Astronics Corporation — Q3 2021 Form 10-Q
Reporting period: Third quarter ended October 2, 2021; year-to-date results cover the nine months then ended. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. Comparisons are with the quarter and nine months ended September 26, 2020.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $111.8 million | $106.5 million | $328.9 million | $387.8 million |
| Gross profit / margin | $17.2 million / 15.4% | $15.2 million / 14.2% | $46.9 million / 14.3% | $77.7 million / 20.0% |
| Operating loss | $4.5 million | $9.0 million | $19.9 million | $95.2 million |
| Net loss | $7.2 million | $5.3 million | $27.2 million | $95.8 million |
| Diluted loss per share | $0.23 | $0.17 | $0.88 | $3.11 |
- Revenue and segments: Q3 sales rose about 5% year over year. Aerospace revenue increased 16% to $95.8 million, while Test Systems revenue fell to $16.1 million from $24.0 million. Nine-month sales declined about 15%, chiefly due to lower Aerospace sales amid the pandemic.
- Profitability: Q3 Aerospace returned to operating profit of $1.9 million from a $6.3 million loss; Test Systems swung to a $2.2 million operating loss from $0.9 million profit. For the nine months, the smaller net loss versus 2020 primarily reflects the absence of the prior-year $87.0 million impairment charge; 2021 still recorded an operating loss.
- Cash flow: Operating activities used $18.5 million in the first nine months, versus $31.5 million provided in the prior-year period, mainly reflecting changes in working capital, including higher receivables and inventory. Investing activities used $4.6 million; financing activities provided $12.3 million.
- Liquidity and debt: Cash was $29.1 million at October 2, 2021, down from $40.4 million at year-end 2020. Revolving credit debt was $183.0 million, up from $173.0 million; $190.9 million of availability remained, subject to the facility’s minimum-liquidity covenant. The company reported covenant compliance. Total liabilities were $358.6 million and shareholders’ equity was $251.7 million.
- Other metrics: Backlog was $354.4 million, versus $283.4 million at December 31, 2020. Q3 bookings were $153.5 million, a 1.37:1 book-to-bill ratio. Nine-month capital expenditures were $4.6 million.
Material changes and unusual items
- Supply-chain constraints delayed shipments and raised costs; management estimated Q3 revenue would have been $8 million to $10 million higher under normal supply conditions.
- Q3 gross profit included $1.1 million of AMJP government-grant benefit. The company recognized $3.4 million of COVID-related government assistance in the first nine months, including the AMJP award.
- The company recorded a $2.2 million non-cash reduction in the fair value of a contingent-consideration liability, benefiting SG&A in the nine-month period.
- Following facility consolidation, the company sold an Aerospace facility after quarter-end for approximately $9.1 million; net proceeds were about $8.8 million and an estimated $5.0 million gain was expected in Q4 2021.
- A potential earnout from the 2019 semiconductor test-business sale remains under negotiation. The buyer’s calculation changed from $10.7 million to $7.1 million for 2020; timing and amount remain uncertain, and no gain had been recorded.
Outlook, risks and contingencies
- Management expected Q4 2021 revenue of $115 million to $118 million and stronger shipments in the final quarter. It did not provide 2022 guidance, citing uncertainty.
- The company expected AMJP to contribute about $7.3 million to gross profit in Q4 2021 and about $6.2 million in Q1 2022, subject to payroll attribution and grant conditions. Full award receipt is principally conditioned on retaining a defined employee group through March 2022.
- Management reduced its 2021 capital-expenditure expectation to approximately $8 million to $9 million. About 32% of backlog was expected to convert to revenue during the remainder of 2021.
- Key risks include persistent COVID-19 effects on aerospace demand, supplier shortages and delivery delays, higher labor and benefit costs, and possible workforce attrition or supplier disruption from vaccine requirements.
- Legal matters include Lufthansa patent-infringement litigation, for which a $17.1 million reserve was recorded for a German indirect claim, and Teradyne patent and copyright claims against Astronics Test Systems. The filing says no amount was accrued for the Teradyne matter because loss exposure was not considered probable or estimable; elsewhere it states that losses related to patent-infringement proceedings are probable.
- The credit facility restricts certain activities, including acquisitions and share repurchases, through Q2 2022. The company also maintained a valuation allowance against U.S. federal deferred tax assets amid expected taxable losses and recent cumulative losses.
Investor verification priorities
- Track whether supply constraints ease and delayed shipments convert into revenue, margins and cash flow.
- Verify backlog conversion, Q4 revenue delivery, and the timing and conditions for AMJP grant receipts and recognition.
- Monitor operating cash burn, revolver borrowings, covenant headroom and the February 2023 credit-facility maturity.
- Follow resolution of the disputed semiconductor-sale earnout and the outcome or reserve adequacy for legal proceedings, particularly the differing descriptions of patent-litigation probability.
- Assess whether commercial aerospace recovery and Test Systems bookings support sustainable profitability without relying on grants or other one-time benefits.