Astronics Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended April 2, 2022. Astronics supplies aerospace, defense and electronics products through its Aerospace and Test Systems segments.
Financial performance
- Revenue: $156.5 million, up 34.7% year over year. Aerospace revenue rose 33.7% to $135.6 million, driven mainly by commercial transport; Test Systems revenue was $20.9 million.
- Profit and margins: Gross profit was $27.5 million and gross margin was 17.6%, versus $19.9 million and 17.2%. Operating loss was $2.4 million, compared with a $4.2 million loss. Net loss was $4.4 million, or $0.14 per diluted share, versus a $3.1 million loss, or $0.10 per share.
- Segment results: Aerospace operating profit was $4.1 million, with a 3.0% margin, unchanged as a percentage of sales. Test Systems reported a $0.6 million operating loss; excluding a $5.8 million deferred-revenue reversal, its operating loss was $6.4 million.
- Cash flow: Operating activities used $19.2 million, versus $0.3 million provided a year earlier. The company attributed the outflow principally to inventory buildup and longer component lead times. Investing activities provided $1.9 million; financing activities provided $9.2 million.
- Liquidity and debt: Cash and restricted cash totaled $5.7 million. Debt was approximately $172.4 million and reported net debt was $172.4 million, up from $150.2 million at year-end 2022. The ABL facility had $88.1 million drawn and $26.9 million available. The company reported compliance with its debt covenants at quarter-end.
- Backlog and orders: Backlog was a record $578.5 million, versus $571.4 million at year-end and $475.1 million a year earlier. Approximately $498.7 million was expected to be recognized as revenue over the following 12 months. Quarterly bookings were $157.8 million and book-to-bill was 1.05:1, excluding the $5.8 million sales adjustment.
Key changes versus the prior-year quarter
- Revenue increased $40.4 million, chiefly from commercial transport demand and higher aerospace activity.
- Gross margin improved slightly despite higher material and labor costs; the 2022 comparison benefited from a $6.0 million aviation-industry grant offset to cost of sales.
- SG&A rose to $29.9 million from $24.1 million, reflecting higher wages and benefits and $3.2 million more litigation-related legal expense.
- Interest expense increased to $5.5 million from $1.6 million, primarily because of higher rates on the new credit facilities.
- The company recorded a $3.4 million gain from the final earnout on its former semiconductor test business, compared with $11.3 million in the prior-year quarter. Other income included a $1.8 million reversal of an equity-investment liability.
- The prior-year quarter included $6.0 million of grant benefit; the current quarter included a $5.8 million reversal of an acquired deferred-revenue liability that increased Test Systems sales and improved its reported operating result.
Outlook, risks and unusual items
- Guidance: Management expects Q2 2023 revenue of $165 million to $175 million and maintains full-year 2023 revenue guidance of $640 million to $680 million. Planned 2023 capital expenditures are $14 million to $17 million. Management expects positive cash flow for the remainder of 2023.
- Restructuring: After quarter-end, Test Systems began workforce and management changes expected to save $4 million to $5 million annually starting in Q3 2023; approximately $0.6 million of severance expense was expected in Q2.
- Test Systems program: A U.S. Marine Corps radio-test-equipment award is expected to generate approximately $40 million over five years; an initial task order of approximately $10 million was expected in the coming weeks. Management cautioned that new programs have progressed more slowly than anticipated.
- Debt and covenant risk: The January 2023 refinancing added a $115 million asset-based revolver, maturing in 2026, and a $90 million term loan with interest of SOFR plus 8.75% and a 2.50% SOFR floor. Minimum liquidity requirements and rising trailing-EBITDA covenants apply; management said covenant compliance during 2023 would be challenging and dependent on achieving expected results. The term loan’s weighted-average rate on current maturities was 13.60%.
- Other risks: Management cited supply-chain and labor constraints, inflation, variable customer demand, the pace of aircraft production and recovery (particularly widebody), defense funding, and uncertainty related to COVID-19 and the Russia-Ukraine conflict. A 1% change in rates on approximately $178.1 million of floating-rate debt was estimated to affect annual pretax results by about $1.8 million.
- Contingencies: Accrued Lufthansa patent-litigation liabilities included approximately $18.0 million for a German matter and $7.2 million for a UK matter, plus $0.8 million of UK legal-cost reimbursement. The UK damages trial was scheduled for October 2024. A separate Teradyne case was scheduled for trial in December 2023; no loss was accrued because exposure was not considered probable and estimable.
- Taxes: The effective tax rate was negative 41.3% despite a pretax loss, mainly reflecting a valuation allowance on certain deferred tax assets and other tax adjustments. The filing reports continuing valuation allowances in light of recent losses.
Important facts for investors to verify
- Whether revenue growth converts into sustainable operating-margin improvement and positive operating cash flow, given the quarter’s inventory-related cash use.
- Progress against the full-year revenue outlook, backlog conversion, and the timing and economics of the Marine Corps and other Test Systems programs.
- Compliance with minimum liquidity and EBITDA covenants as thresholds rise, and the effect of high variable interest costs on cash generation.
- Whether the Test Systems restructuring achieves the stated savings, and the extent to which reported segment results normalize after the deferred-revenue reversal.
- Developments in Lufthansa and Teradyne litigation, including potential changes to accrued liabilities or payment timing.