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Best Ideas Newsletter holding Astronics (NASDAQ:ATRO) reported a first quarter that displayed the company's fantastic earnings potential. Revenue jumped 14% year-over-year to $76 million, which exceeded consensus estimates by a few million dollars. Earnings growth was robust as earnings per share rose 40% year-over-year to $0.56, which was significantly above consensus estimates. The firm's backlog increased $4.5 million sequentially to a record high of $119 million. To top it off, the firm generated $12.5 million in free cash flow.

Aerospace continued to be the standout segment. Total aerospace revenue rose 16% year-over-year to $71.7 million. While commercial revenue also grew 16%, business jet revenue jumped 30% year-over-year and FAA/Airport revenue increased 48% year-over-year. Although the FAA results were certainly a surprise to the upside, management warned that it was the result of the timing of orders for its Max-Viz product as opposed to a permanently higher level of spending. In any case, we liked the performance. Business jets, on the other hand, have suffered from weak demand during the past several years, and in spite of a solid increase, management isn't bullish on the segment for this year. CEO Peter Gundermann added:

"… our sweet spot is more in the smaller end but - and the smaller end has not had the kind of recovery this year that most industry watchers were expecting, and now they're hoping for next year. But from our perspective, we're really looking a few years out, and those small jet manufacturers are continuing to develop new airplanes."

Its smallest segment, Test Systems, was weak again, with revenue falling 27% year-over-year to $2.3 million. Unfortunately for shareholders, the segment isn't profitable at such a low level of sales, but management indicated it was taking measures to improve the cost structure of the business. We aren't anticipating a material improvement in the Test Systems business in the near term, nor do we think it is vital to our long-term thesis on Astronics.

On a product basis, Astronics remains tied primarily to cabin electronics, which grew 15% year-over-year to $40.4 million. However, the company saw fantastic growth of 71% in its avionics segment. These sales come from Ballard Technology, which was acquired in late 2011 for $30 million. Based on the strong sales trends we've seen recently, Astronics made a wise deal.

On the cost side, Astronics' gross margin declined 50 basis points year-over-year as the company experienced higher engineering and development costs. However, the firm mitigated its previous warrant reserve headache, which dragged gross margins down to the 26% level in the previous quarter. SG&A was $300,000 higher than that of the same period a year ago, but it fell 120 basis points to 12.4% of sales (as the company experienced powerful sales leverage). Overall, the firm's operating margin increased 80 basis points to 15% of sales.

Looking ahead, management narrowed its sales guidance range to $280 million to $310 million, though Gundermann mentioned that he thought there was a greater chance of upside to the sales guidance range than downside risk. The company's book-to-bill ratio increased to 1.05, suggesting future delivery demand looks robust. We remain bullish on the aerospace supply chain, and we will continue to hold shares of Astronics in the portfolio of our Best Ideas Newsletter.

Source: Astronics Surges On Record Results

Additional disclosure: ATRO is included in the portfolio of our Best Ideas Newsletter.