Astronics Corp.’s first foray into the electronics test systems business didn’t go well, but that isn’t stopping the East Aurora company from delving into the industry again.
Astronics, in a move to bolster its long-struggling test systems unit, said Tuesday that it has agreed to buy EADS North America’s Test and Services Division in a deal that ultimately could be worth about $63 million.
The EADS business, which has about 210 employees at its facility in Irvine, Calif., provides highly engineered automatic test systems and instruments for a variety of industries, from the semiconductor and consumer electronics fields to the commercial aerospace and defense sectors. The business also makes and designs test equipment under the Racal and Talon brands.
The business had about $70 million in sales last year, with revenues for the current year expected to reach about $100 million, and possibly a little more. And unlike Astronics’ existing test systems business, which has consistently lost money since its acquisition in 2009, company executives expect the EADS unit to be profitable from the start.
“We believe there is a strong long-term potential in the test market, even though our experience in the test market has been something different,” Peter J. Gundermann, president and CEO of Astronics, said during a conference call.
Gundermann said the strengths of the EADS business should complement the abilities of Astronics’ existing test systems unit in Orlando, Fla.
“What we’re good at is the software side of the test business, while Irvine is better on the hardware side,” he said. “We like the EADS business also because it has a proven ability to diversify and find new markets.”
Those diversification efforts have left the EADS unit with a sales base that got more than half of its $70 million in sales last year from commercial customers – a figure that is expected to approach 70 percent this year, Gundermann said. In contrast, Astronics’ test systems business gets nearly all of its roughly $10 million in annual revenues from military customers.
With a backlog of orders approaching $120 million, Gundermann said, forecasts that the EADS business could reach $100 million in sales this year are on solid footing, although he said the unit will need to continue winning new contracts to maintain its sales at that level in future years.
“It’s a lumpier business, and it’s a business that has transitioned more easily away from the defense business,” he said. “The challenge for this business will be what happens in the medium and the long term.”
Tyler Hojo, an analyst at Sidoti & Co., estimated that the purchase price of $53 million plus a working capital adjustment that is expected to be about $10 million, values the EADS business at around four times its cash flow – a valuation that he described as low.
“It’s a business that has not had much of a track record outside the defense business to merit a higher multiple,” Gundermann said.
Astronics branched out into the test systems business five years ago with its acquisition of DME Corp., an Orlando-based company that makes weapons and communications test equipment, training and simulation devices and aviation safety solutions. But that deal ran into trouble almost immediately, when DME failed to win a major defense contract that it had counted on, leading to a steady decline in its sales, which had reached as high as $86 million before the deal. The test systems business also has been a drain on Astronics’ profits, steadily losing money even as Astronics officials restructured the business in an effort to cut costs, while still retaining the unit’s expertise.
Astronics’ existing test systems business lost $2.9 million through the first three quarters of last year on $7.2 million in sales.
The EADS deal, which Astronics is paying for with cash and bank borrowings, is expected to close next month, assuming the acquisition receives anti-trust clearance from federal regulators.
Once EADS is in the fold, Gundermann said, he hopes the capabilities of both companies can help Astronics’ bulked-up test systems business win work on bigger projects, possibly even as a subcontractor on very large contracts.