Astronics Corporation — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 29, 2012, compared with periods ended October 1, 2011. Astronics supplies aerospace systems and military test, training and simulation products through its Aerospace and Test Systems segments. The results include Ballard Technology, acquired in November 2011, and Max-Viz, acquired July 30, 2012.
Financial results and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $68.9 | $56.4 | $199.0 | $167.0 |
| Gross profit | $16.7 | $14.3 | $51.9 | $43.1 |
| Gross margin | 24.3% | 25.3% | 26.1% | 25.8% |
| Income from operations | $7.7 | $7.9 | $24.7 | $23.3 |
| Net income | $4.9 | $6.7 | $16.2 | $16.4 |
| Diluted EPS | $0.33 | $0.45 | $1.07 | $1.11 |
| Operating cash flow | — | $17.1 | $12.9 |
At September 29, cash was $7.6 million; current assets were $107.7 million and current liabilities $47.8 million. Debt totaled approximately $33.4 million, including $8.3 million current maturities. The company had $9.0 million drawn on its revolving facility, $10.8 million in letters of credit and $15.2 million of available borrowing capacity. It reported compliance with credit-facility covenants. Nine-month capital expenditures were $10.6 million; operating cash flow less capital expenditures was approximately $6.6 million.
Material changes and management commentary
- Q3 sales rose 22.2%, driven mainly by Aerospace; nine-month sales rose 19.2%. Aerospace sales increased in both periods, while Test Systems sales declined year to date.
- Q3 gross margin fell to 24.3% from 25.3%, which management attributed to higher engineering and development costs and increased inventory and warranty reserves, partly offset by sales-volume leverage. Nine-month gross margin improved modestly.
- SG&A rose to $9.1 million in Q3 and $27.2 million year to date, reflecting acquisitions, compensation and, year to date, legal costs. Q3 net income declined despite higher sales. The nine-month effective tax rate increased to 32.1% from 24.8%.
- Test Systems reported a nine-month operating loss of $3.5 million, versus $1.4 million a year earlier; management said low sales volumes did not cover fixed costs. Aerospace operating margin also declined year to date, to 17.5% from 18.1%.
- Max-Viz was acquired for $10.6 million cash, plus contingent consideration of up to $8.0 million based on revenue-growth targets. Its addition expands the company’s enhanced-vision product offerings.
- Nine-month comprehensive income was affected by a $3.4 million after-tax retirement-liability adjustment, contributing to accumulated other comprehensive loss of $4.0 million. The filing also reports adoption of SERP II and a $5.8 million liability at adoption.
Outlook, risks and contingencies
- Management expected 2012 Aerospace sales of $257–$263 million and Test Systems sales of $10–$12 million. It forecast full-year engineering and development costs of $44–$46 million and capital spending of approximately $20–$21 million.
- Backlog at quarter end was $115.6 million, including $110.0 million in Aerospace and $5.5 million in Test Systems. Management expected approximately $67.2 million in combined segment shipments during the rest of 2012; backlog expected to ship over the next 12 months was approximately $102.2 million.
- Key uncertainties include aircraft production rates, government funding and contract changes, customer demand, product acceptance, vendor performance, acquisition integration and broader economic conditions. Panasonic accounted for 38% of nine-month revenue and 40% of Q3 revenue; the U.S. Government accounted for 7% in both periods.
- The company described an unresolved German patent-infringement action and said potential loss could not be reasonably estimated; an adverse outcome could materially affect results and financial condition. It also disputes a separate claim seeking $1.4 million in alleged preferential payments. Management did not expect ordinary-course legal matters overall to have a material adverse effect.
- The filing states that contractual obligations and market-risk disclosures had not changed materially from the 2011 Form 10-K. Management said cash flow and the revolving facility should fund future capital needs.
Important facts for investors to verify
- Whether Aerospace growth and backlog convert to shipments and earnings, and whether Test Systems losses improve.
- Whether elevated engineering costs, warranty and inventory reserves, and SG&A continue to pressure margins and net income.
- Max-Viz and Ballard integration, acquisition-related costs, and the likelihood of contingent consideration payments.
- Cash conversion, working-capital needs, planned capital spending, borrowing capacity and covenant compliance.
- Developments in the German patent litigation, customer concentration and the retirement-benefit liability.
Share and per-share figures reflect the filing’s retrospective adjustment for the announced three-for-twenty Class B share distribution.