December when that gets settled down. I'm going to turn it over to Dave for a financial discussion. I'll come back and do questions and answers.
All right. I'm going to make this pretty quick. We talked quite a bit last week on the conference call on the financial results for the quarter and year to date. For the most part, most of these slides, most of you are familiar with them, and they're going to tell a common story. That common story is we have a bad trend going on here from 2015 through 2016 and 2017. We know that. Drop in sales, the margin charts are going to follow that. There's some noise in there too, but the big issue going on from 2016 to 2017 was a drop in sales. We talked earlier in some of our conference calls toward the end of 2017 about what was going on in the air pocket in the in-seat power systems and the IFE installations going on across the airlines.
I'm not going to harp on that. One of the things I want to point out in 2018, we've provided the guidance in there of $790 million-$800 million. We're well on our way there. You can see where we are in terms of our range here. We have backlog to hit those numbers, so we're pretty confident on the 2018 update there as we reaffirm today. Looking forward, bookings are strong. We like to focus on what was going on back in the bad years. I don't know if that's human nature or what. If you look at what's going on in the trailing 12 months here, our bookings are up to $854 million, an all-time high over a 12-month period there.
Our backlog as well, we're at $398 million at the end of the third quarter, another all-time high, giving us confidence in the guidance that we initiated for 2019. You're going to see these slides, 2016, 2017 margins. 2016, 2017 operating profit, same story. Revenue drops, you're going to have a drop in operating profit. What we're highlighting here is, we talked on the conference call last week about the three businesses that we're working on right now. I think we referred to them as the three problem children. These blocks here highlight a couple things. The blue blocks here highlight the loss impairment that we took in the fourth quarter of last year relating to the Armstrong business. Additionally, the gray blocks here show the combined losses for those three businesses. The point here is the remaining aerospace businesses are really strong.
If you look at our operating margins for the aerospace segment in the third quarter, you remove the performance of these businesses, we're up around 16% operating margins in the aerospace business. I'm not trying to imply that those losses are going to go away immediately. We're working on those things. Pete talked quite a bit on the conference call about the progress on the three of them and what it's going to take to reduce those losses and move toward a break-even point as we move through 2019 with those businesses. I'm not going to say that in 2019, we think we're going to get to that break-even point there, but I think we're going to make progress steadily as we go through the year in 2019 on those. Some of the issues there are one-time things.
Some of them we're going to grow out of the losses there with top-line growth. Talked a little bit earlier today about the antenna business. That's got to be a key contributor to growing out of those losses at the AeroSat business. The balance sheet's in really good shape. Again, same story with cash flow from operations. We're not happy with the cash flow from operations. The biggest drop here is being driven by the margin decline, and it's driven by the sales decline. Additionally, we've had some inventory and receivable growth here as of the end of the third quarter and second quarter this year. I expect in the fourth quarter, we're going to have really strong cash flow generation here. I expect we'll generate free cash flow of up to $20 million to pay down debt by the end of the year.
I mentioned that on the call a week ago, too, it still looks like as soon as we can get all our customers to pay us in a timely manner, that that's going to be achievable. No real change in the capital structure. The debt we started to pay down and the borrowings we had at the end of 2017 relating to Telefonix PDT acquisition, we've chipped away at that a little bit so far. We're down to $259 million there. Shareholders' equity continues to grow relating to the profitability of the business. In terms of CapEx, this year our expectation is $18 million-$22 million. We notched it down a little bit on the last conference call. Really due to timing of some stuff. Moving into next year, I don't expect a significant change. We had a few million dollars of stuff that just moved to next year.
It wasn't stuff we decided not to do. I think historically, if you look at our CapEx guidance, it tends to be on the conservative side. In other words, overestimating what we usually end up spending on CapEx. In terms of capital allocation priorities, no change. We talked earlier about the sale of the semi business. We're going to receive $185 million in cash up front. Initially, we'll pay down debt with that. Continues to be our priority. We look for acquisitions. We fund our E&D budget. Lastly, we still have a $50 million authorization for stock repurchase. We tend to do that in a strategic manner when we feel that the price is egregiously low. That is an option. Initially, we'll take the net proceeds and reduce our debt.
Roughly, we're paying about 4% interest on that debt, you can factor that into your models going forward there. I just wanted to run real quick through that. I know you guys don't want to sit and listen to me. You hear me every quarter, and you've been sitting here for about three or four hours today. I thought we'd get to the Q&A section. Come on.
I'm going to do a quick wrap-up here of what I consider to be the major points of today. The guys did a good job covering them, but I just want to make sure that I hit you in the head at least once more on some of these. I'm going way back to the beginning of the slide deck when we started talking about our connectivity. It's probably intuitively obvious. I mean, this crowd of people, you all travel, you all have electronic gadgets. You sit in airplanes. People want to travel with their things, and they want to do things on airplanes, either watching movies or cruising the Internet. You can't find a forecast that doesn't predict very strong growth for this segment. Regardless of what you think of the cycle, the installations of IFE, in-flight entertainment, in-flight connectivity, are destined to increase dramatically in the coming years.
There are some companies that cater to this market, well-known names. There are other ones in China. There are other companies jumping in. We call them content providers or service providers. One of the subtle but very persuasive points to understand is that these guys are more and more interested in the content. They're interested in the bandwidth. They are less and less interested in the hardware, even though they know they need to deliver hardware to make the system work. I'm sure some of these companies, if they're in the room, might object to my statement, but I could pretty much go around the table here and give you examples of what I'm talking about. Installations are going to go up. The primary providers are less interested in the hardware. Why does that matter?
Because we've accumulated a group of capabilities and companies that collectively can provide all that hardware. We didn't present this argument today, but there's nobody else in the industry doing this. Do we have competitors in wireless access points? Yes. Do we have competitors in antenna systems? Yes. Do we have competitors in in-seat power? Not really. Hallelujah. My point is that if you are one of those guys, you have to accumulate that group of hardware somehow. You can design it yourself. You can go to six or seven different companies to source it, or you can call Astronics. That's your option. I don't mean to be too boastful about that. I think it's just a little niche market that we're focused on. I think it's one that's going to serve us really well. One of the main points of today is to understand that dynamic.
This opportunity, a big part of how our year goes in the coming 12 months for sure, but really the next five years, is going to be to see how successful we are in the tail mount antenna for business jets. There are a lot of large business jets ideally suited for this kind of application who fly international routes, and the guy in the back who's paying the bill for this airplane has the choice of either being connected when he's flying overseas or not. Our strong hunch is that now that the technology's available, they're going to choose to be connected. We like our position here. It's been a tough, slow start, and we're paying heavily for it.
When I look at where we're going to be over the next few years, this is a critical indicator, and the next few quarters will be important in figuring this out in terms of momentum. I'm going to flip forward a little bit more here. We don't talk about this market, this lighting market, very much, but it's very important to us. Jim didn't point it out, I don't think, specifically. That's a 737. They call it a Sky Interior, which was built into some of the older NG airplanes, but now is standard on the 737 MAX. That's our PSU. 737 rates, despite recent events, we don't feel are going down. We feel they're going up. Cockpit lighting, usually what we do is flight critical. In the cockpit, that's flight critical. Can't fail, has to work.
Exterior lights on an airplane, actually, this airplane doesn't fly, those little red and green lights out on the wingtip, doesn't fly if those don't work. It's actually illegal. The FAA will not let you take off, or they'll send you a nice little letter if they see you take off with one of those lights not working. An airline won't do it. Flight critical stuff, that's what we concentrate on there. Then finally, this airframe power bit. This is an example of a ton of innovation being applied to a certain class of airplanes. Mark walked through in some detail what the critical elements of the systems are and how they work. What he didn't maybe point out quite so strongly, because he's an engineer, I'm not. I can get away with saying things. Nobody else is doing this.
We don't have competitors yet in this particular part of the market. An airplane is either going to have our ECBU induction-based starter generator system and the advanced electronics, the advanced capabilities that come along with it, or it's going to be a cockpit littered with thermal circuit breakers like that. Mark kind of talked about this as being old technology. It is, but you go to some prominent airplane manufacturers in this class of airplanes, and that's what you get today, right now. We see that changing. Some companies, this is a Pilatus airplane, are going to be a little bit more ahead of that than others.
I would tell you that between the rotary wing, the turboprops, the small jets, we've drawn a circle around this part of the market, nobody in that market's developing an airplane without giving us a call and asking us to be involved on the electrical power side. We don't do them all. Sometimes we can't agree on the price point. Nobody does it without giving us a call. I think as I project down the road, this is going to grow and be an important part of our thrust and momentum in the future. That's all the flipping around I was going to do. I guess we'll ask for questions if anybody has any.
All right. Go ahead and ask it.
My question was that the larger players probably cannot shift as quickly to technological change. Having walked around your floor, and seeing what you can do with printed circuit boards, it looks like you can adapt very quickly and make changes weekly if necessary to meet demand. I'm curious if that's one of your competing positions that you have in the marketplace.
Definitely. I've often described us as big enough to have the resources that we need to do what we need to do, but small enough to respond much more quickly than our bigger competitors. I think as we've gotten bigger, I haven't changed that perspective. The other thing I would add is that we tend to compete with smaller parts of bigger companies, where there's maybe a much higher level of turnover in the management ranks. People move through the organization. Which makes sense. In our case, most of us have nowhere to go. We have a lot of tenure doing what we do. I think that serves us well from looking at a long-term perspective. Thanks. Are you picking, Deb, or am I?
Pete, can you maybe just talk about why Astronics is different this time with Satcom Direct at the helm relative to the Panasonic relationship?
I guess my boss is gone. I think business jets are different than commercial transport airplanes in a number of respects. Panasonic was involved in the team. They're a very capable company. They do a lot of things really well. They're a big customer of ours. They're much more geared towards commercial airplane service and routes and structure. Commercial airplanes fly a relatively predictable route. American or Delta or United, they know today what they're going to do tomorrow, barring some kind of weather-related change. Business jets are fundamentally different. I can pull up my computer and pop in a flight plan to go to Rio de Janeiro right now and be in the airplane in an hour and do it. I think developing a system with that kind of flexibility for fleets of one is fundamentally different than an established route structure with much larger fleets.
It appears that Satcom Direct, I know they're very focused on that, and they've got it worked out, it appears, with Intelsat, to execute on that, too. That's really the thing. Bandwidth is bandwidth. Satellites are satellites. Many of the satellites are the same. Our antenna works kind of the same way with both of them. We've been ready to go for a long time. It's getting Satcom Direct happy and content and ready to go, I think they're getting really close. I think that's why we're pretty excited about it at this point.
Follow up on two things. The one is, the AeroSat business is currently losing money that you're spending in development, product development, engineering expense to do the wins like you've done with Satcom Direct. It's losing, what, about $11 million a year ballpark?
At least.
Okay. If you're selling these things for $250,000 a pop, right?
If we hit a run rate of or we get to 100 a year, which seems like a low reasonable bar to get to in the immediate term, that's $25 million of revenue. How much money will AeroSat make at that $25 million of revenue?
It depends on what else we're asking AeroSat to do. AeroSat actually has a number of other initiatives in place right now. If they executed on the tail mount, and the other things didn't work, we'd probably still be in a negative situation, but it'd be relatively small. That's what we're kind of counting on. It's quite possible AeroSat could triple their revenues this year, or next year.
Could triple. That would include commercial AeroSat.
Include a couple other things, yeah.
A couple of other things that you're working on there.
Yep.
Just following up on incremental margins as we think about the total company, excluding AeroSat here. You talk about 16% op margins in the business, you're talking about the engineering and development expense that's peaked as a % of revenue. Right?
Yep.
You put up the slide that it is going to decline. You've got the growth initiatives in front of you. How do we think about incremental margins then? You're going to get leverage from that line as well as these other swings.
Do you want to add this, or?
I'll add on after you.
I think the biggest margin opportunity we have right now is minimizing, I'll choose the word minimize, the losses at the three companies. I think we've got line of sight to do that. If I go through the array, we've done this before, the Armstrong business, of the three, I'd say Armstrong is pretty much out of the chute. Mike and his team have done a really good job refocusing that business, retooling it, and opening some doors that had become shut. The business was underperformed financially. It also underperformed in the face of some customers, some important customer relationships. We've been able to salvage that, turn it around, and give it the opportunity such that while I don't think it's going to make us a whole lot of money next year, it's not going to lose us a whole lot of money either.
From where we are today, that's good. Going around the horn, CCC, the challenge there has been this development program for this unnamed customer that we will someday be able to talk about, today's not the day. The issue there is they had a development program that they were committed to that we didn't appreciate. I don't think they appreciated it either when we bought the company, the development program has proven to be quite painful. It's a specific program. You can touch it, see it, put your fingers on it. It's right there. It's not endemic to the business necessarily. It's this particular development program. The latest expectation is that we're going to have that largely done through the first quarter, into the second quarter. First quarter. That's got to end.
We took a big charge for the estimate to complete on that in the third quarter. We're hoping that's the end. Of course, we hoped it was the end in the second quarter, and it wasn't. If that estimate to complete is all-encompassing and adequate, Custom Control Concepts is basically in the same boat as Armstrong Aerospace. It'll basically be out of the woods, which leaves us AeroSat. You just ran through a little exercise there. We're going to have a fourth quarter to report here sometime soon, and we're going to be talking about the performance of the handful of airplanes that are out on the Intelsat network. If those are going well, I think we're going to have a quick turnaround there also. If those are not going well, we're going to have some trouble. That's where that is.
That'll be an accelerating ramp through the year if it's successful, such that losses will step down. The hope is, I don't think AeroSat will be break even for the year, but they'll be at break even at the end of the year. That's the idea.
To that, I think I'm still mic'd up here, right? We talked a little bit about the effective tariffs on our last calls. Who knows where that's going to end up. We've applied for a waiver to the government. My understanding is they haven't granted any yet. I don't understand why they don't grant them all and say, "Look it, everybody, take a year. Figure out your supply chain." Our estimate is that'll be about a $10 million headwind to us in 2019, assuming the tariffs as currently drafted stay in place.
Again, with the margin question, we call attention to these three sore spots, not to throw our own family under the bus necessarily, but to help everybody understand what the issues are here. The issues are not endemic across the business. The issues are specific to these three operations. We fix the three operations, the margin picture improves dramatically pretty quickly.
Yeah. That should explain, too, they went through, Mike talked about the antenna business, and they showed the market opportunity there that you alluded to. A lot of the engineering and development costs are going there, too. Hopefully, you understand why we're doing this. There is a really big market opportunity there, it takes money to develop the antennas. They've changed over time. The business we bought back in 2014 had a little different business model when we bought it. It was doing a lot of business with Gogo, supplying Gogo's Ku system. About a year after we bought that business, Gogo changed direction, all of a sudden, the largest customer there was gone. A lot of that is what you saw happening in the end of 2015, 2016, and 2017 on the financial statements there. We lost the Gogo business.
At the same time, we started investing heavily in the tail-mounted antenna. You had this double whammy going on at AeroSat there that was resulting in a lot of headwinds. Again, the reason for doing it is there is a huge market opportunity there that we see, and we need to execute on it now.
Hey, Pete. Peter and Dave. When you close the test deal, you're going to be relatively under-levered, I guess. As you think about M&A right now, where is your head at in terms of opportunities that you're viewing as attractive, maybe opportunities that are out there? Is there a lot you're seeing that looks attractive right now? Can you talk about the pipeline there, and maybe what we should think about moving forward here that could be something you'd be looking to get into or to maybe look at?
Yes. We'll have some resources available to pursue on the acquisition side. One of my favorite thoughts is that it's easier to buy things that are for sale than things that aren't for sale. We can't control what comes for sale, we're constantly looking. I would say that as we get bigger, we get a little wiser, we're a little bit choosier as to the kinds of things we look at. We've learned some lessons, obviously. We know how to look for certain rocks that maybe we didn't look for quite as diligently before. I think we'll continue that track. I would expect we'll continue acquisitions. It's hard to predict timing, it's hard to predict quantity. I think it is something that the three companies we just talked about are three acquisitions we struggled with.
If we'd never done any acquisitions, we'd be about a $10 million company right now, which I remember when we were $4 million. We would've doubled in size. You guys wouldn't be sitting here right now. Acquisitions are part of what we do, and we'll continue to do it.
There's no particular aerospace, defense, in-flight entertainment. There's no area you'd identify that maybe you view more attractively than other areas, or maybe an area that's not as attractive to you?
I think in our major thrust of connectivity, I think with the Telefonix deal, we are very well positioned. It's hard for me to think of things that we absolutely need. One of the things we're careful about is we don't want to compete with our customers, even though we kind of do by supplying various competitors. There are occasionally opportunities where we might look at something that we get really close to competing, and we don't want to do that. I think we're well-positioned. I don't know if you guys would color that at all. If you think of in the airplane, like the electrical system, it touches pretty much almost everything in the airplane, not structures, not engines. Anything it touches, you could think of as kind of a lateral extension of things that we do.
It's hard to say, we tend to take a ground-up approach on acquisitions when we see it. Are there customers we can benefit from? Are there technologies that we can benefit from? Are there operational skill sets we can benefit from? We don't have a set formula that we use to go in and evaluate. It's more of a ground-up approach, and we'll continue to do that. Takes a lot of time.
Okay, just one final one. Obviously, when you complete the sale, if there isn't anything on the M&A front, would now, with where the stock is, fall into the bucket that Dave outlined as sort of an opportunistic time or disconnect that you might maybe look for some sort of acceleration on the buyback?
Ken, we keep pretty tight-lipped about that.
I got our board.
Clearly, I think our stock is low right now. Of course, I should say that, too, right? Typically, the way we exercise these in the past, if you go back to the last buyback program, is we'll set up a 10b5-1 plan with parameters in it, that we won't disclose what the parameters are. You guys can try to figure what those are. That's how we'll go about it.
I can tell you that I got our board on the phone Monday, to close or sign this deal on Tuesday. It was a 45-minute conversation, nobody brought that topic up. We'll get this closed, then we have a meeting in December. It's a regular part of our board review, it may change our calculus a little bit. That's not why we're doing it. We'll see what happens. Abhishek, got the mic?
Just contrary to the prior line of questioning about M&A, I would just say that the existing businesses need to be fixed before we could think about doing any other large M&A. Just my thought, because if you just look at 2015 to 2017, revenues are down $70 million, gross profits are down $50 million. Free cash flow year-to-date is down $70 million. There's just been a lot of deterioration in the existing businesses, which need to be fixed before we can think about doing more M&A.
The house needs to be fixed first. Just on that topic, there's very little discussion on how these metrics are going to improve going forward. We've heard about 2018, that's fine. Thinking about 2019, 2020, 2021, next two, three years, how management is getting incentivized, in terms of margin profile, return profile, free cash flow profile. Are these metrics linked to your incentives? When we look at the proxy, the comp came down, the options went up a lot. Look at the last three years, incentives and compensation for senior management has been flat to up while the performance has kept deteriorating. There's a big disconnect. Just interested in your thoughts on how you think about the next two, three years in terms of the financial outlook and how that's tied to how you guys are getting paid.
I guess we think that, or I think that we're on a really good track. I think the growth we're seeing this year is vindication of the approach we're taking to the market. That's a starting point for success, we're expecting more of the same in 2019. That's good. I think if we fix these three problems, we're going to end up with substantially improved margin profiles. That's why we're calling it out. We're basically putting our head in the noose to some extent, saying, "This is what we need to do." It's pretty easy to tell based on how we report results, to make sure that you guys see how that works. As for our compensation system, our system is formulaic, at the end of the day, it's discretionary.
I mean, basically, our comp committee, our board uses what they think is a reasonable judgment. We do some metrics and some comparisons. I think our feeling is that Well, let me see. The formulas are based on sales growth and profitability, primarily. Those are the two measures.
That would drive acquisitions. Why isn't there a margin of return?
Profitability is a margin measure. Pre-tax profitability, not after-tax. There is not a free cash flow measure.
Profitability is the one which they're going to do this way.
It's based on the margin percentage.
Yeah. It's margin percentage.
Not the dollar.
I think most deals. It's hard to make money doing an acquisition the way the accounting rules work, at least right away. It's usually a step backwards.
How much of it is formulaic versus discretionary? If you look at the last three years, there's a disconnect.
I don't feel like there is. We can talk about that. There's a couple of things you also need to keep in mind, and if you really want to dive into the compensation, I would suggest some comparisons. One of the things we've done is struggle to understand how we fit into the industry relative to competitors. We're pretty conservative, actually, I think on most measures when you look at it on a comparative basis.
Yeah. There can be a disconnect short-term if you don't The sales growth is based on a three-year average. The cash bonus is based on a three-year average. You could conceivably have a year where your sales went down, but the three-year average actually went up. It catches up with itself over time, right? If you continue to have lower sales, that part of the consideration generates a lower bonus.
Dave, are there any metrics on where you plan to spend free cash flow? It's almost breaking on this year. The free cash flow conversion to net income
Oh, I-
is 9% year to date.
I totally agree. If you look at the growth in receivables, which are all collectible, they happen to be under some agreements where the customer has longer terms to pay. Combined with a lot of our revenue was generated at the end of the quarter, it's going to flow out. I think we're going to generate $20 million in the fourth quarter to pay down, just fourth quarter alone. Inventory growth has been another area, too, that we got to get our hands around a little better. We're running into some situations where we have some long lead items. The electrical components, for example, are becoming a little bit problematic, so we tend to buy more in advance of where we used to be. I know you and I were talking about this a little while ago.
In terms of the supply of electrical components, just the lead time continues to grow. To respond to our customers, we need to have more stuff on hand. That's contributing to it a little bit. I wanted to add on to the equity comp, too. I think to add on to what Pete said about the equity comp, if you kind of do your own research and you look at the equity compensation of the Astronics officers, compare it to other businesses, you're going to see that it's fairly low. Did it increase last year? It did in response to the compensation committee looking at it and saying, "Wow, your equity comp is really low compared to other companies." Options by definition are performance. If the company doesn't do well, they go and then they expire. They have no value to them.
The biggest part of our equity compensation are options that are granted at market price. The market doesn't go up, they're worthless. You look at the Black-Scholes calculation, which is gibberish. It's a mathematician's calculation on what the value of an option is if it were traded on the market, which these aren't, and it's what the accounting rules tell us to use. You look at it and you go, okay, if all of these things happen that we build into the model, this is what it should be worth. All those things never happen. Sometimes the option exercises at a better value than what the Black-Scholes calculate that. Sometimes it expires worthless, though. That, by definition, is a performance-based grant in my mind. Others would disagree with that.
Thanks. Just two questions. If we can just look at the AeroSat business specifically, Pete, I think you said in a best case or an optimistic case, it could triple. The goal is to think of that business as getting towards breakeven by the end of next year. If everything were to go right, could that, and I think a breakeven is, call it, 2% margin, could that be a double-digit margin exiting that year if everything goes as it optimistically could?
Well, I suppose anything's possible. Double-digit for that business at the end of next year would be a stretch based on some of the other plans we've got going. The tail mount's the thing we talk about, there are other programs getting pretty substantial investment also that we're not yet talking about.
Is the key variable the success of the planes flying on the Intelsat business? How long a lead time, assuming the data comes back positive, how long do new customers have to look and study at that data before they say, "I'm ready to pull the trigger," or does that move pretty quickly? Thanks.
I don't think the holdup's going to be the customers. I think the holdup is Satcom Direct pulling the trigger and saying, "We're taking orders." I think the customers are there. They're ready. It's Satcom Direct who's got to turn it on.
Hi, Pete. Do you expect the penetration of power for the single-aisle aircraft to increase at a similar rate as in-flight connectivity penetration? Many analysts believe that in-flight connectivity penetration over the next 10 years could approach 75%. Do you think that the penetration for power, which I think you guys said was around 20% for single-aisle aircraft, do you think that could increase in parallel with in-flight connectivity?
I'll let Mark comment after I comment, but my opinion is the two go hand in hand. For the most part, customers don't want one without the other. There are some notable exceptions. There's this little airline in the U.S. called I can't, what is it called again? Oh, yeah, Southwest. Those guys do content and streaming content, but they have not put power on yet.
Yet.
Yet. Never say never. That's an exception. That hardly ever happens. Is there another example we can think of that's kind of like that?
No, not yet.
Stand up.
The only thing I would add is, potentially the low-cost carriers in the Asian market, we're not quite sure where they're going to go yet. They may end up going with a lower cost system, or they may not go with anything, or they may go full nose-to-tail. That's still to be played out.
We obviously think there's a nice match there, which is why we've accumulated the capabilities that we have.
Okay. Related to several of the previous questions, on the Satcom Direct partnership, you said that you expect a significant ramp in that product through the end of next year. How many of the larger business jets do you already have the supplemental type certificates now to install your system on out of the total addressable market of big business jet aircraft that the antenna can actually fit on?
I need some people here who aren't here, I think. I would tell you there are eight platforms that kind of matter. Most of them are Gulfstreams. There's some Dassaults and some Bombardiers. A couple Embraers maybe. I think we have STCs on probably half of them. These kinds of STCs are really fit and function STCs. They're not performance STCs. STCs don't really care whether the product works or not. All they care is whether it's safe. Once you have one, and you've got the DO-160 and all the environmental and testing done, EMI testing done, getting an STC for this kind of application isn't all that hard. Most of the airplanes, they have that radome up on the tail, and that radome is there for that purpose. You don't have to worry about center of gravity or flight dynamics or anything like that.
You just have to make sure it goes on.
Okay. Lastly, you obviously made a pretty large divestiture this morning, and you've referenced the three struggling aerospace divisions. If those businesses don't considerably improve, would they be candidates for divestiture as well?
Nobody's going to buy them. We like these three businesses. We think they bring important capabilities. We think they're going to be successful as part of our company. We've just got to get them there. That's our path. There will be backup plans of some sort and increasing severity if we can't execute the plans that we have in front of us. Selling them is, I was kind of joking, but not really. I mean, you just can't sell a business like that.
Pete, I wanted to thank you guys for hosting the meeting today, and Deb, because I know it's a lot of work to put something on like this. I thought the divestiture this morning was great news. Just to finish the thought, I guess, when we leave a meeting like this, coming up here and
The hope is that the guidance that you've given for next year is incorporated in your incentive comp plan one way or another. We haven't gotten to that point yet where the proxy for next year has been written. You're going to get $185 million in cash, minus whatever the taxes will be for that business. Yet there's no commitment really here today to buy back stock enthusiastically, although I think the stock is cheap. I heard Dave say he thinks it's inexpensive. I guess, sort of my feeling is, and again, I don't know why you'd need a 10b5-1 plan to buy back stock here. I don't know why you just wouldn't commit to making I don't know how companies do it for the most part when their stock's inexpensive, going to the market and buying shares.
It seems like what's lacking a little bit today is the conviction that the shares are undervalued given what you have told us today are your plans for next year. Whether that has to do with the incentive comp plan or potential share repurchase. Those are the kinds of things that, as I leave here, and I have a long drive home, those are the things that'll be top of mind.
Okay. I think the stock is cheap. Let me be clear. I think we've got really good opportunities, and the stock's trading at a one-year low. I don't, you know
Your peers are
Yeah. I think the big knock is the margin pressure. We're showing strong growth. If we're predicting 5%-10% growth organically next year, that's on the high end of what most people would expect. I think absent these three problems, our margin profile is just about as good as anybody's. There are some people that have fundamentally different business models in this space. We're not doing that. I think it's close enough to touch. We just got to do it.
Just a question. In CCC, just so I'm clear, the potential for sales to double, is that predicated on this one program getting out of product development, or is there something else going on there?
There is something else going on there. CCC is in what we call the VVIP market. The VVIP market is turning around from a really slow period brought about by international geopolitical crises, primarily in the Middle East, where a disproportionate percentage of the buyers of these kinds of airplanes live. Oil prices being cheap. The life cycle of popular platforms for VVIP conversions. 737 was waiting for the MAX, A320 was waiting for the NEO, A350 wasn't out yet, 777X isn't out yet. What am I missing? 787 is not a popular platform because it's largely a carbon fiber airplane, and most shops, completion centers, are reluctant to do the kinds of things you need to do to a transport to convert it into a VVIP airplane with that kind of structure. All those airplanes are coming available now.
The geopolitical thing is still problematic in certain parts of the world, but it's relatively stable. Oil prices are up a little bit. All of a sudden, the demand picture seems to be changing. It's a combination of the revenue associated with the development program, which we think will be meaningful, but also these other developments kind of working themselves out. The other thing that I will draw attention to is the competitive landscape has changed in such a way that we think it's to our favor. We basically have two competitors. One of them is a combination or a joint venture between Lufthansa Technik and Panasonic, a company called IDAIR, and it appears that those companies are losing some interest in that segment, in that venture. Rockwell Collins is the other competitor that we have in this space.
Rockwell Collins, as part of its planned sale to United Technologies, is restructuring and reorganizing their business and actually physically moving this particular business in such a way that our experience is that tends to be disruptive to an operation. If I want to think optimistically, we get this program done, the market continues to turn around, and we're focused on it, and competitors may be a little bit less so, and it could actually turn into a pretty good business for us.
Yeah. The system that's in development also is the basis of the latest technology available out there for that kind of system. We'll have a whole new, highly competitive system.
That's code for a really quick background for data transmission.
Just one follow-up, maybe for Dave. The PSU chart that was put up under lighting, I think it had like $250,000 of content. Would that flow into on the end product line? Is that through lighting or through structure?
The PSU is through lighting and safety.
Not through structures at all.
No
even though part of it is coming from
No. The structures are just fuel access doors for the most part.
Okay.
Are the biggest part of the structures.
Okay. Thank you.
I just wanted to add something real quick on your question on the STCs, because Pete threw out a lifeline. What does that show? "Who Wants to Be a Millionaire" or whatever. The Gulfstream G4, Dassault Falcon 7X, and there's multiple other STCs in work. Plus, in that market, you can do field approvals. Once you have a radome and an antenna combination, you can have the DERs at the MROs. Keep in mind, in that market, a lot of times, with Satcom Direct with their distributor network, that's where those guys, like executive jets, that's where they like to make some of their piece of that pie, is getting their DERs involved and doing field approval. I think that's much different, a much faster turn than on a transport category.
Hey, would you ever consider breaking out the orders and backlogs for CSC and AeroSat just so investors have a better indication of when those businesses are starting to turn around?
Maybe. We can talk to it. That clearly is one of the indicators that we will be monitoring and talking to.
Yeah, we actually do have orders for the tail mount antenna in what I call starter quantities.
Yeah.
A few questions. Just the $39 million of losses from those three businesses year to date, is that including the amortization, or that's the charges plus the underlying-
Yeah, that includes their operating loss, excluding the goodwill write-down that we had for Armstrong in the fourth quarter of last year, which is a separate block on that chart.
Right. You had the $39 million year to date for 2018.
Oh, for 2018?
Yeah. Does that include amortization or not?
Yes.
Okay. I think you said on the last call, assuming you don't have anything further in Q4, we got $39 million of operating losses from those three businesses for the year, I think you said on the Q3 call, that's against $50 million of revenues?
Ballpark.
Ballpark. If we take the $675 million or whatever for the year of aerospace revenue, back out the $50 million, that's $625 million, the remaining businesses are going to generate whatever our estimates are of operating profit. That gets us to some sort of mid-teen margin, I'm assuming, is what you're saying.
Yep.
Right. It was 16% for Q3. To John's question earlier, now, you said the $50 million of revenue from those three businesses could double in 2019, right?
Roughly.
Right. You gave us guidance for aerospace for 2019 as a whole. We can back $100 or $90 or something out of that. The question is, the growth in the core, what kind of incremental margin is just going to occur on that? Forget minimizing losses. I'm just saying, if you can grow that core business, what's the incremental margin on that?
Yeah. It's going to be netted down for the tariff. Typically, we've seen, in recent years, 30%-40% incremental margins, assuming we have no increase in our fixed costs, assuming we have no increase in our engineering and development costs. I would expect, absent the $10 million tariff cost, we should see margins improve by a couple percentage points for the year. They're going to be netted back down by that $10 million that we've built into the budget for the tariffs. Again, keep in mind, for next year, the trajectory of the year, we expect this first quarter to be our weakest, and grow as sales grow equally, peaking in the fourth quarter. I think the fourth quarter, if things come out the way we think they will, is going to be our best quarter next year.
Unfortunately, that's kind of the way things are going the last few years. Seems to be heavily weighted toward third and fourth quarter results for some reason. A lot of that's going to be driven by the, we expect the tail mount to grow as the year goes on, which is going to be a big driver in the revenue.
That $10 million all incremental, or did you see some of it back this year?
There was some this year. I don't remember how much. Was it like a couple $ million or something? I thought they had microphones. The question was.
Yeah.
Was there any tariff costs this year? We're guessing about $2 million, mid-year on.
The incremental is eight, not 10.
Incremental would be eight, yeah.
10 this year.
Yeah.
This year. Yeah. Okay. Moving to test, $80 million-$90 million of revenues today in semi-test comes back at 65% of that, the margins are going to go from low double digits to, I'm assuming when you say contract manufacture, that's like a 4% or 5% margin business probably?
Probably net. Yeah.
Okay.
It'll depend on volume, so it'll vary.
Right. You're going to have probably $150 million, $155 million of net proceeds that you'll pay down 4% debt, is what you said?
The net proceeds will probably be closer to $130 million, but we'll pay down at 4% is our current interest rate. Yeah.
Okay. All right. When I do that math, then, if you got $90 million of revenue, you're losing $9 million-$10 million of EBIT, and you're getting back $3 million-$4 million of EBIT on the manufacturing, and then you're paying down another $4 million, $5 million, or $6 million of interest expense you save. It seems like it's kind of a wash. Am I doing the math right in terms of operating profit?
Yeah. To Pete's point, if we see really high volumes next year, it'll be more profitable because it's going to eat into more of our fixed overhead. At the lower volumes, your numbers were probably in the ballpark of where that delta would be. It's tough to say because of the way the contract manufacturing is going to be. If we do $30 million or $50 million or $100 million with the customer, it changes things a lot.
That range is possible.
Yeah.
More.
Just going back to Satcom Direct. The big player in the large business jet antenna market or connectivity market has been Honeywell and the GX, right? They've got about 400 aircraft in the market today. Out of those 400, do you have any idea how many Satcom Direct kind of controlled the path to market on?
That's a good question. I don't know. I don't know the answer to that. Satcom Direct, for those who don't know, is a value-added reseller of that system. Yeah. I don't know. I don't know the answer.
Influential, though? Is that the right way to think about that relationship?
I just don't know enough to comment on the relationship. I know that the Honeywell Inmarsat arrangement is of an indefinite nature in terms of long-term treatment, and I guess our feeling is that Satcom Direct certainly knows the market as well as anybody, and they're pretty excited about this plan we've put together. However the puts and takes are with their arrangement with Honeywell, I don't know much about that.
Okay, just the last thing. As it relates to Panasonic and their decision to go away from Intelsat to Inmarsat, what are the opportunities that opens up just from a hardware standpoint?
I don't know if we know enough to talk about that. Panasonic has been a Ku connectivity provider, their interest with Inmarsat is definitely Ka. What that shifts or signals in terms of where they're taking their business is hard for us to say. We certainly know Panasonic pretty well, and they know what we're capable of pretty well. If they're interested, we'd be happy to talk to them. At this point, we don't know much about what that Inmarsat arrangement that they've struck up, what, if anything, it means for us.
Would Honeywell still be exclusive with Panasonic?
Mike wants to talk.
Yeah. I think that arrangement is coming to its kind of logical conclusion, right? The Honeywell Inmarsat. I think Pete mentioned earlier that chart, what those customers want to get into and what they're trying to get out of, and we've been working closely with both Inmarsat and Panasonic. Panasonic's obviously a big customer to many of the Astronics division. I look at that as a very positive development, because we have relationships with both of those people, and they're both looking to kind of get out of one area of the business that happens to be one that we're very focused on.
Maybe one answer to your question is, it's not obvious to us that Honeywell has rights to supply hardware to Inmarsat and Panasonic, if that's what you're talking about. We don't believe that's the case, but we don't know.
Thank you.
I know we're still in 2018, and you gave revenue guidance for 2019, which is great. I'm going to go one more year out, which you're probably not going to want to commit to. As you described the three struggling businesses, they're early in this ramp in a lot of the programs that they're involved in. It seemed like their growth prospects go out many years. Is that a fair characterization? I mean, I'm not saying they're going to double again in 2020. Their ability to add incremental revenue in 2020 and 2021, it seemed like those businesses are very early in a lot of the programs that they're developing.
Let me answer it this way. The CCC on the VVIP side, that is not an unlimited market. Their ability to grow will be constrained by the market pretty quickly. It's maybe a $50 million, $60 million, $70 million market worldwide. Their ability to grow long term will depend on extending their market into large business jets, which is a possibility. Not something that we're actively Well, we always have an interest, it's not something that we're knocking real hard on right now. That's what their constraint will be. I'd say AeroSat, the connectivity world is going to continue to evolve and get bigger and bigger. They have more of a market opportunity in terms of those three. Armstrong is pretty narrowly focused on a certain skill set in terms of STCs.
What we want them to do, first and foremost, is develop and execute the organizational competence they need to be successful on a reliable basis. That's the first priority for them.
How about the core? Is the core, where would you say, what inning are we in terms of the core, the remaining call it $625 million of revenues this year? Where are we in that cycle?
For all of Astronics?
Yeah. Well, everything else. I'm just saying, again, if you're saying 6-11, was it 6%-11% growth in 2019, is that a lofty goal as we look out in further years, or is that something that you think is some sort of achievable mid-single digit, high single-digit revenue growth as kind of a bogey for longer term?
I guess I think we've got excellent growth prospects for the foreseeable horizon. We're kind of in a sweet spot of an area that the cycle's extending and good from our perspective. Rising tide raises all ships, but even within that rising tide, we're not making landing gear or something where you put it once on an airplane. It's one of these things where you put it on an airplane, and the technology continues to evolve and, even though what you can do on an airplane today in terms of connectivity is really cool compared to what you could do five years ago, and very effective, it's inadequate when you compare it to what is happening on terra firma. We think there will be continuing pressure for that market to evolve, and the hardware is integral to that. You can't improve it without improving the hardware.
I guess we feel like we're in the right place in this growing market. We should easily exceed market growth for the aerospace industry indefinitely.