Astronics Corporation — Q1 2016 Form 10-Q
Business and period: Unaudited results for the three months ended April 2, 2016, compared with the three months ended April 4, 2015. Astronics supplies aerospace, defense, electronics and semiconductor markets through its Aerospace and Test Systems segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales | $159.5 million | $161.6 million |
| Gross profit / margin | $39.5 million / 24.7% | $40.2 million / 24.8% |
| Income from operations | $17.6 million | $17.5 million |
| Net income | $11.5 million | $10.7 million |
| Diluted EPS | $0.44 | $0.41 |
| Operating cash flow | $0.5 million | $26.8 million |
| Capital expenditures | $2.5 million | $7.1 million |
Revenue declined 1.3%, while net income rose about 7.5%; the lower effective tax rate (30.4% versus 34.4%) contributed to earnings growth. The 2016 tax rate benefited from the reinstated federal research and development tax credit. Engineering and development costs increased to $23.3 million from $22.2 million.
Segments: Aerospace sales fell 2.8% to $138.3 million and operating profit declined to $18.7 million from $23.4 million; margin contracted to 13.5% from 16.4%. Lower avionics sales, particularly satellite antenna systems, and higher engineering costs weighed on results. Test Systems sales grew 10% to $21.2 million and moved to $2.2 million operating profit from a $2.2 million loss, reflecting higher volume and efficiency initiatives.
Liquidity, debt and balance sheet
At April 2, 2016, cash was $15.8 million, total current assets $257.0 million and current liabilities $95.1 million. Total debt was approximately $172.3 million, including $2.7 million of current maturities; shareholders’ equity was $311.0 million. Cash decreased $2.8 million during the quarter. Operating cash flow was sharply lower year over year, mainly due to changes in operating assets and liabilities, including receivables, accrued expenses and customer advances/deferred revenue.
The $350 million revolving facility had $158.0 million outstanding and $190.9 million available net of letters of credit. Its maturity was extended to January 13, 2021. The reported leverage ratio was 1.29-to-1 and interest coverage was 35.6-to-1, compared with covenant limits of 3.5-to-1 and a minimum 3.0-to-1, respectively. The company said 2016 working capital, debt service and capital needs are expected to be met with operating cash flows, cash balances and, if needed, the revolver.
Outlook, changes and risks
Management forecast 2016 consolidated sales of $665–$710 million, including $572–$600 million from Aerospace and $93–$110 million from Test Systems. The high end of the Aerospace forecast was reduced by $16 million versus the prior range; Test Systems expectations were relatively unchanged. The expected 2016 effective tax rate is 29%–32%, and planned capital spending is $20–$25 million. Backlog was $276.8 million at quarter-end, with $229.8 million expected to ship in 2016; backlog was $378.5 million a year earlier.
Two Aerospace customers each represented more than 10% of consolidated sales: 22% and 15% combined concentration was not reported, and receivables from the two totaled approximately $31.1 million. Management warns that losing either customer could significantly harm sales and earnings. Results are also exposed to aircraft production and refurbishment cycles, government program funding, and uneven timing of large Test Systems projects.
A $50 million share repurchase program was authorized in February; approximately 129,000 shares costing $4.3 million had been repurchased by quarter-end. The company reported no material change in contractual obligations and no material foreign-exchange impact. It disclosed Lufthansa patent litigation in Germany and the United States: the German court had found infringement, but the company appealed and could not estimate exposure; a U.S. court ruling after quarter-end found the asserted patent claims indefinite, and AES intended to seek dismissal. No liability was recorded because loss exposure was not considered probable or estimable. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the reduced Aerospace sales outlook and lower backlog translate into further revenue or margin pressure.
- Whether operating cash flow recovers after the working-capital outflows, particularly receivables, accrued expenses and customer advances.
- How concentrated customer exposure and the Lufthansa litigation develop, including any subsequent estimate or recognition of potential losses.
- Future use of the repurchase authorization, capital spending, and revolving-credit availability and covenant headroom.
- The effect and implementation timing of forthcoming revenue-recognition, lease and stock-compensation accounting standards; the company was still assessing their impact.