Aerospace supplier Astronics (click ticker for report: ) reported mixed fourth quarter results Tuesday morning. Revenue grew 10% year-over-year to $67 million, falling about $3 million short of consensus expectations. Earnings were also on the light side, growing 9% year-over-year to $0.37, which was disappointing, in our view.
Much like in the third quarter, Astronics was harmed by increased warranty and inventory reserves, as well as higher engineering and development (E&D) costs. Altogether, gross margins slipped 240 basis points year-over-year to 26%. However, CEO Peter Gundermann noted on the firm’s conference call that a few million dollars of sales were pushed into the first quarter of 2013, so we think both margins and revenue growth could improve going forward.
SG&A expenses during the quarter were also not great, growing 230 basis points year-over-year to 14.3% of sales. The firm settled a lawsuit for $1 million, elevating legal expenses, and the small acquisitions the firm made during 2011 also boosted total costs. Legal costs are likely a one-time event, so we aren’t too worried about the firm’s cost containment abilities at this time.
On a segment basis, the firm’s Aerospace division easily outpaced its Test Systems segment, growing 11% year-over-year to $65 million, though costs associated with E&D weighed on operating margins. Management noted a strong USB product that won acceptance for some narrowbody aircraft that could hit the income statement soon, and the firm seems optimistic about the product’s potential for installation with other airlines. The firm’s extremely small Test Systems segment continues to lose money as sales drop, but the operating loss posted during the fourth quarter was halved ($1.46 million). Still, the segment remains almost entirely dependent on government spending, which we aren’t counting on as a big driver for any industry in 2013. Therefore, Astronics remains dependent on aircraft retrofits and Boeing’s 787 Dreamliner (click ticker for report: ) for delivering revenue growth in 2013, which we like a lot. Management didn’t really address the Dreamliner battery issue, but they did note that its 787 sales haven’t ramped yet.
Going forward, Astronics provided a revenue outlook of $275-$310 million, or between 3%-16% revenue growth. The firm’s backlog currently stands at $114.5 million, which is down sequentially, but higher than a year ago. Overall, 2012 was a rather disappointing year for the company, as we thought the firm’s strong sales growth would translate to the bottom line, which it did not. However, earnings should improve regardless of how strong revenue growth is, so we remain confident that 2013 could be a more fruitful year for shareholders.