Astronics Corporation — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 30, 2013, compared with the three months ended March 31, 2012. Astronics designs and manufactures aerospace systems and military test, training and simulation systems. Its reportable segments are Aerospace and Test Systems. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $73.97 | $65.14 |
| Gross profit / margin | $20.22 / 27.3% | $18.12 / 27.8% |
| Operating income | $11.06 | $9.27 |
| Income before taxes | $10.84 | $9.00 |
| Net income | $8.56 | $6.10 |
| Diluted EPS | $0.56 | $0.40 |
| Cash provided by operating activities | $14.33 | $4.79 |
| Capital expenditures | $1.83 | $1.67 |
- Sales rose 13.6%. Aerospace revenue increased to $71.67 million from $62.00 million; Test Systems net sales declined to $2.30 million from $3.14 million.
- Gross margin eased by 0.5 percentage points. Higher volume and lower warranty and inventory-obsolescence expense were partly offset by increased engineering and development costs, which rose to $12.8 million from $10.0 million.
- SG&A was $9.16 million, or 12.4% of sales, versus $8.86 million, or 13.6%. Operating income increased despite the gross-margin decline.
- Net income benefited from a 21.0% effective tax rate versus 32.3% a year earlier. The lower rate reflected tax deductions and credits, including recognition of approximately $1.1 million of 2012 domestic R&D tax credits and $0.2 million of 2013 credits.
- At March 30, cash was $17.80 million; total assets were $216.84 million, total liabilities $82.70 million, and shareholders’ equity $134.14 million. Current assets were $112.48 million versus current liabilities of $49.04 million.
- Cash increased by $10.42 million during the quarter. Operating cash flow improved with higher earnings and favorable changes in operating assets and liabilities; customer advances and deferred revenue declined by $2.32 million.
- Current maturities of long-term debt were $12.26 million and long-term debt was $15.67 million. The company had $7.0 million outstanding on its revolving facility and reported $58.0 million of available credit; outstanding letters of credit totaled $10.0 million.
Material changes and segment results
- Aerospace: Sales increased 15.6% to $71.67 million; operating profit rose to $14.29 million and margin improved to 19.9% from 19.2%. Commercial transport sales grew to $50.96 million, with business jet and FAA/Airport sales also higher; military sales were slightly lower. Backlog was $114.64 million, compared with $110.92 million at year-end 2012.
- Test Systems: Net sales fell to $2.30 million from $3.14 million. Operating loss widened to $1.53 million from $1.08 million, and operating margin declined to (66.4)% from (34.3)%. Backlog was $4.36 million.
- Overall backlog was $119.0 million at quarter-end, up from $114.5 million at December 31, 2012 and $102.0 million a year earlier.
- The company acquired Max-Viz in July 2012, adding enhanced-vision products to Aerospace. Q1 SG&A included $0.6 million of Max-Viz expenses; acquisition-related contingent consideration is subject to revenue targets.
Outlook, risks and contingencies
- Management expected 2013 Aerospace sales of $270–$300 million and Test Systems sales of approximately $10 million. It expected full-year engineering and development expense of $48–$53 million and capital spending of $5–$10 million.
- Management expected the effective tax rate for the remaining three quarters of 2013 to be 30%–32%, above Q1’s 21.0% rate.
- Management said 2013 working-capital, debt-service and capital-equipment needs were expected to be met through operating cash flow, cash balances and, if needed, the revolving facility. The facility was amended in March 2013: revolving capacity rose from $35 million to $75 million and maturity extended to March 27, 2018. The separate $11 million term loan remained due January 30, 2014. The facility is secured by substantially all company assets; Astronics reported covenant compliance at quarter-end.
- Key business sensitivities include aircraft production rates, military-government funding, customer demand, product design wins, supplier performance, new-product acceptance and acquisition integration. Panasonic Avionics represented 33.4% of Q1 revenue, down from 41.6% a year earlier; the filing identifies this customer concentration as a risk.
- Test Systems long-term fixed-price contracts use percentage-of-completion accounting, requiring estimates of total contract costs and gross profit that may change as circumstances evolve.
- The company reported ordinary-course legal matters and did not expect them collectively to have a material adverse effect, while noting outcomes are uncertain. A bankruptcy trustee seeks $1.4 million in alleged preferential payments, which Astronics disputes. A German patent-infringement case seeks injunctive and monetary relief; the company disputes the claim, proceedings are stayed pending a related patent-nullity action, and potential loss cannot be reasonably estimated.
- Other notable items: Q1 comprehensive income was $8.49 million, versus $2.50 million a year earlier, when a substantial retirement-liability adjustment reduced comprehensive income. Management reported no goodwill or intangible-asset impairment indicators at March 30, 2013. Disclosure controls were considered effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether Aerospace growth and backlog convert into shipments and margins, and whether Test Systems losses improve.
- Whether engineering and development spending remains within the $48–$53 million outlook and supports future revenue.
- The sustainability of earnings after the unusually low Q1 tax rate and recognition of prior-year R&D credits.
- Debt repayment and refinancing needs, particularly the $11 million term loan due January 2014, and continued compliance with credit-facility covenants.
- Customer concentration exposure to Panasonic Avionics and the status or financial effect of the disclosed litigation.
- Achievement of the stated segment sales outlook, capital-spending range and expected backlog shipments.