Astronics Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 1, 2011. The interim financial statements are unaudited. Unless stated otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
Business context
Astronics supplies aerospace lighting, electrical power, aircraft safety and electronics products, as well as military test, training and simulation systems. Its reportable segments are Aerospace and Test Systems. Aerospace serves commercial transport, military, business jet and FAA/airport markets; Test Systems primarily serves the military.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $56.4 | $49.9 | $167.0 | $143.9 |
| Gross profit | $14.3 | $12.9 | $43.1 | $35.1 |
| Gross margin | 25.3% | 25.8% | 25.8% | 24.4% |
| Operating income | $7.9 | $7.2 | $23.3 | $17.9 |
| Net income | $6.7 | $4.6 | $16.4 | $10.5 |
| Diluted EPS | $0.52 | $0.37 | $1.28 | $0.85 |
| Net interest expense | $0.4 | $0.6 | $1.5 | $2.0 |
| Effective tax rate | 11.2% | 29.3% | 24.8% | 34.4% |
Q3 sales rose 13% and nine-month sales rose 16% year over year. Growth was concentrated in Aerospace: nine-month Aerospace sales increased $22.8 million, while Test Systems sales increased $0.2 million. Aerospace operating margin was 18.5% in Q3 and 18.1% year to date; Test Systems reported operating losses of $0.8 million and $1.4 million, respectively.
For the nine months, operating cash flow was $12.9 million, versus $14.6 million a year earlier. Capital expenditures were $12.9 million, versus $2.6 million, primarily reflecting purchases of facilities in Kirkland, Washington, and Fort Lauderdale, Florida. Financing activities used $2.1 million; cash declined $2.1 million to $20.6 million.
At October 1, 2011, total assets were $166.3 million, current assets $104.4 million, current liabilities $32.3 million and shareholders’ equity $96.2 million. Balance-sheet current and long-term debt totaled $34.7 million. The term loan balance was $18.0 million; no revolving-credit borrowings were outstanding. The company reported $23.2 million of available working-capital capacity under its facility.
Material changes and notable items
- Q3 gross margin declined from 25.8% to 25.3%, while nine-month margin improved from 24.4% to 25.8%. Management attributed the year-to-date improvement mainly to higher Aerospace volume, partly offset by increased engineering and development costs.
- Research, development, design and related engineering costs were $26.6 million for the first nine months, versus $21.0 million; Q3 costs were $9.5 million, versus $6.9 million.
- SG&A was $19.8 million year to date, up $2.6 million, chiefly due to $1.1 million of additional legal costs and increased IT spending. Q3 SG&A included $0.3 million of additional legal costs.
- Lower debt contributed to reduced interest expense. The company extended its $35 million revolving credit line through August 31, 2016; the $18 million term loan matures January 30, 2014. The facility is secured by substantially all company and guarantor assets. The company reported covenant compliance.
- The 2011 tax rate benefited primarily from reversal of approximately $1.3 million of uncertain-tax-position reserves, as well as domestic production deductions and R&D credits. The lower rate materially supported reported earnings and is not solely reflective of operating performance.
- A one-for-ten Class B stock distribution occurred in August 2011; reported share counts and per-share data were restated accordingly.
Outlook, risks and contingencies
Management forecast 2011 Aerospace sales of $208–$210 million and Test Systems sales of $14–$15 million; the filing does not provide a consolidated sales forecast. Aerospace backlog was $101.4 million, with approximately $52.4 million expected to ship during the remainder of 2011. Test Systems backlog was $8.8 million, with approximately $3.5 million expected to ship; quarterly new orders were $2.8 million. Total company backlog was $110.2 million, compared with $99.8 million at December 31, 2010.
Management expected 2011 capital spending of approximately $14–$15 million and another $7–$8 million over the following 12–15 months to complete and occupy the Kirkland facility. It said operating cash flow and the revolving facility should fund future capital needs.
Key risks include dependence on aircraft production and refurbishment, government funding and contracts, product acceptance, vendor performance, execution and acquisition integration, and general economic conditions. Panasonic Avionics accounted for 36% of nine-month sales and 39% of Q3 sales; the U.S. Government accounted for 10% and 9%, respectively. Management warned that a significant reduction in sales to either customer could adversely affect results.
Legal matters include a claim seeking recovery of $1.4 million in alleged preferential payments related to Eclipse Aviation, which Astronics disputes, and a German patent-infringement action seeking injunctive and monetary relief. The company disputes the patent claim and said it could not reasonably estimate potential liability; an adverse outcome could materially affect results and financial condition. Management did not expect ordinary-course legal proceedings overall to have a material adverse effect, but noted outcomes are uncertain.
Important facts for investors to verify
- Whether Aerospace demand and backlog convert into shipments and sales as forecast, and how much growth remains dependent on Panasonic Avionics.
- Whether Test Systems can improve from ongoing operating losses, particularly given weaker Q3 sales and margin.
- The sustainability of earnings after the $1.3 million tax-reserve reversal and other tax benefits.
- Cash generation relative to elevated capital spending, including remaining facility build-out costs and available credit capacity.
- Developments and potential financial exposure in the patent litigation and Eclipse-related claim.
- Whether management’s segment sales forecasts and expected backlog shipments are achieved; the filing cautions that interim results are not necessarily indicative of full-year results.