Deborah K. Pawlowski - Peter J. Gundermann - Chief Executive Officer, President, Director and President of Luminescent Systems Inc David C. Burney - Chief Financial Officer, Executive Vice President of Finance and Secretary.

Richard A. Ryan - Dougherty & Company LLC, Research Division Tyler Hojo - Sidoti & Company, Inc. Kenneth Herbert - Canaccord Genuity, Research Division Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division J. B. Groh - D.A. Davidson & Co., Research Division Josh Goldberg - G2 Investment Partners Management LLC.

Greetings, and welcome to the Astronics Corporation Fourth Quarter Full Year 2014 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Deb Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin..

Thanks, Melissa, [indiscernible] everyone. We certainly appreciate your time and interest in Astronics. On the call today is Peter Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Pete is going to cover the results of the quarter and the year and then we will open up the call for questions and answers.

You should have the news release that went out this morning. It's also available on our website at www.astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and Q&A portion of this teleconference.

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

These documents can be found in our website or at sec.gov. So with that, I'll turn it over to Pete.

Peter?.

Thanks, Deb, and good morning, everybody. Thanks for turning in to our call.

We're going to follow the agenda of reviewing first our fourth quarter results, which we thought were a good strong close to the year and then we will spend a few moments talking about 2014 final results as the year has passed and then we will set the stage with our initial expectations for 2015. So our headlines for the quarter.

We had strong fourth quarter sales of $166 million, up 57% over the fourth quarter of 2013. While that wasn't a record, it was our third strongest quarter ever only after the second quarter and the third quarter. We did, however,have record net income in the fourth quarter of $18.4 million, that is 11.1% of sales.

There were a number of things moving in our financials. We'll talk about them in some detail in a minute. But one highlight that's definitely worth mentioning in the fourth quarter was our bookings of $235 million, up 50% from our previous record, which happened to be the previous quarter, the third quarter of 2014.

So we closed the year with pretty strong financial results but really strong bookings, which sets up a solid 2015. Our headlines for the year 2014. Sales reached $661 million, up 94.5% from 2013. Net income reached $56.2 million, up 106% over 2013.

And even with that, that's after some pretty heavy acquisition-related expenses including $19 million of fair market value step-up for inventory. Our earnings per diluted share, again as a headline for 2014, even after those inventory expenses was $2.48, up 100% over what we did in 2013. Diving into the quarter in a little bit more detail.

Revenue again I said was strong at $166 million and our third highest ever. Organic growth during the quarter was 16-plus percent -- 16.1%. Acquisitions added the remainder of the growth $43 million from acquisitions and $17 million organically. Our bottom line was similarly positively impacted.

Record income, as I said of $18.4 million, 11.1% of sales, that's well above our 2-year average of 8.3% of sales. So bottom line was really strong at 11.1%. Producing earnings per diluted share of $0.81, up from $0.29 in the fourth quarter of 2013.

There were a number of things moving, as I said, kind of underneath the financials, and it's worth talking about them a little bit to provide some context. In the fourth quarter, our fair market value inventory step-up expense was relatively light compared to what we saw in the first 3 quarters of the year.

It was only $800,000 over the course of the year, for comparison, it was $19.4 million. So what that means is that basically for the acquisitions that we did in 2013 and early 2014, we're basically through that inventory step-up expense.

During the fourth quarter, we wrote off $1.3 million in assets for the postponement, I guess, is the right word, for the Lear 85 program that we've been working on for a while. Bombardier announced they were putting the program on hold.

And following their cue and a number of other suppliers that we're in contact with, we wrote down the assets that are dedicated to that program. There are certain other assets that we'll be able to use elsewhere in due course, but the value $1.3 million were assets that were pretty much dedicated to the Lear 85 at this program -- at this point.

There were some things that helped our financials in the quarter. One was a $3.4 million reduction in taxes due to the passing[ph] of the R&D tax credit, which includes recognition of R&D credits from prior years as those years were settled. We expect for looking forward the normal rate for taxes in 2015 to be in the 31% to 33% range.

So the fourth quarter was abnormally low. We also got a benefit in the fourth quarter due to the write down of $4.5 million in a fair -- in value of a contingent consideration liability related to some of our recent acquisitions.

Some of our acquisitions had earn-out elements to them and those elements are due to certain revenue targets and, in sum, those revenue targets at this point, we feel, are not likely to result in the earn-out payments that we originally considered or originally expected.

So that actually helps us in the short term by reducing the liability, in this case, $4.5 million in the fourth quarter. Our E&D expenses in the fourth quarter were $19.7 million, that's 11.9% of sales.

That continues a trend that we've been talking about for a few quarters now where while our historical percentage of E&D expense was substantially higher, somewhere in the 15% to 18% range. Through most of 2014, it dropped down to 11%, 12% and that's what we're expecting going forward for the foreseeable future.

We expect we're going to hang in that 11% to 12% range. And again, just to drive it home our fourth quarter bookings were very good at $235 million, well eclipsing our previous record in the previous quarter of $154 million. And looking at our segments with respect to bookings in the quarter.

Aerospace was $131 million, which was our second highest ever and our Test segment had bookings of $105 million, which is clearly and easily a new record for our Test segment. That means with our backlog for the -- at the end of the quarter was $371 million. That's again a new record and puts us in really good position going into 2015.

So moving from the quarter to the year. Revenue again ended up at $661 million, up 95% from 2013. Organic growth over the course of the year was just shy of 15%, which we feel is pretty solid. GAAP net income was $56.2 million, up 106% from 2013, 8.5% of sales, $2.28 per diluted share.

Looking beneath the numbers a little bit, again, our fair market value of inventory write-up expense was $19.4 million. That pretty much does it for all the acquisitions we did up through February of 2014.

We announced the acquisition of Armstrong Aerospace in early 2015 and there will be some fair market value expense associated with that acquisition, but it's a little premature at this point to predict what that's going to be. So we'll have to talk to that more clearly in future calls.

Our engineering and development expense for the entire year 2014 was $76.7 million, that's again 11.6% of sales. We think that 11%, 12% number, for those of you inclined to make models, is a reasonable projection going forward here relative to what it's been over the last few years when it was substantially higher.

2014 bookings were strong at $675 million, that's slightly more than our shipment level and backlog again at the end of the year was $371 million compared to $214 million at the end of 2013. Going into our segments briefly. Our Aerospace continues to be our largest segment at 75% of total. Revenue in 2014 was $495 million, up 50% from 2013.

Operating profit was just shy of $80 million or 16% of revenues. It's always interesting for me to look at how our markets and products are evolving, so I'll spend a little bit of time on that. Definitely worth noting that we are primarily a commercial transport supplier. At this point, 60% of our total sales going to Commercial Transports.

Military and Business Jets are relatively light at 6.5% and 5.9%. When you look at our product lines, Electrical Power & Motion was up to $254 million, that's an increase of 35% over last year and about 38% of our total revenues. Our Lighting and Safety products reached $148 million in revenue. That was an increase of 45% and making up 22% of total.

And our smaller Avionics product line was $58 million, up 200% and 9% of our total sales. We, at the end of the year, are willing and able to identify a couple of major customers in our Aerospace segment. These are significant customers as defined by the SEC.

Panasonic was our biggest Aerospace customer at $117 million, 17.8% of total sales and volume was #2 at $93 million, that's 14.1% of sales. Moving to our Test Systems segment. Revenues for our Test Systems segment reached $167 million, that's up from $10 million in 2013.

I didn't bother to calculate that percentage increase, but it's very large and is due primarily to the acquisition of our EADS Test business -- or Test business from EADS, I should say, in Irvine, California. Our Test business reached 25% of our consolidated sales.

GAAP accounting shows operating profit of 7.4%, but in considering that 7.4%, one has to remember the inventory flush, which lowered operating margins by just shy of $17 million in that segment.

The backlog at year end for the Test business was $147 million and we have one significant customer in that segment per SEC definitions, which is, as it happens, Apple Computer. Our 2014 revenues to Apple was $118 million, about 17.9% of total. Our balance sheet at the end of the year, we feel, is pretty healthy.

Cash of $22 million, total debt of $183 million, which is down from $200 million at the beginning of the year. Net debt canceling out cash of $161 million at the end of the year versus $146 million at the beginning of the year.

Cash from operations has been pretty strong at $100 million and with that, we were able to pay down about $78 million in principal from our debt facilities. Looking forward into 2015, our beginning backlog, as mentioned a couple of times now, is $371 million going into the year. That's a new record.

We are establishing initial revenue guidance at this point taking into account the acquisition in January of Armstrong Aerospace to be somewhere in the range of $680 million to $740 million. That would suggest a midpoint sales increase somewhere in the neighborhood of 7.5%, but obviously quite a wide range at this point, so early in a year.

We are expecting at this point Aerospace to be somewhere in the $550 million to $580 million range and our Test Systems segment to be in the $130 million to $160 million range.

And in terms of weighting, we expect the second and third quarter of 2015 to be the stronger quarters and we expect the first quarter and the fourth quarter to be a little bit lighter and that's just based on customer demand as we understand it at this point.

I guess my final comment, just on in terms of looking back at 2014, it was obviously a watershed year for the company. It was a lot of things going right in the right direction and I guess I'd like to take this opportunity to thank the crew that we have here at Astronics who achieved these results.

I get to talk about it, but we've got some 2,300 people who made it all happen and it's not one of those years that comes along every year, but it's sure fun when it does. And we feel that we've established great momentum closing out 2014. We're going to carry that into 2015 and we'll see where it takes us.

So I think that's the end of my prepared remarks. So Melissa, let's open it up for questions..

[Operator Instructions] Our first question comes from the line of Dick Ryan with Dougherty & Company..

You mentioned Apple is the customer on the Test side of the $157-odd million that you did.

What percent was that and from total would they be north of 20% or am I calculating that wrong?.

You got it a little bit wrong. They were $118 million for the year, so just under 18% of total..

Okay.

And maybe the follow-on order that you announced after year end, I'm assuming would tie in to their demands for 2015 and is that the reason why Q2, Q3 are more heavily weighted?.

Those are reasonable assumptions, yes..

Good. Just a question on the gross margin side, a little lower than we're expecting.

Obviously volume on the Test side being down from September would appear to be the primary reason, anything else in the overhead side of the calculation that we should be paying attention to?.

No, I think that certainly the reduction in volume was part of it. Part of it also was some mix changes. We have some products and some companies where we are investing more than in others. So those companies have big quarters, sometimes the profit doesn't come through quite the same way.

But I wouldn't at this point suggest that there's a material change going on in the business. I think it's just one of those quarter-to-quarter fluctuations that happens..

Okay. Just a couple more from me.

In-seat power, do you happen to know what the organic growth, or are you willing to offer that up for the quarter?.

I don't think we pulled back together for this quarter and once Dave, if you got it handy?.

No. We just have it for the product line..

Okay.

And the reversal on the earn outs, is that more heavily weighted to AeroSat? I know you have some STC issues early in the year and maybe expand on what's your expectations are for AeroSat going into 2015?.

We're expecting continued development at AeroSat. AeroSat, as you said, did make good progress with STCs and is continuing to get opportunities where there are STC challenges. But we also had an earn-out element as part of our deal with the acquisition of PGA in France. So it was really a combination of those 2.

As you know, you've got to test your expectations as the future becomes clearer and we think that given what we understand today that, that reversal was appropriate. So that's something we would expect to repeat going forward in 2015. Dave, I don't know if you want to correct me on this at all.

But I think we view it more as a one-time correction in our assumed liabilities there..

And one correction on your statement. The other earn-out was on Ballard, not PGA..

So sorry..

Okay. So when you look at AeroSat, obviously, you had the anchor customer there. We've seen Intelsat push out their high throughput satellite launches is just a little bit into 2016.

Can you talk a little bit about your R&D spend versus where you might be taking the technology from your current Ku antenna?.

Sure. I guess qualitatively, I would say a few things. It's certainly one of the quivers in our arsenal, so to speak. And revenue wise, AeroSat got up to the $30 million range this year, which is a big increase over where they were last year, and that was definitely a positive development.

I think it's safe to say that we see opportunities there both in terms of technology and in terms of market. So some opportunities to take tried and true -- relatively tried and true technology into new markets and some opportunities to develop new technologies.

And as you know, this continues to be a rapidly evolving and I don't know -- a market in product area that, I guess, we would say is in its relative infancy.

So we're a little cautious about talking specifically about where we see the technology going, but we are definitely obviously monitoring and interested in it and I think as we get a little further down the road, we may clarify for you some of the things we're doing.

But we certainly don't view it as some kind of margin play at this point or some kind of business that where you milk it for a lot of money. This is an investment business and this is one that we think we have some pretty good growth potentials in..

How is your performance on the deployed Ku antennas up to this point?.

We think we're doing pretty well..

Our next question comes from the line of Tyler Hojo with Sidoti & Company..

Just on, I guess a follow-up to the last question.

What was the break down in electrical power between Cabin Electronics and Airframe Power, either for the quarter or the year?.

That's the question Dick was asking. I don't think we have with us today, Tyler. But I'd say it is the third thing in that product grouping that you can't forget about which is motion. So it's both what we used to call Cabin Electronics and Airframe Power and motion primarily out of our French company.

So it's a combination of all 3 of those things and I don't think we have the breakdown with us today. My apologies..

It's okay, but is that something you're going to continue providing on a go-forward basis?.

We can. We try to -- as our company grows and as our business product lines, which we feel have some synergy and some rational fit that may be different than our historical divisions as that all evolves we've tried to look for different areas where we can be both communicative and meaningful. So I'm not sure we're going to break it out forever.

But I know we have been in that habit and I know that obviously people are looking for that number. So we'll try to remember to do that next quarter..

Okay, sounds good. Maybe just to kind of attack the question a different way, for 2014, for Commercial Transport sales, I think organically, your volumes were up just shy of 30% year-over-year.

When we look into 2015 and kind of the guidance that you provided, is the expectation for kind of a comparable growth rate in 2015?.

It's a very good question. We look at our -- the growth rates we've been achieving and some of our products are relatively easy to predict because they go on new airplanes and it's relatively easy to figure out what our ship set content is and what the OEMs production plans are.

It's a simple multiplication exercise to figure out what our revenues going to be. But as we get bigger and as we get more complicated, there's a higher percentage of our revenues that are aftermarket-oriented and those are relatively difficult to predict.

So I think historically, we've tended to be pretty conservative in those estimations and I think frankly, today, we continue to be pretty conservative. I can tell you qualitatively, as we look around the company, the market forces and the opportunities that have brought us where we are don't seem to be showing any signs of tiring at this point.

In fact, they'd show signs of accelerating. So we are definitely still in a mode that's as positive as it's been over the last couple of years. So I think it is a little bit of a guessing man's game about where the growth is going to finally come in, and we will do as we always have done.

At the end of each quarter, we'll give you our best estimate of where we've been and where we're going and we will revise it accordingly. But as of today, we think we've put a range in that's reasonable.

If this year, 2015, works like it has in the previous years, there's a chance that we will end up loosening up that revenue forecast as the year progresses. That's been our pattern. So hopefully that will be our pattern again..

Okay, that makes sense. And just a follow on to that last question. Any sort of update, Pete, just in regards to the litigation? I think there was an expectation for a ruling some time around now..

Yes. Well, there has been some -- a ruling in Germany of about in the last month or so, which was -- I would say, as we expected.

It was a -- this has been -- something that's been going on for a couple of years and the ruling by a lower court basically followed German law pretty faithfully and essentially ruled against us based on the data that it was considering. We think we're going to appeal it to a higher court.

Our opponent here is going to appeal it to a higher court, we believe, at the same time, and we think that higher court will take another 1 to 2 years to resolve itself and we continue to have a general feeling that the situation here is highly unique on a specific German patent, which is different from patents elsewhere and German law, which has some interesting points, which are different than, say, U.S.

patent law for sure. So -- and we would, I guess, we're of the opinion that the invention in question isn't all that critical to our system anyway. So we're not quite sure what it's all about, but we will continue to prosecute it and we report back when things are meaningful.

But at this point, I would say, that there was the decision in January but it's going to be appealed on both sides and it will be another year or two to get it figured out..

Okay and the same goes for the U.S. litigation, I know it's kind of attached..

Yes. Well, they're not formally attached. It's a similar issue, but again it's moving this issue into a U.S. -- a different domain, so to speak, where there's different laws and different patents and we think quite favorable to us, actually. So we'd prefer not to spend the money and go through the exercise, but if we have to, we have to, so we will..

Yes, got it. Okay. Just one last one on Test. Nice to finally hear who that customer is. But just a kind of clarification on the guidance, so you're lifting the guidance range for Test, following the order that you got, I think, was for close to $90 million.

What's the rationale for that? Is there an opportunity for kind of a plus-up with Apple or are you making additional attraction with additional customers?.

Well, I guess I'd say both. We acquired the Irvine operation in February and we folded our Orlando operation into Irvine. And as a bit of an aside, you didn't ask this question, but I think it's pretty obvious, you're looking at the numbers. That group did a wonderful job.

It was a real tough challenge put down by some of our big customers and the group performed excellently, very well. And we faced some tough issues. We still are facing some tough issues in some of our core markets.

But I would say that we've executed on the opportunities that we've been given across our customer base very well and that in turn, if you -- like in most businesses, if you execute pretty well, you tend to get other opportunity.

So we think there are other opportunities, both within our current customer base and beyond it a little bit and we think the opportunities are real enough to justify that revenue expectation.

So yes, we think it's a beginning of a title change, in part because of some generic market trends and in part because I think we've got some really good capabilities and we've shown that we can apply it and I think our customers are starting to respond positively to that.

So you look at the -- I don't have these numbers in front of me but those 2 businesses, if they were together in 2013, would've done somewhere in the neighborhood of maybe $70 million, $75 million in revenue and they essentially doubled that in 2015. That's not an easy thing to do.

And that exercise is kind of all organic and they've done it and not only done it, but done it in such a way that the customers recognize it and the customers appreciate it, too..

Our next question comes from the line of Ken Herbert with Canaccord Genuity..

Peter, I just wanted to first, again, on the Test Systems business, when I back out, give or take, the $17 million in the accounting charge, margins 17.5% in that business for the full year, are you confident in the new contract that you can sustain these margins in '15 in the Test business? Or how should we think about sort of directionally margins there or anything specific under the follow-on contract that you can comment in terms of margins relative to the initial contract?.

Well, obviously there's a lot of things that go into the profitability of a business. You might recall that we've had a force reduction in that operation at the same time all these results were being accumulated, and we took some expenses for that.

And we think we're going to continue to face a pretty tough market, and we think we're going to continue to face a pretty competitive market. So there will be some pressure there, I'd predict.

But I think that given the fair market value and inventory flush that we went through, when it comes down to bottom line reporting, we ought to continue to be in pretty good shape as a business through 2015 anyway..

Okay. That's helpful.

And specifically, is there anything you can say under the new -- under the follow on contract, or is it -- did you give up pricing on that at all? Or do you feel good about your ability with Apple to maintain margins or under this contract to maintain margins?.

There were definitely some different terms and conditions, that's safe to say. But I think, we feel like we've had a really good first year with them. I think that they appreciate the kind of work that we did -- that we do and that we did.

And I think that if things go correctly, there may be opportunities where we can expand our work base with them over time. We've shown that we can do, like any customer, you start doing one thing first and if that works well, then you can expand it beyond.

And I think what we're focused on is continuing doing a good job with the work we've been given and I think the fact that we got more of it is certainly a big compliment, otherwise we wouldn't have gotten it. And I think we're looking at what else we might be able to do to help this customer solve problems.

And I think that's the thing that we're focused on going forward. So we're happy with where we are right now, and we'll see where we end up next year..

Okay, that's helpful. And if I could then on the Aerospace -- within the Aerospace segment, have you seen just in the last few months or since you talked last publicly with what's happened to fuel prices.

Have you seen your conversations at all change either with Panasonic or Boeing or more importantly with some of your airline customers about maybe their budgets or desire to maybe look at any change in their retrofit or modification spending plans for this year. I mean, it seems -- it continue to be a strong market for you.

I'm just wondering if you've seen any inflection over the last few months about -- within this market in particular, as airlines are now seemingly generating greater profits with lower fuel..

No, I can't tell you that we've seen any change that we can attribute that specific issue. Obviously, anything that makes airlines more profitable tends to be good for us. So we're happy to see that.

But in our little area, little corners of the market, I think we're being driven by forces which are quite a bit different than the price of fuel at this point. So I can't attribute anything to that change..

Okay. And then just finally, just a bigger picture, you've talked about sort of a reset of the -- of your engineering spend on sort of a go-forward basis now to 11%, 12% of sales.

Is this a reflection of just as the company matures and maybe some of your particular products mature their life cycle? Or does this at all reflect maybe a smaller pool of opportunities to invest in? Or is there anything you'd comment bigger picture around directionally sort of the reset in the engineering spend?.

That's a good question and I don't know if I have a real convicted answer for you. But my observation, it's not a reduction in opportunities. I mean it doesn't help on things like did Lear 85 get canceled and that happens occasionally I guess. But I would say, we continue to see a wide range of opportunities.

In fact in quite a few situations, our inability to spend more is more driven by a lack of resources in terms of people to do the work than finding opportunities that we would ideally like to pursue. So it's a combination of forces.

I think the biggest factor probably mostly has to do with the acquired businesses, which are used to operating in a certain way and though some of them we've had for a year or plus now, they're still operating kind of the way they did. So they fundamentally worked at a different level of investment than what some of our other businesses do.

So over time, this could change a little bit, but we think it's important to keep our investment in check.

We think it's important to make profits obviously and so the investment is driven by the size of the opportunity that we see and the best I can tell you is that for now, a year going forward, we think we're going to be in that 11%, 12% range and if it changes, I'll be sure to talk about it..

Okay, now that's helpful.

And then just finally, you mentioned Lear 85, just the charge you took in the quarter, does that represent a sort of a complete write-down on that? Or if they do eventually officially cancel the program, is there may be another shoe to drop?.

I think it's the vast majority of it, Dave, there might be a little bit left, right?.

It was combination of some inventory and some specific tooling and fixed assets that would only be utilized on that program and had no other use. So that's it for that program. As you know, we don't defer or capitalize any of our development costs there, so that was our exposure to that program..

Yes, I think the finer answer though that I might give is that there are some things that we have bought for that program that we can use elsewhere, but realistically we probably wouldn't have bought at this point if we knew the Lear program wasn't going to happen.

So over time, those things will or won't be used somewhere else and I guess it could be -- it's probably is a relatively small number but there might be some of that kind of inventory on our books now..

Our next question comes from Kevin Ciabattoni with KeyBank Capital Markets..

Similar vein to the last question, was asking about the Lear 85 and kind of what was left there.

I guess looking at the contingency reserve in the quarter, the reserve release, what's left there in terms of earn-outs that -- or was that pretty much a cumulative release based on kind of where we are today?.

Yes. The remaining -- the earn-out liability is about $1.5 million, $1.5 million to $2 million..

Okay, great. I think you talked a little bit about fuel prices not having an impact.

Are you guys I mean, qualitatively speaking seeing any shift in customer behavior in In-Seat Power in terms of kind of what you're shipping OE versus retrofit, narrow versus wide body or has that been pretty steady?.

Well, the terms that have been driving us continue to drive is and no doubt about it. There continues to be widespread adoption in the wide body world from nose to tail across all seat classes. And the narrow body world is definitely picking up.

It continues to accelerate and it's accelerating around the world interestingly enough, maybe not so much in Europe but certainly, South America and Asia as along with the U.S. So we're seeing pretty strong interest, pretty strong demand and we -- it continues to be an exciting part of our business for sure..

Thanks, Pete.

Looking at the Armstrong acquisition, I mean, it seems like there could be the potential for some sales synergies there and I'm just wondering if you can give any color on that and kind of potential integration plans for Armstrong?.

That's a little bit of a work in process. But yes, you're right. Armstrong brings the capability and the talent that we have not had before.

We've always viewed ourselves primarily as equipment designers and manufacturers and the equipment finds its way onto airplanes, but that's not something that we have traditionally been directly involved in to a large degree and that's much more Armstrong's expertise, Armstrong's capability.

So it's one of those kind of unmet needs that we think has an interesting opportunity for integration kind of across our business. So that's something that we're working on. I mean, we think Armstrong in and of itself was a very nice business, brings a nice capability, brings a nice -- another touch point to our customer base, which will benefit us.

But the idea here, more than many of our acquisitions is that there might be some way to take 1 plus 1 and make it equal more than 2.

So it's a little premature to talk about that really specifically at this point, but we are doing the things that we normally do subsequent to an acquisition trying to develop organizational familiarity and bringing the management team at Armstrong, introducing them to all the kind of far corners of our company as it stands.

And as we develop those plans, we'll talk more specifically about them. But yes, I think it's an interesting complementary skill set that we've picked up here..

And then last 1 just more of a housekeeping question in terms of the model, I guess probably for Dave. Interest expense in the quarter was down pretty significantly sequentially.

I'm just kind of wondering what thoughts are there for 2015?.

There are 2 drivers to that. One, the outstanding debt was lower compared to prior periods and the actual interest rate that we're paying is lower because our leverage is lower. We want to do a lower interest rate bucket..

So I probably expect to see kind of similar levels going forward?.

Yes. If our leverage remains....

Right, everything else?.

Yes, everything remains the same. We should see the same effective interest rate and apply to the outstanding debt..

Our next question comes from the line of J.B. Groh with D.A. Davidson..

I just have a couple housekeeping deals. I'm assuming this earn-out reversals all in corporate, right.

There's none about in the segment?.

That's correct..

And so when I add that back, your corporate expense about was about 28 [ph] in the quarter and that's up a little bit over the course of the year.

Is that just typical year-end type stuff or is there anything in acquired businesses and such? But is there anything that we should read into that and is that sort of a good run rate to use for 2015?.

Yes. I think our fourth quarter is a good run rate to use. As Pete alluded to earlier in his comments, as we continue to grow, we continue to add infrastructure and personnel. All of that is reflected in that corporate expense that you're referring to. But I think what you saw in the fourth quarter is probably a good run rate to use..

Okay.

And then, can you talk maybe about with this follow-on order, is that we're going to see a little bit smoother year in Test in terms of the quarterly progression? Or is Q2 and Q3 are going to be again a little bit stronger than Q1 and Q4?.

We would expect Q2 and Q3 to be a little bit stronger, but as the business grows, some of the opportunities we're looking at will round that out. So we'll fill that in a little bit, but from today's perspective, Q2 and Q3 will be a little stronger, Q1 and Q4 will be a little bit weaker..

Okay.

And how would you sort of characterize the penetration, maybe with the key customer there in terms of other incremental opportunities and obviously, you could probably go to other producers but how would you line that up?.

I guess I'd tell you that our primary focus has been to do a good job on the work we've been given and that's been what we're -- what we've been really applying ourselves for and we think that's been pretty successful and we are committed to keeping it successful.

And I guess we believe that that's a pretty big customer and they do a lot of interesting things and we will make ourselves -- express our interest in whatever other things they might think we are worthy of. So that's more for them to say than for us, but we certainly think there's potential there..

Okay. Good.

And then lastly, pretty hardy folk up there but did you guys lose any days to weather?.

Yes, we did, certainly, in Western New York. But we have -- if you look at our distribution of sales at this point, we do probably 2/3 of our sales on the West Coast of the U.S., so not that big of an impact for us..

It's quite nice up here, so that's good..

Our next question comes from the line Josh Goldberg with G2 Investment Partners..

I have a couple of questions. First just on the Test division, when you originally bought the company for $53 million, you thought you'd do about $100 million in sales this year, obviously, much better than that, almost 50% above that. And it seems like your biggest customer increased their spending with you in '14.

Can you just talk about competitively who else they're working with on testing their equipment and how much market share you think you have right now? And it just seems to me like there could be a chance for you to have even more orders as the year goes on.

That was great to get this first order to kind of solidify the year, but it seems like they could be spending more with you over time.

I just wanted to kind of understand the competitive dynamic on that side?.

It's hard for us to speak about their business. I guess what I would say that we don't think we're anywhere near a dominant position of a hardware provider. They're a very large company. They're involved in a lot of very unique and interesting things and most of it we have no idea about, frankly. So we don't know.

It's hard for me to answer that question. I'm sure that we're doing a good enough job and such that we're probably -- there are other competitors kind of eyeing our portion. So I'm sure it works both ways. But our confidence here is just like it is with pretty much any other customer.

The hope is if you do a good job and you proved to be reliable and committed and competent that companies, every company exists to try to make its life easier and be more successful and having competent partners and suppliers is a big part of that.

So you try to work those people into being more of your routine, not less of your routine and if we do that, I'm confident we'll have other opportunities, yes..

Do you have any -- is it true though that when you bought the company, obviously they've increased their order production with you in '14 and relative to what you originally thought?.

That is true, that is true, yes..

And when you looked at the segment in terms of its contribution again that operating profit about $12.4 million, pretty good margins of something that's obviously a Test business.

Do you anticipate margins -- I know obviously, you're going to have a lower revenue this year, but do margins really kind of stable or do you think its a fixed cost business that could be a little more difficult to keep the margins at even at 8%, 9% this year? Then I have a follow-up..

I think it's hard to say. We -- I think on the one hand, it could be lower because there's more pricing pressure in various corners of the business. On the other hand, the team out there has kind of rationalized the business and we think sized it more appropriately for the task at hand.

So we've got our cost structure a little bit more where we want it and we are also are pursuing a wider range of opportunities, some of which could have material impacts on 2015. So it's a combination of knowns and unknowns that probably amounts to a little bit more of an unknown than we'd like.

But I guess I would say that we're pretty pleased financially with how the business performed in 2014. We think that the table is set for another strong year in 2015. Is it going to be exactly the same? I think it's a little early to tell. It could be a little bit lower. But overall, I think, we're pretty pleased with how things have evolved..

Okay.

On the Armstrong business that you bought, does it carry similar margins to what you have right now on Aerospace?.

Yes. it's not -- it's -- I'd say it's similar. It's a little bit of a smaller business. We're hoping for somewhere in the neighborhood of $30 million of revenues. So I wouldn't expect it to materially drive our margins on a consolidated basis one way or the other. But historically, it's been a reasonably profitable business for sure..

So similar to the 16%, 17% Aerospace profit that you have right now..

Yes, I'd say it's in that range..

Okay.

So if you have more business in '15 toward the Aerospace business, which has a higher margin and your Test business which has a lower margin, you would seem that you should see your margins improve on the revenue growth you're expecting in '15, especially with a lot of these one-time costs out of the way now?.

Yes. Although a lot of those one-time costs were on the Test side, not on the Aerospace side for 2014, so -- I think our Aerospace portion of our business is a little bit more known at this point. I think our Test business is probably evolving a little bit more.

That's where the art is going to come in in terms of building models and forecasting our results..

Got you.

And obviously with an anchor customer like this, there are probably some other big semiconductor and mobile phone companies to work with kind of how does the pipeline look on the Test side?.

Honestly, our primary focus has been satisfying and keeping up with our big customer. That's been our purpose. And also it's probably safe to say that there are areas of joint technology ownership here where we have -- we certainly don't want to do anything to offend anybody or get ourselves in trouble. So we're careful about that.

Our primary focus has been working with Apple in keeping that project going well and we haven't spent a whole lot of time looking beyond that at this point..

Got it. Okay, great.

And what's the proper share count for '15?.

Dave?.

Question, I don't have it at my fingertips here. There'll probably be some increase due to option exercises during the course of the year but nothing dramatic change. I think what you see in the release there for our shares outstanding, it will go up a little bit but not dramatically..

Okay.

And is the goal for next year as you generate more cash to pay down debt or there is other uses for the cash as well?.

Well, we certainly are inclined not to have a whole lot of cash sitting around on our balance sheet. So to the extent that we accumulate cash and have nothing else to do that, we will pay down debt, but we do remain active on the acquisition side. I think, as we get bigger, we see a more consistent deal flow at least with respect to opportunities.

We don't obviously pursue all of them, not even close. But it's possible that we could use cash more along those lines also. We'll see what the new year brings..

Mr. Gundermann, there are no further questions at this time. I'd like to turn the floor back to you for closing comments..

Okay and I'll wrap it up pretty quickly. So thanks for your interest again. 2014 was obviously a great year for the company and we're excited about 2015. We'll talk to you at the end of the first quarter. Have a good day..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..