Tuesday morning, aerospace supplier Astronics (click ticker for report: ) reported mixed third quarter results. Revenue surged 22% year-over-year to $68.9 million, roughly in-line with consensus estimates. However, earnings were a bit weaker than expected, falling 27% year-over-year to $0.33 per share.
Unfortunately, all cost metrics for Astronics ticked up, leading to a 100 basis point year-over-year decline in gross margins to 24.3%, and a 190 basis point increase in SG&A expenses to 13.2% of revenue. Management cited a one-time issue—an increase in warranty reserves—as the main reason for the year-over-year decline. When we back out the number, gross margins were roughly flat. Assuming CEO Peter Gundermann was correct, we don’t view the issue as much of a problem.
SG&A, on the other hand, looks to be permanently higher as a result of the company’s previous acquisitions. The firm cited $2 million as a result of the acquisitions, and $900,000 of amortization of related costs for increasing SG&A expenses. Gundermann noted that $1.1 million of the increase was related to compensation, specifically sales compensation, which he said is structured differentially than the rest of the company. We think this implies lower SG&A expenses at some point, though we aren’t sure when it will occur. The company’s tax rate during the third quarter of 2011 was also incredibly low, so the surge in income tax expense negatively impacted the comparison.
Total aerospace revenues continued to grow at an impressive rate, increasing 23% year-over-year to $65.8 million. Demand for cabin electronics remains strong (up 33% on a year-over-year basis), particularly from commercial OEMs and retrofits, driving commercial transport revenue up 36% year-over-year to $47.9 million. Military sales remained flat. Airframe power sales to private jet customers were weak, but avionics sales were able to drive 7.4% revenue growth for the segment. FAA/Airport revenue, which is comprised of airfield lighting, fell 27% year-over-year, but the increase from the rest of the segment more than offset this slowdown.
The firm’s Test Systems segment, which only accounts for 4.5% of revenue, grew 7.5% year-over-year to $3.1 million. While not nearly as vital as cabin electronics, airframes, or any other aerospace product, the Test Systems segment is expected to contribute $10 million in revenue for the full year. The backlog fell 15% sequentially to $5.5 million, but the book-to-bill ratio improved to 0.69, from 0.59 in the previous quarter.
Overall, guidance was relatively strong, calling for full-year revenue of $267 million-$275 million, roughly in-line with consensus estimates. The aerospace backlog grew 2% sequentially to $110 million, and the segment’s book-to-bill ratio remains relatively strong at 0.98, though that’s down substantially from 1.24 in the previous period.
The quarter was a mixed bag, in our view, but we see profitability improving going forward. The firm’s decision to distribute 15% of its Class B shares to current shareholders was a little puzzling, in our opinion, so we will have to revisit our fair value estimate. However, the Class B distribution does not represent dilution to existing shareholders, but simply a larger number of diluted shares outstanding. We plan to publish an updated report soon.
Nevertheless, stock-market pricing weakness related to an Obama victory, as well as the sell off from slightly disappointing results could create an interesting opportunity for us to add to our position in the portfolio of our Best Ideas Newsletter. Initial reactions regarding the Boeing 787 Dreamliner have been overwhelmingly positive, and we think Astronics, EDAC Technologies (click ticker for report: ) and Precision Castparts (click ticker for report: ) are poised to benefit.