Astronics Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are also shown below. Astronics supplies aerospace and defense products through its Aerospace and Test Systems segments. Figures are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Sales | $266.4 | $228.2 |
| Gross profit / margin | $69.4 / 26.1% | $60.5 / 26.5% |
| Operating income | $32.6 | $30.8 |
| Net income / net margin | $21.9 / 8.2% | $21.6 / 9.5% |
| Diluted EPS | $1.45 | $1.45 |
| Cash from operations | $24.2 | $27.9 |
| Capital expenditures | $16.7 | $14.3 |
| Year-end cash | $7.4 | $10.9 |
| Year-end debt | $30.0 | $33.3 |
| Working capital | $60.0 | $58.8 |
- Sales rose 16.8%, mainly from Aerospace growth, including higher cabin electronics sales and contributions from acquisitions. Net income increased only modestly; net margin and gross margin declined. Management attributed the gross-margin pressure to increased engineering and development spending and weaker Test Systems margins. SG&A rose to $36.8 million, or 13.8% of sales, from $27.2 million, or 11.9%, reflecting acquisitions, legal expense and higher compensation costs.
- Aerospace sales increased 19.2% to $255.0 million; operating profit was $44.1 million and margin was 17.3%, down from 18.9%. Commercial transport sales were $179.1 million. Test Systems sales fell to $11.5 million, with a $5.0 million operating loss and a 43.4% negative margin; its backlog also declined.
- Q4 2012 sales were $67.4 million and net income was $5.7 million, versus $61.2 million and $5.2 million in Q4 2011. Diluted EPS was $0.37 versus $0.34.
- Operating cash flow was below 2011, primarily due to working-capital use, including higher receivables and inventory. Cash flow after capital expenditures was approximately $7.5 million. Investing cash use was $27.4 million, including the Max-Viz acquisition and facility/equipment spending.
- Current assets were $108.0 million and current liabilities $48.0 million at year-end. The company reported $17.9 million of borrowing availability on its revolving facility, after considering outstanding letters of credit. Debt was $30.0 million, including $9.3 million current maturities; about 23% of debt was fixed-rate. It reported compliance with credit covenants, with fixed-charge coverage of 2.37x against a 1.25x minimum and leverage of 0.71x against a 3.25x maximum.
Business changes and outlook
- Astronics acquired Max-Viz on July 30, 2012, for $10.7 million cash, with up to $8.0 million of contingent consideration tied to revenue targets. Max-Viz contributed $2.7 million of post-acquisition sales and a $0.8 million net loss in 2012. The prior-year comparison includes Ballard only from its November 2011 acquisition date.
- Panasonic Avionics accounted for 38.0% of FY2012 sales, up from 35.7%; U.S. Government sales were 7.2%, down from 9.0%. The Panasonic concentration is a significant customer risk.
- Backlog was $114.5 million at year-end, versus $106.3 million in 2011; management expected approximately $97.8 million to ship during 2013. Aerospace backlog was $110.9 million, while Test Systems backlog was $3.6 million.
- Management forecast 2013 consolidated sales of $275–$310 million, Aerospace sales of $265–$300 million and Test Systems sales of approximately $10 million. It projected capital spending of $5–$10 million and engineering and development costs of $42–$46 million. Management cited continued weak business-jet production and constrained military opportunities, while emphasizing investment in technology and new products.
- Engineering and development costs increased to $44.9 million from $36.1 million. The company paid no cash dividends and said it planned to retain cash for investment, acquisitions and debt reduction.
Risks, contingencies and unusual items
- Demand is exposed to aircraft build rates, airline spending and economic conditions, defense funding, program awards and customer acceptance of new aircraft and products. Most sales are based on customer contracts or purchase orders rather than long-term commitments; nearly all sales were under fixed-price contracts, exposing margins to cost overruns and delivery penalties.
- Reliance on Panasonic Avionics, supplier performance, product quality, and the ability to recruit technical personnel are material risks. U.S. Government contracts may be terminated or affected by annual appropriations. Variable-rate debt creates interest-rate exposure; currency sensitivity is comparatively limited, with a disclosed estimated $0.6 million net-income impact from a 10% U.S.-dollar/Canadian-dollar movement.
- An unfunded supplemental retirement obligation increased during 2012, including adoption of SERP II. The projected benefit obligation was $15.0 million at year-end; the retirement-liability adjustment reduced other comprehensive income by $4.2 million after tax. Management identified discount rates and other actuarial assumptions as sensitive estimates.
- Astronics is defending a German patent-infringement case brought by Lufthansa Technik. Proceedings were stayed pending a separate patent-nullity action, and the company said it could not reasonably estimate potential liability. A separate bankruptcy-trustee action seeks $1.4 million in alleged preferential payments; the company disputes the claim.
- No goodwill impairment was recorded in 2012; 2011 included $2.5 million of impairment charges, principally for Test Systems. The 2012 effective tax rate was 30.7%, versus 25.6% in 2011; management expected to recognize approximately $0.7 million of research-credit tax benefit in Q1 2013 following a law enacted after year-end.
- Management and the independent auditor reported effective internal control over financial reporting. Max-Viz was excluded from the internal-control assessment, although included in the consolidated financial statements.
Key facts for investors to verify
- Whether 2013 sales guidance and backlog conversion were achieved, and whether Test Systems losses improved.
- How much growth and profitability came from organic Aerospace demand versus acquired Ballard and Max-Viz businesses.
- Whether Panasonic Avionics concentration, receivable growth and working-capital requirements affected cash generation or customer credit exposure.
- Debt repayment, revolver availability, covenant headroom and the effect of variable interest rates and planned capital spending.
- Developments in the Lufthansa Technik patent case, the $1.4 million preference-payment claim, and the unfunded retirement obligations.