Astronics Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013. Amounts below are in millions of dollars except per-share data. The company designs and manufactures aerospace systems and military test, training and simulation systems, and reports Aerospace and Test Systems segments.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $70.8 | $65.0 | $144.8 | $130.1 |
| Gross profit | $18.7 | $17.1 | $38.9 | $35.2 |
| Gross margin | 26.4% | 26.2% | 26.9% | 27.0% |
| Operating income | $8.0 | $7.8 | $19.0 | $17.0 |
| Net income | $5.2 | $5.2 | $13.7 | $11.3 |
| Diluted EPS | $0.34 | $0.34 | $0.90 | $0.75 |
- Q2 sales rose 9.0%; first-half sales rose 11.3%. Aerospace drove growth, while Test Systems revenue declined.
- Q2 Aerospace operating margin was 16.7%, down from 17.5%; first-half margin was 18.3%, unchanged year over year. Test Systems recorded operating losses of $0.6 million in Q2 and $2.1 million in the first half.
- Operating cash flow was $17.3 million for the first half, versus $9.0 million a year earlier. Capital expenditures were $3.7 million; cash increased by $9.2 million to $16.5 million.
- At June 29, current assets were $118.5 million and current liabilities $49.5 million. Reported current and long-term debt totaled approximately $25.5 million. The company reported $58.4 million of credit-facility availability and compliance with its covenants at quarter-end.
- Total assets were $222.4 million, total liabilities $82.8 million, and shareholders’ equity $139.7 million at June 29.
Changes versus the prior comparable period
- First-half Aerospace sales increased $15.9 million, while Test Systems sales decreased $1.2 million. Commercial transport demand, particularly for cabin electronics, was an important growth contributor.
- First-half R&D, design and engineering costs increased to $26.0 million from $21.1 million; management attributed pressure on gross margin to higher engineering costs and, in Q2, higher warranty and inventory-obsolescence expense.
- Q2 SG&A rose to $10.7 million from $9.3 million, reflecting acquisition and financing-related professional costs and Max-Viz expenses. The six-month effective tax rate fell to 26.1% from 31.6%, mainly due to domestic production and R&D tax credits.
Outlook, transactions and risks
- Management forecast 2013 Aerospace sales of $310–$330 million, including $35–$37 million from Peco for the remainder of the year; Test Systems sales were expected to be approximately $10 million. Forecast full-year engineering and development expense was $53–$56 million, and the expected tax rate for the remaining two quarters was 30%–32%.
- Peco acquisition: completed July 18, after the reporting date, for $136 million cash. The company expected Peco to join Aerospace; Peco had $40 million of backlog at acquisition. Initial purchase accounting and pro forma information were incomplete. A possible Section 338(h)(10) tax election could require additional seller consideration.
- To fund Peco, the company entered a new facility with a $190 million term loan and a $75 million revolver, both expiring in 2018. The loan bears interest at 225–350 basis points over LIBOR, subject to leverage. Scheduled principal payments include a substantial 2018 maturity payment.
- Reported backlog was $114.5 million at June 29, with approximately $86.5 million expected to ship during the rest of 2013; Peco added $40 million after quarter-end. Management said remaining-2013 cash needs were expected to be met by operating cash flows, cash balances and, if needed, the revolver.
- Panasonic accounted for 32% of first-half revenue and 30% of Q2 revenue. Management identified dependence on Panasonic and, following Peco, Boeing as significant customer risks. Other risks include acquisition integration and unknown Peco liabilities, changes in aircraft production and government demand, and execution of product and growth plans.
- A German patent-infringement case brought by Lufthansa Technik remained unresolved and stayed pending a related patent-nullity action; the company could not reasonably estimate potential loss. The company said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes were uncertain. The AE Liquidation case was settled in Q2 without significant operating impact.
Important facts for investors to verify
- Whether Peco’s integration, purchase accounting, contributions to sales and earnings, and any tax-election make-whole payment align with management’s expectations.
- Post-acquisition debt, interest expense, repayment requirements, covenant headroom and liquidity under the new credit agreement.
- Customer concentration and order trends, especially Panasonic and Boeing, and whether Aerospace growth and backlog convert to shipments as expected.
- Test Systems’ progress after cost reductions and whether the segment can improve from operating losses.
- Developments in the Lufthansa Technik litigation and any change in the company’s assessment of potential exposure.