Astronics Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparative periods ended October 1, 2016. Financial statements are unaudited. Astronics supplies products and services to aerospace, defense, electronics, and semiconductor markets through Aerospace and Test Systems segments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $149.6 million | $155.1 million | $453.1 million | $479.1 million |
| Gross profit / margin | $32.5 million / 21.7% | $38.7 million / 24.9% | $105.0 million / 23.2% | $123.0 million / 25.7% |
| Operating income | $10.1 million | $17.5 million | $38.5 million | $57.7 million |
| Net income | $6.1 million | $12.1 million | $25.3 million | $38.5 million |
| Diluted EPS | $0.21 | $0.41 | $0.85 | $1.28 |
- Q3 sales declined 3.5% year over year; net income fell about 50%. Nine-month sales declined 5.4% and net income fell about 34%.
- Cash from operations was $22.3 million for the first nine months, versus $25.2 million a year earlier. Capital expenditures were $9.7 million; cash used for investing was $22.0 million, including $10.2 million for CCC. Cash decreased $2.5 million to $15.4 million.
- At September 30, cash was $15.4 million, current assets $285.7 million, and current liabilities $93.1 million. Long-term debt was $174.7 million, plus $2.7 million of current maturities. The revolver had $167.0 million drawn and $181.9 million available, net of letters of credit.
- Credit agreement leverage ratio was 2.12:1 against a 3.5:1 maximum (temporarily 4.0:1 after qualifying acquisitions); interest coverage was 20.2:1 against a 3.0:1 minimum.
Material changes and management commentary
- Aerospace Q3 sales rose 2.8% to $128.7 million, but operating margin fell to 10.1% from 14.0%. Management cited pricing pressure, particularly cabin power products, and a $1.8 million CCC operating loss, as well as higher engineering costs. Nine-month Aerospace sales decreased 2.7% and operating margin fell to 11.8% from 15.0%.
- Test Systems Q3 sales fell 29.9% to $21.0 million, mainly due to lower semiconductor-market sales; operating margin declined to 5.2% from 10.8%. Nine-month sales fell 20.5%, with semiconductor sales down $15.5 million.
- Backlog was $302.3 million at quarter-end, up from $258.0 million at December 31, 2016. Q3 book-to-bill was 1.14:1 in Aerospace and 1.91:1 in Test Systems.
- SG&A rose to 15.0% of sales in Q3 from 13.6%. The nine-month effective tax rate improved to 27.0% from 29.3%, reflecting share-based compensation tax benefits, lower foreign tax rates, and the federal R&D credit; Q3 rate increased to 29.9% from 26.5%, partly due to additional state tax expense.
- CCC, a cabin-management and in-flight entertainment provider, was acquired April 3 for approximately $10.2 million net of acquired cash. Purchase accounting remained preliminary. On October 26, after quarter-end, Astronics agreed to acquire substantially all assets of Telefonix and a related company for approximately $104 million cash; the commitment is excluded from the contractual-obligations table.
Outlook, risks, and contingencies
- Management forecast Q4 2017 sales of $169–$183 million and full-year sales of $622–$636 million. Initial 2018 sales outlook was $675–$750 million. These forecasts exclude effects of the new revenue standard.
- Expected 2017 effective tax rate was 28%–30%; capital spending $17–$19 million; engineering and development costs $96–$97 million, including CCC.
- Revenue standard adoption was planned for January 1, 2018, using the modified retrospective method. Management said it could accelerate recognition for some customer-specific products where the company has an enforceable right to payment; the impact was still being evaluated.
- Two Aerospace customers each represented more than 10% of sales; together they represented 37% of nine-month 2017 sales. Management warned that losing either would significantly harm sales and earnings.
- German patent litigation brought by Lufthansa against AES remained unresolved. Estimated potential exposure was $1–$3 million; no liability was recorded because a loss was not considered probable. A separate U.S. patent case was affirmed in AES’s favor by the Federal Circuit on October 19, 2017; further review remained possible.
- Management identified a material weakness involving IT change controls and financial-statement consolidation review controls. Disclosure controls were deemed ineffective as of September 30, 2017; management expected remediation by December 31, 2017 and said it did not expect adjustments to previously issued financial statements.
- Key operating risks include aircraft production and refurbishment cycles, defense funding, semiconductor demand, large and irregular Test Systems project timing, foreign exchange exposure, and forward-looking forecast uncertainty.
Most important facts for investors to verify
- Whether Aerospace margins recover from pricing pressure and CCC’s reported operating loss, and whether CCC meets management’s expectations.
- Whether Test Systems orders and backlog convert into revenue, particularly given the sharp decline in semiconductor sales.
- Progress in remediating the material weakness and the effectiveness of controls after remediation.
- Funding, financing, and integration implications of the pending approximately $104 million Telefonix transaction, alongside existing debt and repurchases.
- Any material outcome or change in status of the German Lufthansa litigation, and the final quantified effects of the new revenue-recognition standard.