Astronics Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013; unaudited. Unless noted, amounts are in millions of dollars. Astronics supplies aerospace systems and military test, training and simulation products through its Aerospace and Test Systems segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $89.7 | $68.9 | $234.5 | $199.0 |
| Gross profit | $23.8 | $16.7 | $62.7 | $51.9 |
| Gross margin | 26.5% | 24.3% | 26.7% | 26.1% |
| Operating income | $12.4 | $7.7 | $31.4 | $24.7 |
| Net income | $7.2 | $4.9 | $20.9 | $16.2 |
| Diluted EPS | $0.39 | $0.27 | $1.14 | $0.89 |
- Q3 sales rose 30.2%; nine-month sales rose 17.8%. Aerospace drove the growth, while Test Systems sales declined.
- Q3 Aerospace operating margin improved to 17.6% from 16.1%; nine-month margin was 18.0% versus 17.5%. Test Systems remained loss-making: nine-month operating loss was $2.9 million, unchanged at a 40.0% margin.
- Operating cash flow was $34.1 million for the first nine months, up from $17.1 million. Investing used $140.7 million, principally reflecting the Peco acquisition; financing provided $167.4 million, primarily from acquisition debt. Capital spending guidance for 2013 was approximately $7–$24 million.
- At September 28, cash was $68.2 million, current assets $191.9 million and current liabilities $56.5 million. Total debt was approximately $198.7 million, including $188.1 million long-term debt. No revolver balance was outstanding; reported remaining borrowing capacity was $51.5 million, with $8.8 million of letters of credit outstanding.
Changes, acquisitions and outlook
- Peco was acquired on July 18 for $136 million in cash and added $15.7 million of sales from acquisition through quarter-end. The acquisition substantially increased goodwill and intangible assets and was funded mainly with a new $190 million term loan. Peco contributed little operating profit in Q3, partly due to $2.0 million of purchase-accounting inventory charges.
- Management expected a further approximately $3.0 million Peco inventory fair-value charge in Q4 and Peco intangible amortization of approximately $1.7 million in Q4. It forecast 2013 Aerospace sales of $325–$335 million, including $32–$34 million of Peco sales for the remainder of 2013 and $1–$2 million from AeroSat. Test Systems sales were expected to be approximately $10 million. Full-year engineering and development expense was forecast at $52–$54 million; Q4 effective tax rate at 31%–33%.
- Backlog was $168.2 million, including $39.7 million for Peco, versus $114.5 million at December 31, 2012. Aerospace backlog was $159.5 million; Test Systems backlog was $8.7 million. Management expected approximately $86.0 million of Aerospace backlog to ship during the remainder of 2013.
- After quarter-end, Astronics agreed to acquire AeroSat for $12 million plus contingent payments of up to $53 million, and PGA Electronic for €21.4 million (approximately $28 million), payable approximately 60% in cash and 40% in Astronics shares.
Risks and unusual items
- Panasonic accounted for 30% of nine-month revenue and Boeing for 12%, creating significant customer concentration. Management cited aircraft production rates, government funding, customer demand, program changes, vendor performance and acquisition integration as risks.
- The company’s debt was primarily variable-rate; its credit agreement is secured by substantially all company assets and includes leverage and fixed-charge coverage covenants. Astronics reported compliance at quarter-end. The term-loan payment schedule includes a large 2018 maturity.
- A German patent-infringement action brought by Lufthansa Technik remained unresolved; Astronics disputed the claim and said it could not reasonably estimate potential loss. The company did not expect ordinary-course legal proceedings overall to have a material adverse effect. It settled a separate AE Liquidation matter in Q3 with no significant operating impact.
- Peco integration, potential unknown liabilities and internal-control integration were identified as risks. Management stated that its disclosure controls were effective at quarter-end and that no materially affecting internal-control changes occurred during the quarter.
- Q3 gross-margin improvement reflected higher volume and lower warranty and inventory-obsolescence expense versus the prior year, but Peco purchase-accounting charges partly offset the benefit. The filing says interim results are not necessarily indicative of full-year results.
Most important facts to verify
- Whether Aerospace guidance, Peco contribution and the anticipated Q4 inventory and amortization charges were achieved.
- Debt repayment, floating-rate exposure, covenant headroom and the substantial 2018 maturity; the filing’s term-loan schedule and MD&A describe the maturity amount differently ($128.25 million versus a $123.5 million balloon).
- Customer concentration and the sustainability of Panasonic and Boeing demand, as well as Aerospace backlog conversion.
- Integration, purchase-price accounting and contingent consideration for Peco and the subsequent AeroSat and PGA transactions.
- Developments in the Lufthansa Technik litigation and any financial exposure from the Peco multiemployer pension plan.