Astronics Corporation (NASDAQ: ATRO) — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter filing. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. Aerospace products include electrical power and motion systems, lighting and safety, avionics, aircraft structures and certification services; Test Systems provides automated test, training and simulation systems. Commercial transport is the largest market. Boeing represented 11% of consolidated sales, unchanged from 2022.
Financial performance
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Sales | $689.2 million | $534.9 million |
| Gross profit / gross margin | $120.8 million / 17.5% | $71.5 million / 13.4% |
| Operating loss / margin | $6.7 million / (1.0)% | $30.0 million / (5.6)% |
| Net loss / diluted loss per share | $26.4 million / $0.80 | $35.7 million / $1.11 |
| Operating cash flow | $(24.0) million | $(28.3) million |
| Capital expenditures | $7.6 million | $7.7 million |
| Debt at year-end | $172.5 million | $164.0 million |
| Cash and restricted cash at year-end | $11.3 million | $13.8 million |
| Working capital | $246.4 million | $213.7 million |
Sales grew 28.8%, led by Aerospace, whose sales rose 31.1% to $604.8 million. Test Systems sales increased to $84.4 million. The annual net loss narrowed by $9.3 million, while interest expense rose to $23.3 million from $9.4 million, largely reflecting higher rates and the 2023 refinancing. Net debt was $161.2 million, up from $150.2 million.
Aerospace operating profit improved to $24.6 million from a $1.9 million loss. Test Systems reported an $8.7 million operating loss, versus $8.1 million. Its 2023 sales included a $5.8 million reversal of deferred revenue for a program no longer expected to occur; excluding that item, the segment’s reported operating loss was $14.5 million.
Fourth-quarter 2023 sales were $195.3 million, compared with $158.2 million a year earlier. The quarter reported net income of $7.0 million, versus a $6.8 million net loss in fourth-quarter 2022; the filing attributes the improvement primarily to higher gross profit on increased volume.
Liquidity, debt and financial position
The company used $24.0 million in operating cash during 2023. Financing activities provided $25.4 million, including $21.3 million of net proceeds from its at-the-market share offering and $8.5 million of net borrowings. Year-end cash and restricted cash totaled $11.3 million; the balance sheet separately reports $4.8 million of cash and $6.6 million of restricted cash.
The January 2023 refinancing established a $90 million asset-based term loan and a $115 million asset-based revolving facility. At year-end, $87.0 million was drawn on the revolver, with $32.7 million of availability reported, subject to borrowing-base and minimum-liquidity requirements. The term loan’s rate was SOFR plus 8.75%; its current-maturity rate was 14.2% at year-end. All debt was variable-rate. Management estimated a 1 percentage-point rate change would affect annual net loss by approximately $1.7 million before tax.
The company was in compliance with debt covenants at December 31, 2023, but management said covenant compliance could be challenging in 2024. Minimum trailing-four-quarter Adjusted EBITDA requirements increase from $51.7 million for fourth-quarter 2023 to $57.6 million in first-quarter 2024, $65.2 million in second-quarter 2024 and $70 million thereafter. A 1.10:1.00 minimum fixed-charge coverage ratio applies beginning in first-quarter 2024. Management expects operating cash flow, borrowing capacity and ATM proceeds to support operations for at least 12 months, contingent on achieving expected results.
Material changes and unusual items
- Cost and margin pressures persisted from inflation, supply constraints and labor costs. Management cited higher volume and pricing actions as supports to margin recovery, while noting cost increases may take time to flow through sales.
- A customer filed for Chapter 11 bankruptcy in November 2023. Astronics reserved $7.5 million of receivables and $3.6 million of dedicated inventory, totaling $11.1 million of segment charges.
- SG&A increased to $127.5 million from $101.6 million, including the $7.5 million receivables reserve, increased wages and benefits, higher incentive compensation, and increased litigation-related expenses and reserve adjustments.
- FY 2023 included a $3.4 million earnout gain from the 2019 semiconductor test business divestiture, compared with $11.3 million in 2022. No further earnout payments are expected.
- The company sold 1.33 million common shares under its ATM program in 2023, generating $21.3 million in net proceeds and diluting shareholders.
- No goodwill impairment was recorded. The auditors identified goodwill valuation and revenue recognition as critical audit matters; the financial statements and internal control over financial reporting received unqualified opinions.
Outlook, risks and contingencies
Management expects commercial aircraft build rates and airline aftermarket activity to improve during 2024 and 2025, and expects general aviation demand to continue improving. It also expects pricing to improve and certain input costs to stabilize during 2024. No numerical revenue or earnings guidance is provided in the filing. Consolidated backlog increased to $592.3 million from $571.4 million; the company expects approximately $526.5 million to be recognized as revenue in 2024. Aerospace backlog was $517.2 million, with $474.5 million expected in 2024; Test Systems backlog was $75.0 million, with $52.1 million expected in 2024. Test Systems bookings were below sales, with a 0.76 book-to-bill ratio.
Key risks include covenant and liquidity pressure, variable-rate debt, supply-chain and labor constraints, fixed-price contract cost overruns, dependence on cyclical aerospace demand and government funding, and customer concentration. The FAA’s January 2024 grounding of Boeing 737-9 MAX aircraft could affect Boeing production or demand; Boeing is a significant customer. The company also faces ongoing Lufthansa Technik patent litigation: recorded non-current liabilities include $17.1 million for German indirect-sales claims and $7.4 million for the UK matter. A UK damages trial was scheduled for October 2024, with payment considered likely in early 2025. Outcomes could differ from recorded estimates. A separate French claim has no recorded liability because loss was not considered probable and estimable.
Other considerations include a substantial deferred-tax valuation allowance of $65.6 million, no planned cash dividends, and debt-agreement restrictions on dividends and share repurchases. Management states it expects covenant compliance, but adverse changes in orders, delivery schedules, supply costs or labor availability could undermine liquidity and compliance.
Important facts for investors to verify
- Progress against 2024 EBITDA and fixed-charge coverage tests, minimum liquidity requirements, and available revolver capacity.
- Whether operating cash flow turns positive and debt, interest expense and net debt stabilize or decline.
- Conversion of the $592.3 million backlog into revenue, especially Test Systems bookings and backlog replenishment.
- Realized pricing and margin improvement after inflation, supply-chain and labor costs, and the impact of customer delivery schedules.
- Final damages and timing in the German and UK Lufthansa Technik cases, and developments in the French appeal.
- Effects of the Boeing 737-9 MAX grounding or related production changes on Astronics’ sales and customer exposure.
- Further customer credit or inventory losses following the 2023 bankruptcy, and the continuing effects of ATM share issuance on dilution.