Astronics Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; quarterly figures below refer to the quarter ended December 31, 2016. Astronics supplies aerospace, defense, electronics and semiconductor products through its Aerospace and Test Systems segments.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Sales | $633.1 million | $692.3 million |
| Gross profit / margin | $159.5 million / 25.2% | $187.9 million / 27.1% |
| Operating income | $73.1 million | $98.8 million |
| Net income / diluted EPS | $48.4 million / $1.61 | $67.0 million / $2.22 |
| Operating cash flow | $48.9 million | $78.5 million |
| Capital expenditures | $13.0 million | $18.6 million |
| Cash and cash equivalents | $17.9 million | $18.6 million |
| Total debt | $148.1 million | $169.8 million |
| Working capital | $168.5 million | $145.7 million |
Year-end shareholders’ equity was $337.4 million and total assets were $604.3 million. Interest expense was $4.4 million; the effective tax rate was 29.6%. The company reported a 1.38 debt leverage ratio and 29.5 interest coverage ratio at year-end, and stated it complied with its credit covenants.
Fourth quarter: Sales were $154.1 million versus $157.3 million in Q4 2015; net income was $9.9 million versus $13.9 million, and diluted EPS was $0.33 versus $0.46.
Changes versus prior year
- Consolidated sales fell 8.5%; net income declined 27.7%. Gross margin contracted 1.9 percentage points.
- Aerospace sales decreased 2.9% to $534.0 million and operating margin fell to 14.6% from 15.5%. Lower avionics and systems-certification sales more than offset growth in electrical power and motion, structures, and military sales.
- Test Systems sales decreased 30.5% to $99.1 million, primarily reflecting a $54.2 million decline in semiconductor sales. Segment operating margin declined to 8.6% from 17.9%; aerospace and defense sales increased.
- Operating cash flow fell by $29.6 million, with lower net income and working-capital movements contributing. Receivables increased, while customer advance payments and deferred revenue declined.
- Debt decreased $21.7 million. The company repurchased approximately 523,000 shares for $17.6 million during 2016.
Outlook, risks and contingencies
- Management forecast 2017 consolidated sales of $640–$720 million, Aerospace sales of $560–$600 million, and Test Systems sales of $80–$120 million. Expected 2017 capital spending was $17–$22 million; engineering and development spending was expected to remain roughly at the 2016 level.
- Year-end backlog was $258.0 million, down from $274.4 million; approximately $230.4 million was expected to ship in 2017. Aerospace backlog was $219.1 million, with $197.8 million expected to ship in 2017; Test Systems backlog was $38.9 million, with $32.6 million expected to ship.
- Customer concentration is material: Panasonic represented 21.6% of 2016 sales and Boeing 15.2%. Sales are also exposed to aircraft production, airline spending, semiconductor demand and government defense funding. Almost all 2016 sales were under fixed-price contracts, creating exposure to cost overruns and delivery penalties.
- Most debt is variable-rate: approximately $136 million was floating-rate at year-end. Management estimated a 1 percentage-point rate change would affect annual net income by about $0.9 million. The $350 million revolving facility matures in January 2021.
- In German patent litigation brought by Lufthansa Technik, two courts found infringement; Astronics sought leave to appeal. Management estimated potential exposure at $1–$3 million, considered a loss not probable and recorded no liability. No products remained in German distribution channels at year-end. A separate U.S. case was dismissed with prejudice, but Lufthansa appealed; no liability was recorded.
- Goodwill and purchased intangible assets were substantial, and impairment estimates depend on assumptions including future cash flows and discount rates. No impairment was recorded in 2016. The company also identified adoption of new revenue-recognition rules in 2018 as potentially changing revenue timing.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether 2017 sales guidance and backlog conversion are supported by customer orders, particularly given lower Test Systems backlog and semiconductor sales.
- Trends in Panasonic and Boeing orders and the potential effect of any reduction in business with either customer.
- Whether Aerospace margins stabilize and Test Systems profitability recovers as sales mix and volume change.
- Working-capital and cash-flow trends, variable-rate debt exposure, and ongoing compliance with credit covenants.
- Developments in the German and U.S. Lufthansa litigation, including any change to the estimated German exposure or likelihood of a recorded liability.