Astronics Corp. 10-Q Summary: Period Ended September 27, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 27, 2008, and the nine-month period ended on that date. Astronics Corporation designs, develops, and manufactures electronic systems for the commercial transport, business jet, and military aerospace markets. On September 16, 2008, the company announced a one-for-four distribution of Class B Stock; all share quantities and per-share data in this report have been restated to reflect this distribution.
Key Financial Metrics
| Metric | Nine Months Ended Sep 27, 2008 | Nine Months Ended Sep 29, 2007 | Three Months Ended Sep 27, 2008 | Three Months Ended Sep 29, 2007 |
|---|---|---|---|---|
| Sales (Revenue) | $129.3 million | $122.0 million | $40.4 million | $37.7 million |
| Gross Profit | $28.5 million | $33.2 million | $7.9 million | $10.1 million |
| Gross Margin | 22.1% | 27.2% | 19.6% | 26.9% |
| Net Income | $10.1 million | $13.3 million | $2.4 million | $4.1 million |
| Diluted EPS | $0.95 | $1.25 | $0.22 | $0.38 |
| Cash from Operations | $3.6 million | $1.4 million | N/A | N/A |
| Cash and Equivalents (End of Period) | $0.5 million | $0.8 million | N/A | N/A |
| Total Debt (Current + Long-term) | $15.0 million | $15.6 million | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 6.0% year-to-date and 7.0% in the third quarter. Growth was driven by a 21.6% increase in business jet sales and a 12.2% increase in military sales, partially offset by a 2.3% decline in commercial transport sales due to lower retro-fit demand.
- Margin Compression: Gross margins declined significantly, dropping from 27.2% to 22.1% year-to-date. This was primarily caused by a $5.5 million increase in engineering and development spending, product mix shifts, and increased infrastructure costs.
- Profitability: Net income decreased 23.9% year-to-date ($10.1 million vs. $13.3 million) due to the margin compression described above, despite revenue growth.
- Liquidity: Cash provided by operating activities improved to $3.6 million from $1.4 million in the prior year period. However, cash balances decreased from $2.8 million to $0.5 million due to capital expenditures and debt repayments.
- Debt Structure: The company entered a new $60 million Senior Secured Revolving Credit Facility in May 2008, replacing a $25 million facility. As of September 27, 2008, $4.0 million was outstanding on this facility.
Guidance, Outlook, and Risks
- Outlook: Management projects full-year 2008 sales to be approximately $175 million. The backlog as of September 27, 2008, was $92.1 million, with approximately $47 million expected to ship by year-end.
- Market Risks: The company faces risks related to the weakening national economy, which may tighten lending standards and impact the financial stability of major customers and suppliers. There is a significant concentration of risk with Panasonic Avionics Corporation, which accounted for 25.5% of revenue in the first nine months of 2008.
- Operational Risks: Reduced production rates by Eclipse Aviation (a business jet customer) impacted third-quarter sales. The company expects cabin electronics sales to shift from aftermarket retro-fits to new aircraft installations over the coming years.
- Interest Rate Risk: The company has approximately $19.0 million in floating-rate debt. A 1% change in interest rates would impact annual net income by approximately $0.2 million.
Investor Verification Checklist
- Verify the sustainability of the 25.5% revenue concentration with Panasonic Avionics Corporation.
- Monitor the impact of increased engineering and development spending on future gross margins.
- Assess the financial health of major customers, particularly Eclipse Aviation, given recent production rate reductions.
- Review the utilization of the new $60 million credit facility and the company's ability to meet leverage ratio covenants.
- Confirm the transition of commercial transport sales from retro-fit markets to new aircraft builds as projected by management.