Astronics Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Unless noted, amounts are in U.S. dollars.
Business context
Astronics designs and manufactures aerospace products and automated test systems. Its reportable segments are Aerospace and Test Systems. The company acquired Armstrong Aerospace for $52.3 million in cash in January 2015; its results are included from the acquisition date.
Financial performance and changes
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Sales | $692.3 million | $661.0 million |
| Gross margin | 27.1% | 25.3% |
| Operating income | $98.8 million | $87.4 million |
| Net income | $67.0 million | $56.2 million |
| Diluted EPS | $2.55 | $2.16 |
| Operating cash flow | $78.5 million | $99.9 million |
| Capital expenditures | $18.6 million | $40.9 million |
- Sales rose 4.7%; Armstrong contributed $25.5 million and organic sales increased $5.7 million, or 0.9%. Net income increased 19.2%.
- Gross margin improved partly because acquired-inventory step-up costs fell to $1.0 million from $19.4 million in 2014. Engineering and development expense increased to $90.1 million from $76.7 million.
- Aerospace sales grew 11.1% to $549.7 million; operating margin declined to 15.5% from 16.1%. Test Systems sales fell 14.3% to $142.5 million, while operating margin improved to 17.9% from 7.4%, in part because 2014 included $16.8 million of inventory step-up costs and $1.7 million of workforce-reduction charges.
- Fourth-quarter sales were $157.3 million, net income $13.9 million and diluted EPS $0.53, versus $166.1 million, $18.4 million and $0.71, respectively, in fourth-quarter 2014.
- Operating cash flow declined by $21.4 million, primarily due to changes in operating assets and liabilities. Cash at year-end was $18.6 million; working capital was $145.7 million.
- Year-end debt was $169.8 million, including $155.0 million of floating-rate revolving credit borrowings. Debt declined from $183.0 million a year earlier. The company reported covenant compliance, a 1.28x leverage ratio and 34.9x interest coverage.
Outlook, risks and unusual items
- Management forecast 2016 consolidated sales of $665–$725 million, capital spending of $25–$30 million, and engineering and development expense at roughly the 2015 rate. Segment sales outlook: Aerospace $572–$616 million; Test Systems $93–$109 million.
- Backlog fell to $274.4 million from $370.7 million. Management expected approximately $236.1 million to ship in 2016. Test Systems backlog decreased to $61.7 million from $147.0 million, and its sales outlook indicates a substantially lower expected year.
- Panasonic, Apple and Boeing represented 21.0%, 13.1% and 13.0% of 2015 sales, respectively. The filing identifies loss or reduced orders from these customers as a significant risk.
- Other risks include cyclical airline and semiconductor markets, government defense funding and contract termination, fixed-price cost overruns, variable interest rates, acquisition integration, and potential product or supplier disruptions. A 1 percentage-point rate increase on variable debt was estimated to reduce annual net income by about $1.0 million.
- Lufthansa Technik obtained a German court ruling finding patent infringement; Astronics appealed. Related U.S. patent litigation was also pending. The company stated that potential losses were neither probable nor estimable and recorded no liability for these matters.
- Subsequent events: the credit facility maturity was extended to January 2021, and the board authorized a stock repurchase program of up to $50 million. No cash dividends were planned.
- Auditors issued an unqualified opinion on the financial statements and internal controls. Management’s control assessment excluded the 2015 Armstrong acquisition.
Key facts for investors to verify
- Whether 2016 sales guidance and the sizable decline in Test Systems backlog translated into realized revenue and margins.
- Customer concentration, particularly Panasonic, Apple and Boeing, and the sustainability of orders from each.
- Cash conversion and working-capital trends after operating cash flow fell despite higher earnings.
- Debt, variable-rate exposure, covenant headroom and any use of the authorized buyback.
- Developments, potential damages or product restrictions in the German and U.S. Lufthansa patent cases.
- Armstrong’s post-acquisition performance and the scope of controls coverage for the acquired business.