Astronics Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended October 1, 2016; comparisons are with the quarter and nine months ended October 3, 2015. Amounts are in millions of dollars unless noted.
Business context and results
Astronics supplies aerospace, defense, electronics and semiconductor markets through its Aerospace and Test Systems segments. Management cites aircraft production and upgrades, military funding, and irregular timing of large Test Systems projects as important business drivers.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $155.1 | $200.1 | $479.1 | $534.9 |
| Gross profit / margin | $38.7 / 24.9% | $59.4 / 29.7% | $123.0 / 25.7% | $149.0 / 27.9% |
| Operating income | $17.5 | $37.1 | $57.7 | $82.8 |
| Net income | $12.1 | $24.7 | $38.5 | $53.1 |
| Diluted EPS | $0.41 | $0.82 | $1.28 | $1.76 |
Q3 sales declined 22.5% and nine-month sales declined 10.4%. Lower volume reduced profits and margins; lower commissions partially offset the decline in SG&A. The 2016 effective tax rates were lower—26.5% for Q3 and 29.3% year to date—partly reflecting the federal R&D tax credit’s permanent reinstatement.
Segment performance and material changes
- Aerospace: Q3 sales were $125.2 million, down 9.8%, and operating margin fell to 14.0% from 16.6%. Nine-month sales declined 1.8% to $406.0 million and margin was 15.0%, versus 16.1%. Lower avionics sales, including satellite antenna systems and VVIP in-flight entertainment/cabin management, and lower systems certification activity weighed on results. Year-to-date growth in electrical power and motion products partly offset those declines.
- Test Systems: Q3 sales fell 51.3% to $29.9 million; operating margin was 10.8%, versus 27.6%. Nine-month sales declined 40.0% to $73.1 million and margin fell to 8.9% from 20.2%, primarily due to lower semiconductor-market shipments. Aerospace and defense sales partly offset the weakness.
- Consolidated backlog was $275.2 million at October 1, compared with $274.4 million at year-end 2015 and $297.0 million a year earlier. Q3 orders were below prior-year levels in both segments; Aerospace book-to-bill was 0.98.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $25.2 million, down from $43.2 million. The cash flow statement shows significant uses from receivables ($23.7 million) and customer advances/deferred revenue ($11.3 million), alongside net income of $38.5 million.
- Investing activities used $11.5 million, including $9.9 million of capital expenditures; the prior-year period included $52.6 million for the Armstrong acquisition.
- Financing activities used $19.1 million, including $25.9 million of debt repayments and $17.4 million of share repurchases, partly offset by $20.0 million of new borrowings. Cash declined $5.3 million to $13.3 million.
- At October 1, total debt was approximately $164.0 million, including $151.0 million outstanding on the revolving facility. The company reported $197.9 million of revolver availability, net of letters of credit. Its $350 million facility matures January 13, 2021.
- Current assets were $266.0 million and current liabilities $93.2 million. Shareholders’ equity was $329.4 million. The reported leverage ratio was 1.52x against a maximum covenant of 3.5x; interest coverage was 29.9x against a 3.0x minimum.
Outlook, risks and unusual items
- Management forecast 2016 consolidated sales of $635–$645 million: Aerospace $539–$545 million and Test Systems $96–$100 million. Expected 2016 effective tax rate was 29%–31%; planned capital expenditures were $15–$17 million, with R&D spending expected to be similar to 2015.
- Of the $275.2 million backlog, $121.9 million was expected to ship in 2016. Aerospace and Test Systems expected to ship $104.3 million and $17.6 million, respectively, during the remainder of 2016.
- Two Aerospace customers each accounted for more than 10% of consolidated sales; together they represented 36% of nine-month sales and had approximately $35.9 million in receivables at quarter-end. Management warns that losing either could significantly harm sales and earnings.
- A German patent-infringement case brought by Lufthansa against subsidiary AES had an adverse trial ruling and was under appeal; the court decision was scheduled for November 9, 2016. Exposure was not estimable and no liability was recorded. A related U.S. case was dismissed with prejudice, but Lufthansa appealed.
- Other risks include cyclical aircraft production and upgrades, military funding, semiconductor demand and the timing of large Test Systems projects. Management reported no material change in contractual obligations or interest-rate market risk. The company repurchased approximately 517,000 shares for $17.5 million under a $50 million authorization.
Important facts for investors to verify
- Whether forecast sales and segment shipment expectations were achieved, particularly given lower Test Systems semiconductor demand and Aerospace avionics weakness.
- Subsequent order, backlog and book-to-bill trends, and the timing and profitability of project shipments.
- Operating cash conversion and working-capital movements, especially receivables and customer advances/deferred revenue.
- Revolver utilization, covenant headroom and the funding of ongoing repurchases and capital spending.
- Developments in the German and U.S. Lufthansa litigation and any resulting financial exposure.