Astronics Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2011; comparisons are to the periods ended July 3, 2010. Financial statement amounts are in millions of dollars unless stated otherwise. Astronics supplies aerospace products and military test, training and simulation systems through its Aerospace and Test Systems segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Sales | $55.5 | $47.1 | $110.6 | $94.0 |
| Gross profit / margin | $14.4 / 25.9% | $10.7 / 22.7% | $28.9 / 26.1% | $22.2 / 23.6% |
| Operating income | $7.2 | $4.6 | $15.4 | $10.7 |
| Net income | $4.5 | $2.4 | $9.8 | $5.8 |
| Diluted EPS | $0.39 | $0.22 | $0.84 | $0.52 |
Sales rose 17.8% in Q2 and 17.6% in the first half. Aerospace drove the increase, led by commercial transport and cabin electronics; Test Systems sales were nearly flat in Q2. Gross-margin improvement reflected higher Aerospace volume and operating leverage, partly offset by higher engineering and development costs. SG&A was 12.9% of sales in Q2 and 12.2% for the first half, unchanged as a share of sales year over year. Lower debt reduced interest expense. Lower effective tax rates (32.2% in Q2 and 31.9% for the half) reflected the domestic production deduction and R&D tax credits.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $3.2 million, down from $7.5 million. Higher earnings were offset by increased working-capital investment, including higher receivables and inventory.
- Capital expenditures were $7.0 million, compared with $1.5 million in the prior-year period, primarily reflecting the purchase of a Redmond, Washington property. Cash used in financing was $2.8 million, including $3.5 million of net long-term debt payments. Cash declined $6.6 million to $16.1 million.
- At July 2, cash was $16.1 million; current assets were $99.1 million and current liabilities $30.0 million. Total debt was $35.1 million, comprising $5.3 million current and $29.8 million long-term, down from $38.6 million at year-end 2010.
- No revolver borrowings were outstanding. The $35 million facility had $22.4 million available for working capital after letters of credit; the company reported compliance with covenants. The term loan balance was $18.0 million. The facility was committed through January 2012.
- Management expected 2011 capital spending of $17–$21 million and stated that operating cash flow and the revolver should fund future capital requirements. In July, the company separately purchased its leased Fort Lauderdale facility for approximately $5.1 million using cash on hand, and expected another $5–$8 million over 12–15 months for the Redmond build-out and occupancy.
Segments, outlook and other developments
- Aerospace: Q2 sales were $51.9 million, up from $43.6 million; operating profit was $9.0 million (17.3% margin), versus $6.8 million (15.5%). First-half sales were $102.1 million and operating profit $18.3 million (17.9% margin). Full-year 2011 sales forecast: $204–$212 million. Backlog was $93.1 million, with approximately $69.7 million expected to ship during the rest of 2011.
- Test Systems: Q2 sales were $3.5 million and operating loss $0.5 million (15.4% of sales), improving from a $1.0 million loss. First-half sales were $8.5 million and operating loss $0.5 million. Management cited low sales volume; the 2011 loss benefited from a roughly $0.3 million reduction in estimated warranty liability. Full-year sales forecast: $16–$18 million. Backlog was $9.0 million, with about $6.4 million expected to ship during the rest of 2011; quarterly new orders were $3.5 million.
- Total backlog was $102.1 million, versus $99.8 million at December 31, 2010 and $97.3 million a year earlier. Management identified aircraft production rates, military funding, product design wins, customer upgrades and market demand as important growth and profitability factors. No consolidated revenue or earnings guidance was provided in the filing text.
- Panasonic Avionics represented 31% of Q2 sales and 34% of first-half sales; U.S. Government sales represented 8% and 10%, respectively. Management warned that significant reductions in either customer’s purchases could adversely affect sales and earnings.
- Legal matters include a disputed $1.4 million claim for alleged preferential payments related to Eclipse Aviation and a disputed German patent-infringement action. The company could not reasonably estimate potential liability in the patent case and stated an adverse result could materially affect results and financial condition. It did not expect ordinary-course proceedings overall to have a material adverse effect, while noting outcomes are uncertain.
- On August 2, 2011, the company announced a one-for-ten Class B share distribution to holders of common and Class B stock, with fractional shares paid in cash. Distribution was expected around August 30. Management reported no goodwill or intangible impairment indicators and no material changes in market-risk exposures; disclosure controls were considered effective.
Most important facts for investors to verify
- Whether revenue growth and margin gains continue, particularly in Aerospace, and whether the stated segment sales forecasts are achieved.
- Whether Test Systems can improve profitability despite low sales volume and how much its results depend on warranty-estimate revisions.
- Whether working-capital needs, planned property spending and capital expenditures constrain cash generation or increase borrowing needs.
- How customer concentration—especially Panasonic Avionics—and commercial aircraft demand or government funding affect backlog conversion and sales.
- Developments and potential exposure in the patent litigation and the Eclipse-related claim, neither of which has a clear ultimate outcome in the filing.
- The status and terms of the revolver after its January 2012 commitment date, and the impact of the Class B share distribution on share counts and investor holdings.