Astronics Corporation (NASDAQ: ATRO) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023; comparisons are to the periods ended July 2, 2022. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. Financial figures below are in millions of dollars, except per-share amounts.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $174.5 | $129.1 | $331.0 | $245.3 |
| Gross profit / margin | $32.7 / 18.7% | $15.7 / 12.2% | $60.2 / 18.2% | $35.6 / 14.5% |
| Operating income (loss) | $2.4 | $(8.4) | $0.03 | $(12.6) |
| Net loss | $(12.0) | $(11.0) | $(16.4) | $(14.1) |
| Diluted loss per share | $(0.37) | $(0.34) | $(0.50) | $(0.44) |
| Net interest expense | $5.9 | $1.7 | $11.4 | $3.3 |
Q2 sales rose 35.1%, led by Aerospace growth, especially commercial transport; Test Systems sales declined. For the first half, sales increased 34.9%. Higher volume improved gross margin, partly offset by higher material and labor costs. SG&A was $30.3 million in Q2 and $60.2 million in the first half, reflecting increased wages and benefits and litigation costs. Higher borrowing costs contributed to increased interest expense. Tax expense was $8.1 million in Q2 and $9.4 million year to date, including the effect of a valuation allowance on deferred tax assets related to tax-capitalized research and development costs.
Cash flow, balance sheet and liquidity
- Operating cash flow: Used $21.2 million in the first half of 2023, versus $10.3 million used in the prior-year period. Higher receivables and inventory absorbed cash; prior-year cash flow benefited from tax refunds and grant proceeds.
- Investing and financing: Investing used $0.4 million, compared with $19.5 million provided in the prior-year period, which included larger business-sale earnout receipts. Financing provided $11.9 million, including net debt proceeds; the company also paid $6.4 million in debt issuance costs.
- Cash: Cash and restricted cash totaled $4.3 million at July 1, 2023, down from $13.8 million of cash and cash equivalents at December 31, 2022.
- Debt: The balance sheet reported $8.96 million of current maturities and $168.7 million of long-term debt. Management reported net debt of $178.7 million, up from $150.2 million at year-end. The ABL facility had $93.7 million drawn and $26.3 million available; its temporary maximum commitment was raised to $120 million through October 31, 2023, then returns to $115 million. The term loan’s remaining balance was $80.3 million. The filing reports approximately $183 million of floating-rate debt.
- Covenants and liquidity: Astronics stated it was in compliance with covenants at quarter-end. Minimum liquidity requirements are $20 million through delivery of the March 2024 quarter compliance certificate and $10 million thereafter. Required minimum trailing-four-quarter EBITDA rises over coming quarters; a 1.10:1 fixed-charge coverage ratio applies beginning in Q1 2024. Management said covenant compliance will be closely monitored and depends on achieving expected results.
- Capital spending: The company expected 2023 capital expenditures of $7 million to $12 million. A $150 million shelf registration statement was available for potential future securities offerings; none had been issued under it as of quarter-end.
Material changes and operating trends
- Aerospace: Q2 sales rose 44.9% to $158.4 million and segment operating margin improved to 8.7%, from a loss margin of 3.0%. Commercial transport sales increased 61.9%, supported by airline travel, higher fleet utilization and production rates. First-half segment sales were $294.0 million, up 39.5%.
- Test Systems: Q2 sales fell to $16.1 million and the operating loss widened to $6.1 million. The segment cited unfavorable mix, fixed-cost under-absorption and increased litigation expenses. First-half operating loss was $6.7 million; excluding a $5.8 million deferred-revenue reversal, the filing reports a $12.6 million operating loss.
- Backlog and bookings: Total backlog reached a record $611.1 million, compared with $571.4 million at December 31, 2022 and $494.4 million a year earlier. Q2 bookings were $207.1 million, for a 1.19:1 book-to-bill ratio. The company expected to recognize approximately $502.0 million of remaining performance obligations as revenue over the next 12 months.
- Segment restructuring: Test Systems incurred $0.6 million in Q2 severance charges. Management expected the workforce and management changes to yield $4 million to $5 million in annual savings beginning in Q3 2023.
Outlook, risks and unusual items
- The filing provides no formal full-year revenue or earnings guidance. Management said it expects sales growth and working-capital reductions to help fund operations, while identifying possible efficiency, cost-reduction, supplier and collections actions.
- Management remained positive on aerospace demand but said recovery to pre-pandemic activity, particularly in widebody aircraft, would take longer than previously anticipated. Supply-chain disruption, component lead times, labor availability and costs, inflation, customer order timing and delivery schedules remain risks.
- Management warned that weaker-than-expected operating results could impair liquidity, financing access or covenant compliance and could permit lenders to demand repayment. A 1% change in interest rates on variable-rate debt would affect annual pretax results by approximately $1.8 million.
- Legal contingencies include Lufthansa patent litigation. The company reported reserves of approximately $16.8 million for German indirect claims and $7.3 million for estimated UK damages and interest at July 1, 2023. A July 12, 2023 German court ruling, after quarter-end, reduced direct-damage interest and allowed a possible $1.2 million recovery, expected to be recorded in Q3; it also reduced the indirect-claim reserve by $1.3 million in Q2. The UK damages trial was scheduled for October 2024. A separate Teradyne matter had only a copyright claim remaining; no loss accrual was recorded because exposure was not considered probable and estimable.
- Other notable items: the $3.4 million final earnout from the semiconductor test-business divestiture was recognized in Q1 2023; a $5.8 million deferred-revenue liability reversal benefited Test Systems results; and a $1.8 million liability reversal related to an equity investment benefited other income. The prior-year first half included a $6.0 million AMJP grant benefit, complicating year-over-year comparisons.
- The company disclosed ongoing potential exposure to COVID-19 aftereffects, the Russia-Ukraine conflict, customer concentration (Boeing was 11.5% of Q2 sales), and U.S. government contract cost audits. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress in converting the record backlog into sales and cash, especially given receivable and inventory growth and ongoing supply constraints.
- Quarterly covenant headroom, minimum-liquidity compliance and the company’s ability to meet rising EBITDA thresholds and the 2024 fixed-charge coverage test.
- Whether Aerospace margin improvement persists and Test Systems’ restructuring produces the expected savings without further execution or litigation costs.
- Debt costs, principal repayment requirements, floating-rate exposure and any use of the $150 million shelf registration.
- Developments in Lufthansa and Teradyne proceedings, related reserve estimates, and the timing and financial effect of any judgments or settlements.