Astronics Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; fourth-quarter results are also reported. Astronics supplies aerospace and defense products and test, training, and simulation systems through its Aerospace and Test Systems segments.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Sales | $339.9 million | $266.4 million |
| Gross profit / margin | $87.9 million / 25.8% | $69.4 million / 26.1% |
| Operating income | $42.3 million | $32.6 million |
| Net income / net margin | $27.3 million / 8.0% | $21.9 million / 8.2% |
| Diluted EPS | $1.49 | $1.20 |
| Cash from operations | $49.5 million | $24.2 million |
| Capital expenditures | $6.9 million | $16.7 million |
| Cash and cash equivalents at year-end | $54.6 million | $7.4 million |
| Total debt at year-end | $200.3 million | $30.0 million |
Sales rose 27.6%, with $39.5 million attributed to 2013 acquisitions and $34.0 million to organic growth. Gross margin eased 0.3 percentage points; management cited acquired-inventory fair-value step-up expense, higher engineering and development spending, and acquisition-related costs, partly offset by lower warranty and inventory-obsolescence costs. Interest expense increased to $4.1 million from $1.0 million, primarily reflecting acquisition financing and higher leverage.
At December 31, working capital was $126.0 million, compared with $60.0 million a year earlier. Current assets were $211.2 million and current liabilities $85.2 million. The company reported $188.0 million of long-term debt and $12.3 million of current maturities. Its $75 million revolving facility had no borrowings at year-end and approximately $65.2 million available after letters of credit. Covenant ratios were 3.70x fixed-charge coverage and 2.68x leverage; the company reported compliance.
Fourth-quarter 2013 sales were $105.5 million, net income was $6.4 million, and diluted EPS was $0.34. The comparable fourth-quarter 2012 figures were $67.4 million, $5.7 million, and $0.31, respectively.
Segments and material changes
- Aerospace: Sales were $330.5 million, up $75.6 million. Operating profit increased to $55.2 million, while margin declined to 16.7% from 17.3%. Commercial transport sales were $237.7 million; military aerospace sales were $48.7 million.
- Test Systems: Net sales were $9.4 million, down from $11.5 million. Operating loss narrowed to $3.8 million from $5.0 million. Military spending constraints continued to weigh on the segment.
- 2013 acquisitions expanded Aerospace: Peco was acquired for $136.0 million in cash; AeroSat for $12.0 million in cash plus contingent consideration of up to $53.0 million; and PGA for approximately $32.9 million, funded with cash and Astronics shares. Their combined contribution to 2013 sales was included in the $39.5 million acquisition-related increase.
- Backlog at year-end was reported as $214.2 million, versus $114.5 million in 2012. Aerospace backlog was $207.1 million and Test Systems backlog $7.1 million.
Outlook, risks, and unusual items
- Management forecast 2014 consolidated sales of $585 million to $640 million, including ATS, acquired February 28, 2014. The filing separately forecast Aerospace sales of $475 million to $505 million and Test Systems sales of approximately $110 million to $135 million, including ATS.
- Management expected 2014 capital spending of $33 million to $37 million, including approximately $21 million for the purchase and renovation of a Portland-area facility. Engineering and development costs were estimated at $65 million to $69 million, excluding ATS.
- The ATS acquisition was completed after year-end for approximately $53 million in cash, plus a working-capital adjustment. The revolving commitment was increased to $125 million; $58 million was drawn to finance the acquisition, with approximately $56.1 million available on February 28, 2014. The credit agreement temporarily raised permitted leverage limits.
- Customer concentration is significant: Panasonic accounted for 29.6% of 2013 sales and Boeing for 14.5%. The company identified customer losses or lower orders, aircraft production cycles, government funding, fixed-price contract cost overruns, supplier delays, acquisition integration, and variable-rate debt as key risks. Approximately 96% of debt was variable-rate; a 1% rate change was estimated to affect annual net income by $1.2 million.
- A German patent-infringement case brought by Lufthansa Technik remained unresolved. A February 2014 court judgment upheld part of the patent, the infringement proceedings were no longer stayed, and management could not reasonably estimate potential loss.
- No goodwill or intangible-asset impairment was recorded in 2013. Acquisitions substantially increased goodwill and intangible assets; related valuations and purchase-price allocations for PGA and AeroSat were not final.
- The independent auditor issued unqualified opinions on the financial statements and internal control. Management concluded internal controls were effective, but the acquired Peco, AeroSat, and PGA businesses were excluded from the internal-control assessment.
Key facts for investors to verify
- Reconcile the backlog disclosures: the filing gives total backlog of $214.2 million, but a 2014 outlook passage calls consolidated backlog $207.1 million and says approximately $204.1 million is expected to ship; $207.1 million is also stated as Aerospace backlog.
- Assess whether the 2014 sales forecast and expected ATS contribution can be achieved, and distinguish organic growth from acquisition-driven growth.
- Review debt service, floating-rate exposure, covenant headroom, and the impact of ATS financing and future acquisition spending.
- Monitor Panasonic and Boeing concentration, aerospace build rates, defense budgets, fixed-price contract estimates, and the Lufthansa Technik litigation.
- Track post-acquisition integration, final purchase-price allocations, contingent earn-out liabilities, and the acquired businesses’ margins and cash generation.