Astronics Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012, compared with the corresponding 2011 periods ended July 2, 2011. Dollar figures below are in millions unless otherwise noted.
Business context and reporting period
Astronics designs and manufactures aerospace systems and military test, training and simulation systems. It reports Aerospace and Test Systems segments. The November 2011 Ballard acquisition contributed avionics databus products to Aerospace. On July 30, 2012, after quarter-end, Astronics acquired enhanced-vision-systems maker Max-Viz.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $65.0 | $55.5 | $130.1 | $110.6 |
| Gross profit / margin | $17.1 / 26.2% | $14.4 / 25.9% | $35.2 / 27.0% | $28.9 / 26.1% |
| Income from operations | $7.8 | $7.2 | $17.0 | $15.4 |
| Net income | $5.2 | $4.5 | $11.3 | $9.8 |
| Diluted EPS | $0.39 | $0.35 | $0.86 | $0.76 |
- Q2 sales rose 17.2%; first-half sales rose 17.7%. Aerospace drove the increase, while Test Systems sales declined.
- SG&A rose to $9.3 million in Q2 and $18.1 million in the first half; as a share of sales, it increased to 14.3% and 13.9%, respectively. Management cited Ballard, compensation and, for the first half, higher legal costs.
- First-half operating cash flow was $9.0 million, compared with $3.2 million in 2011. Capital expenditures were $4.5 million; cash declined $2.8 million to $8.2 million. Financing used $7.2 million, primarily reflecting repayment of a $5.0 million subordinated note.
- At June 30, cash was $8.2 million and total debt was approximately $25.8 million, including $5.3 million current and $20.5 million long-term. No revolver borrowings were outstanding; $23.3 million was available after letters of credit. The $35 million revolving facility matures in 2016. The company reported compliance with its covenants.
- Current assets were $101.8 million and current liabilities $39.0 million. Receivables were $43.5 million and inventory $44.6 million, up from $35.7 million and $40.1 million, respectively, at year-end 2011.
Material changes and segment results
- Aerospace: Q2 sales increased to $62.4 million from $51.9 million; operating profit was $10.9 million versus $9.0 million, with margin of 17.5% versus 17.3%. First-half sales were $124.4 million versus $102.1 million, and operating profit $22.8 million versus $18.3 million. Higher commercial transport demand, including cabin electronics, and Ballard products contributed to growth.
- Test Systems: Q2 sales declined to $2.6 million from $3.5 million, and operating loss widened to $1.3 million from $0.5 million. First-half sales fell to $5.7 million from $8.5 million, and operating loss widened to $2.4 million from $0.5 million. Management attributed losses to sales levels insufficient to cover fixed costs.
- Company backlog was $114.2 million at June 30, versus $106.3 million at December 31, 2011. Aerospace backlog was $107.7 million; Test Systems backlog was $6.5 million.
- First-half comprehensive income was $7.7 million, down from $10.0 million, despite higher net income. A $3.6 million after-tax retirement-liability adjustment drove the difference; accumulated other comprehensive loss increased to $4.4 million.
Outlook, risks and unusual items
- Management raised its 2012 Aerospace sales forecast to $250–$264 million and maintained its Test Systems forecast at $10–$11 million. It expected full-year engineering and development expense of $40–$43 million and capital spending of $18–$20 million.
- Management said operating cash flow and the revolving facility should fund future capital requirements. Aerospace backlog included approximately $76.2 million expected to ship during the remainder of 2012; Test Systems backlog included approximately $5.5 million expected to ship during that period.
- Max-Viz was purchased for $10.0 million cash plus contingent consideration of up to $8.0 million, dependent on revenue growth. Its unaudited 2011 revenue was approximately $5.4 million. Purchase-price allocation was not yet complete.
- Astronics adopted a new supplemental executive retirement plan in March 2012 and recorded a $5.8 million projected benefit obligation. Estimated 2012 pension cost for the plan was approximately $0.8 million; it is unfunded.
- Customer concentration is significant: Panasonic represented 37% of first-half revenue and the U.S. Government 8%. The filing identifies aircraft production rates, government funding, customer demand, product acceptance, vendor performance and acquisition integration among key risks.
- Pending legal matters include a claim seeking $1.4 million in alleged preferential payments and a German patent-infringement case. Astronics disputes both; it said the potential loss in the patent matter could not be reasonably estimated and an adverse outcome could materially affect results or financial condition.
- The filing provides no numerical full-year consolidated sales or earnings forecast. Management cautioned that interim results are not necessarily indicative of full-year performance.
Most important facts for investors to verify
- Whether Aerospace growth and backlog convert into shipments and margins as forecast, and whether Test Systems losses improve.
- How much reported growth reflects Ballard and other acquired activity versus underlying demand, especially commercial transport and Panasonic exposure.
- Cash conversion, receivables and inventory growth, and remaining capital spending and debt repayment needs.
- The final Max-Viz purchase accounting, contingent consideration, and contribution to results after acquisition.
- Developments in the German patent litigation and the quantified cost and funding implications of the supplemental retirement plan.