Astronics Corporation — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 28, 2014, compared with the corresponding 2013 periods. Astronics supplies aerospace and defense products and test systems through its Aerospace and Test Systems segments. Results include acquisitions completed since July 2013, notably ATS, acquired February 28, 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $174.6m | $70.8m | $315.5m | $144.8m |
| Gross profit / margin | $43.2m / 24.7% | $18.7m / 26.4% | $73.2m / 23.2% | $38.9m / 26.9% |
| Income from operations | $22.5m | $8.0m | $36.1m | $19.0m |
| Net income | $13.1m | $5.2m | $20.7m | $13.7m |
| Diluted EPS | $0.70 | $0.28 | $1.09 | $0.75 |
- Revenue rose 146% in Q2 and 118% in the first half. Acquired businesses contributed $93.8m and $152.6m, respectively; organic sales increased 14.1% and 12.5%.
- Gross margin declined year over year. Management cited acquired-inventory fair-value step-up costs of $8.7m in Q2 and $17.4m in the first half, as well as increased engineering and development expense. R&D, design and related engineering costs were $20.6m in Q2 and $37.9m year to date.
- Q2 Aerospace sales were $121.5m, with a 17.1% segment operating margin; first-half sales were $243.9m, with a 15.7% margin. Test Systems sales were $53.0m in Q2 and $71.6m year to date; margins were 7.6% and 3.2%, respectively. Test Systems benefited from ATS acquisition sales but bore substantial inventory step-up and integration-related costs.
- Operating cash flow was $23.2m for the first half, versus $17.3m a year earlier. Cash declined to $20.8m from $54.6m at year-end, principally reflecting $90.9m of investing outflows, including $67.9m for ATS and $23.1m of capital expenditures. Capital spending guidance for 2014 was $40m–$44m.
- Debt totaled $245.6m at June 28 ($13.3m current and $232.3m long-term); cash was $20.8m. The company had $79.9m available on its $125m revolving facility, net of letters of credit. Leverage under the credit agreement was 2.20:1, and the company reported compliance with covenants.
- Backlog was $326.8m, compared with $214.2m at December 31, 2013. Total assets were $582.8m and shareholders’ equity was $194.7m.
Changes, outlook and risks
- Growth reflected the addition of four businesses since July 2013, including ATS, PGA, AeroSat and Peco; year-over-year comparisons are therefore materially affected by acquisitions. ATS purchase price was approximately $69.4m, with the working-capital adjustment not finalized and purchase-price allocation incomplete.
- Management expected 2014 Aerospace sales of $485m–$505m and Test Systems sales of $155m–$160m. It expected 2014 effective tax rate of 33%–35%, assuming the R&D tax credit was not extended. No consolidated sales or earnings guidance was provided in the supplied filing text.
- Management identified aircraft production rates, airline refurbishment spending, military funding, customer demand, new-product acceptance, program awards, acquisition integration and vendor performance as factors that could affect results. The company noted that three customers each represented more than 10% of sales; together they accounted for 52.0% of Q2 sales and 48.7% of first-half sales. Their receivables totaled $48.6m.
- A German patent-infringement suit brought by Lufthansa Technik remains unresolved. A court upheld part of the patent’s validity in February 2014; that judgment is appealable, and the infringement case is no longer stayed. Astronics said it could not reasonably estimate potential loss; an adverse outcome could materially affect results and financial condition.
- Other unusual items include acquisition-related contingent consideration, including an AeroSat earn-out with potential payments up to $53m based on revenue targets, and material acquisition-related inventory step-up charges.
Important facts for investors to verify
- How much of reported growth and backlog converts to organic revenue, shipments and cash flow, particularly following the ATS acquisition.
- Whether gross margins recover as acquisition inventory step-up costs pass through and integration and engineering costs evolve.
- Working-capital trends: receivables and inventory increased substantially, and first-half operating cash flow included a $33.7m cash use from accounts receivable.
- Debt repayment capacity, revolving-facility availability, covenant headroom and the large scheduled 2018 debt maturity.
- Customer concentration, the outcome and potential exposure of the Lufthansa Technik litigation, and final ATS purchase accounting and working-capital adjustment.