Astronics Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; quarterly figures below identify the fourth quarter. Astronics supplies aerospace products and automatic test systems through Aerospace and Test Systems segments.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $661.0 million | $339.9 million |
| Gross profit / margin | $167.0 million / 25.3% | $87.9 million / 25.8% |
| Income from operations | $87.4 million | $42.3 million |
| Net income / net margin | $56.2 million / 8.5% | $27.3 million / 8.0% |
| Diluted EPS | $2.48 | $1.24 |
| Cash from operating activities | $99.9 million | $49.5 million |
| Cash and cash equivalents at year-end | $21.2 million | $54.6 million |
| Debt at year-end | $183.0 million | $200.3 million |
| Working capital | $136.6 million | $126.0 million |
Sales rose 94.5%, with $270.4 million of the increase attributed to acquisitions and $50.7 million, or 14.9%, to organic growth. Net income more than doubled. Gross margin eased as lower margins at acquired businesses and $19.4 million of acquired-inventory fair-value step-up expense offset organic volume leverage. Interest expense rose to $8.3 million from $4.1 million, reflecting higher borrowings; the effective tax rate was 29.0%.
Fourth-quarter sales were $166.1 million, net income was $18.4 million and diluted EPS was $0.81, versus $105.5 million, $6.4 million and $0.29, respectively, in fourth-quarter 2013.
Segments, cash flow and liquidity
- Aerospace: Sales increased to $494.7 million from $330.5 million; operating profit was $79.8 million, with a 16.1% margin versus 16.7%. Commercial transport sales grew, led by passenger power products; organic military and business-jet sales declined.
- Test Systems: Sales were $166.3 million versus $9.4 million, primarily reflecting the February 2014 acquisition of ATS. The segment recorded $12.4 million operating profit versus a $3.8 million loss; ATS contributed $159.2 million of sales. Its largest customer accounted for $118.1 million of ATS sales.
- Operating cash flow increased to $99.9 million. Investing used $109.1 million, including $68.2 million net cash for ATS and $40.9 million of capital expenditures. Financing used $23.1 million; cash declined by $33.4 million during the year.
- The September 2014 refinancing replaced prior facilities with a $350 million revolving credit line, expandable by up to $150 million, maturing in 2019. The company reported covenant compliance at year-end, with a 1.28-to-1 leverage ratio and 18.7-to-1 interest coverage ratio. About $165 million of debt was variable-rate; management estimated a one-percentage-point rate increase would reduce annual net income by about $1.1 million.
Outlook, material developments and risks
- Management forecast 2015 consolidated sales of $680 million to $740 million, including Armstrong, acquired January 14, 2015 for approximately $52 million in cash. Forecast segment sales: Aerospace $550 million to $580 million; Test Systems $130 million to $160 million. Planned capital spending was $20 million to $25 million and engineering and development costs $75 million to $80 million, both excluding Armstrong.
- Year-end backlog was $370.7 million, up from $214.2 million; approximately $321.8 million was expected to ship in 2015. Segment backlog was $223.7 million for Aerospace and $147.0 million for Test Systems.
- Acquisitions materially changed the business mix, particularly ATS, which added commercial electronics exposure to Test Systems. The January 2015 Armstrong purchase was a subsequent event, not part of FY2014 results.
- Customer concentration is significant: Apple, Panasonic and Boeing represented 17.9%, 17.7% and 14.1% of FY2014 sales, respectively. Nearly all sales were under fixed-price contracts, exposing the company to cost overruns and delivery penalties. Other risks include cyclical aerospace and electronics demand, changing defense funding, variable-rate debt, acquisition integration, and dependence on key customers and personnel.
- Lufthansa Technik patent litigation is a notable contingency. After year-end, a German court ruled on February 6, 2015 that AES infringed a German patent; Astronics planned to appeal. Potential exposure was not estimable and no liability was recorded at December 31, 2014. Lufthansa also filed a related U.S. patent suit, which the company intended to contest; no liability was recorded.
- Other unusual items included a $5.0 million favorable fair-value adjustment to acquisition contingent consideration, which reduced SG&A, and a $16.8 million inventory step-up expense in Test Systems. No goodwill or other long-lived-asset impairment was recorded. The company paid no cash dividends and said it had no plans to initiate them.
Most important facts for investors to verify
- How much future growth and margin performance is supported by organic demand versus acquisitions, particularly ATS and its concentrated customer revenue?
- Whether the 2015 sales outlook and the conversion of backlog to shipments are achieved, including the expected follow-on Test Systems order.
- Whether Aerospace and consolidated margins recover from the 2014 decline, and how acquired-inventory step-up costs, engineering spending and warranty costs develop.
- Debt reduction, variable-rate exposure, covenant headroom and funding needs for acquisitions and capital expenditures.
- Developments, potential remedies and financial exposure in the German and U.S. Lufthansa patent matters.
- The audited financial statements received an unqualified opinion; management and the auditor reported effective internal control, with ATS excluded from the internal-control assessment.