Astronics Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 27, 2014; comparative periods ended September 28, 2013. The filing is unaudited. Astronics supplies aerospace and defense products and test systems through its Aerospace and Test Systems segments. Results include the February 2014 acquisition of EADS North America’s Test and Services division (ATS).
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $179.4m | $89.7m | $495.0m | $234.5m |
| Gross profit / margin | $51.3m / 28.6% | $23.8m / 26.5% | $124.5m / 25.2% | $62.7m / 26.7% |
| Income from operations | $25.8m | $12.4m | $61.9m | $31.4m |
| Net income | $17.1m | $7.2m | $37.7m | $20.9m |
| Diluted EPS | $0.75 | $0.32 | $1.67 | $0.95 |
| Operating cash flow | — | $68.5m | $34.1m |
Q3 sales rose 100.1%; management attributed $74.1m to businesses acquired after the prior-year quarter and $15.6m to organic growth. For the first nine months, sales increased 111.1%, including $226.8m from acquired businesses and $33.7m of organic growth. Comparisons therefore reflect significant acquisition effects.
Q3 gross margin improved year over year, while the nine-month margin declined. Management cited acquired-inventory fair-value step-up costs, higher warranty and engineering and development costs; nine-month results also included $1.7m of workforce-realignment charges. Acquired intangible amortization increased SG&A.
Segments and material changes
- Aerospace: Q3 sales were $122.2m, up 39.7%, with operating profit of $22.1m and an 18.0% margin. Nine-month sales were $366.1m, up 60.7%, with operating profit of $60.3m and a 16.5% margin, down from 18.0%. Commercial transport demand supported organic growth; military sales declined.
- Test Systems: Q3 net sales were $57.2m and operating profit was $5.7m; nine-month net sales were $128.8m and operating profit was $8.0m. ATS contributed $55.5m of Q3 sales and $124.3m year to date. The prior-year segment was much smaller, making growth comparisons non-like-for-like.
- Company backlog was $301.4m at quarter-end, compared with $214.2m at December 31, 2013. Aerospace backlog was $221.8m and Test Systems backlog was $79.6m.
Cash, debt and liquidity
- Cash was $24.9m at September 27, down from $54.6m at year-end. Nine-month operating cash flow of $68.5m was offset by $100.0m of investing outflows, including $70.0m for ATS and $30.0m of capital expenditures. Financing cash flow was $2.4m.
- Total debt was $212.6m, including $10.2m current maturities. The September 2014 amended facility provides a $350m revolving line, with an option to increase it by up to $150m, and matures September 26, 2019. At quarter-end, $186.5m was outstanding and approximately $154.8m remained available, net of letters of credit.
- The company reported compliance with its credit covenants; leverage was 1.56:1 against a maximum of 3.5:1, and interest coverage was 15.05:1 against a minimum of 3.0:1. Scheduled principal payments over the next 12 months were approximately $10.2m.
- Current assets were $277.5m and current liabilities $135.7m. Accounts receivable was $111.9m and inventory $126.6m, both higher than at year-end. Customer advance payments and deferred revenue increased to $45.6m from $20.7m.
Outlook, risks and unusual items
- Management expected 2014 Aerospace sales of $485m–$490m and Test Systems sales of $160m–$165m. Expected 2014 capital spending was $44m–$47m; the full-year effective tax rate was expected at 31%–32% if the R&D tax credit was not extended.
- Management expected delivery of the final unit under Test Systems’ current major-customer contract by year-end 2014. Follow-on orders were possible but might not arrive by year-end; failure to replace this business could reduce future earnings. The largest Test Systems customer accounted for $45.6m of Q3 sales and $99.5m year to date.
- Three customers each represented more than 10% of consolidated sales; together they accounted for 55.3% of Q3 and 51.1% of nine-month sales. Management warned that loss of a major customer could materially hurt sales and earnings.
- A German patent-infringement case brought by Lufthansa Technik was pending, with a hearing scheduled for November 2014. Astronics disputed the claim and could not reasonably estimate potential loss; an adverse outcome could materially affect results and financial condition.
- AeroSat acquisition consideration included contingent payments of up to $53m tied to revenue targets. The ATS purchase-price allocation was preliminary. The filing also noted $18.6m of nine-month expense from acquired-inventory fair-value step-ups, including $16.0m in Test Systems.
- Other risks cited include aircraft production and refurbishment cycles, government funding, contract awards, new-product acceptance, acquisition integration and vendor performance. The company stated that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Assess organic growth and underlying margins separately from acquired-business contributions and acquisition-related costs.
- Track collection of receivables, inventory levels and cash conversion, given the substantial increases in receivables and inventory and the decline in cash.
- Verify refinancing capacity, debt repayment, covenant headroom and the effect of variable-rate borrowing costs.
- Monitor renewal or replacement of the Test Systems major-customer contract and the high consolidated customer concentration.
- Follow Aerospace and Test Systems backlog conversion against management’s 2014 sales outlook.
- Review the German patent litigation and any developments in contingent acquisition payments or the final ATS purchase-price allocation.