Astronics Corporation — Q1 2014 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 29, 2014. Astronics designs and manufactures aerospace products and test, training, and simulation systems, reported in Aerospace and Test Systems segments. Results include the February 28 acquisition of EADS North America’s Test and Services division, Astronics Test Systems (ATS).
Financial performance
| Metric | Q1 2014 | Prior-year quarter |
|---|---|---|
| Sales | $141.0 million | $74.0 million |
| Gross profit / margin | $30.0 million / 21.3% | $20.2 million / 27.3% |
| Income from operations | $13.6 million | $11.1 million |
| Interest expense, net | $2.3 million | $0.2 million |
| Net income | $7.5 million | $8.6 million |
| Diluted EPS | $0.40 | $0.47 |
| Cash from operations | $2.6 million | $14.3 million |
Sales increased 90.6%; management attributed $58.8 million of the increase to acquisitions and $8.2 million to organic growth. The gross-margin decline primarily reflected $8.7 million of acquired-inventory fair-value step-up costs. Management said gross margin would have been 27.4% excluding those costs, compared with 27.3% in the prior-year quarter. Higher interest expense and the 33.6% effective tax rate contributed to lower net income.
- Segments: Aerospace sales were $122.4 million, up 70.7%, with operating profit of $17.5 million and a 14.3% margin versus 19.9%. Test Systems net sales were $18.6 million, primarily reflecting ATS; its operating loss was $1.7 million, including $6.3 million of inventory step-up expense.
- Cash and liquidity: Cash was $29.1 million at March 29, down from $54.6 million at year-end. Operating cash flow was pressured by working-capital needs, particularly a $37.6 million cash use from accounts receivable. Investing used $87.2 million, including $70.3 million for ATS and $16.9 million of capital expenditures.
- Debt: Total long-term debt, including current maturities, was $268.4 million. The company had $56.1 million available on its $125 million revolving facility, net of letters of credit. Its reported leverage ratio was 2.91:1, and it was in compliance with covenants. The term loan and revolver mature in 2018.
- Other: Backlog was $362.4 million, versus $214.2 million at December 31, 2013. Total assets were $602.7 million; shareholders’ equity was $181.0 million.
Outlook, changes, and risks
- Management forecast 2014 Aerospace sales of $480–$505 million and Test Systems sales of $145–$155 million. It expected 2014 capital spending of $33–$37 million. These are segment and capital-spending forecasts, not consolidated revenue or earnings guidance.
- Management expected a 2014 effective tax rate of 33%–35% if the U.S. R&D tax credit was not extended; the quarter’s rate did not include a benefit from those credits.
- Acquisitions materially expanded sales, assets, backlog, debt, and amortization. The ATS purchase-price allocation and net-working-capital adjustment were not final. Inventory step-up costs were expected to affect acquired-business margins for roughly two to three quarters after acquisition.
- Key business risks include aircraft production and refurbishment cycles, government funding and contract awards, acquisition integration, and customer concentration. Panasonic represented 19.5% and Boeing 15.3% of quarterly revenue.
- A German patent-infringement action brought by Lufthansa Technik had resumed after a court upheld part of the patent’s validity. Astronics disputes the claim and could not reasonably estimate potential loss; an adverse outcome could materially affect results or financial condition.
- Management stated that results for the interim period are not necessarily indicative of full-year results. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether ATS and other acquired businesses meet the sales, margin, and integration assumptions underlying management’s 2014 segment forecasts.
- How quickly acquired-inventory step-up costs run off and whether reported margins recover as expected.
- Collections and working-capital trends, given the large quarterly accounts-receivable cash use and reduced operating cash flow.
- Debt, covenant headroom, interest costs, and liquidity relative to acquisition spending, capital expenditure, and contractual obligations.
- Customer concentration and the outcome and potential exposure of the Lufthansa Technik litigation.