Astronics Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended July 4, 2015; comparative periods ended June 28, 2014. Astronics supplies products and engineering services to aerospace, defense, electronics, and semiconductor markets through its Aerospace and Test Systems segments. It acquired Armstrong Aerospace for $52.6 million in cash on January 14, 2015.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Sales | $173.2 | $174.6 | $334.8 | $315.5 |
| Gross profit / margin | $49.5 / 28.6% | $43.2 / 24.7% | $89.6 / 26.8% | $73.2 / 23.2% |
| Income from operations | $28.2 | $22.5 | $45.7 | $36.1 |
| Net income | $17.7 | $13.1 | $28.4 | $20.7 |
| Diluted EPS | $0.77 | $0.58 | $1.24 | $0.91 |
- Q2 sales declined 0.8%; Armstrong contributed $7.1 million, while organic sales fell $8.5 million (4.9%), primarily due to lower Test Systems sales. First-half sales rose 6.1%; Armstrong contributed $13.8 million and organic sales increased 1.7%.
- First-half operating cash flow was $20.9 million versus $23.2 million. Investing used $67.6 million, including the $52.6 million Armstrong purchase and $12.3 million of capital expenditures. Financing provided $50.0 million. Cash ended the period at $23.8 million.
- At July 4, cash was $23.8 million, current assets $274.1 million, and current liabilities $109.9 million. Balance-sheet debt was $231.2 million, including current maturities. The company separately reported $215.0 million drawn on its revolving facility and $133.9 million available, net of letters of credit.
- Leverage ratio was 1.7x and interest coverage 30.9x, against covenant limits of 3.5x maximum leverage and 3.0x minimum interest coverage. The company reported compliance with all covenants.
Changes and segment results
- Q2 Aerospace sales increased 8.8% to $132.2 million, while operating profit fell to $20.3 million from $20.8 million and margin declined to 15.3% from 17.1%. Armstrong added $7.1 million of sales; higher engineering and development spending, lower Armstrong margins, and higher operating costs pressured margins.
- Q2 Test Systems sales declined 22.7% to $41.0 million, but operating profit increased to $9.9 million from $4.0 million and margin rose to 24.1% from 7.6%. First-half sales fell 15.8% to $60.3 million, chiefly from lower commercial electronics shipments; military sales partly offset the decline.
- Prior-year margins were depressed by acquired-inventory step-up costs: $8.7 million in Q2 2014 and $17.4 million in the first half of 2014, versus $0.1 million and $0.7 million, respectively, in 2015. This is an important comparability factor.
- Research, development, design, and related engineering costs were $21.3 million in Q2 and $43.6 million in the first half, up from $20.6 million and $37.9 million. First-half SG&A rose to $43.9 million from $37.1 million, including acquisition-related costs and increased headcount and compensation.
Outlook, risks, and contingencies
- Management forecast 2015 consolidated sales of $680–$715 million: $545–$570 million Aerospace and $135–$145 million Test Systems. Expected capital spending was $20–$27 million and engineering and development costs $75–$80 million.
- Backlog was $352.0 million at July 4, versus $370.7 million at December 31, 2014 and $326.8 million a year earlier; approximately $263.0 million was expected to ship in 2015.
- Management cited sensitivity to aircraft production, military funding, design wins, airline upgrades, and global economic conditions. Test Systems projects may be large and multi-year, creating substantial fluctuations in orders, sales, profits, and backlog.
- Three customers each represented more than 10% of first-half sales (22%, 14%, and 11%); receivables from these customers totaled approximately $47.4 million. The filing warns that losing any one could significantly harm sales and earnings.
- A German court ruled in February 2015 that an AES power supply infringed a Lufthansa patent. Astronics appealed; potential damages were not estimable and no liability was recorded. Lufthansa also filed a U.S. patent lawsuit, which the company intends to contest; exposure was likewise not estimable. German enforcement could require cessation of distribution if specified bank guarantees are provided; none had been issued as of the filing.
- Other unusual items include a $1.3 million fair-value adjustment to acquisition contingent consideration recorded in SG&A and foreign-currency translation losses of $3.2 million for the first half. Management reported no goodwill or intangible-asset impairment indicators.
- The company was evaluating the forthcoming revenue-recognition standard, expected to apply beginning in fiscal 2018, and planned early adoption of debt-issuance-cost presentation guidance by the end of 2015, with no material impact expected.
Most important facts for investors to verify
- Whether full-year sales guidance is achievable, especially given falling Test Systems sales and the decline in total backlog since year-end.
- Whether gross-margin improvement persists after accounting for the unusually high prior-year inventory step-up charges.
- Customer concentration, Test Systems project timing, and the conversion of backlog into shipments and cash.
- Debt availability, covenant headroom, and working-capital needs, including inventory growth and lower customer advance payments and deferred revenue.
- Developments in both Lufthansa patent cases, including any damages estimate or distribution restrictions.
- Final purchase-price allocation and performance of Armstrong, including acquisition-related costs and contingent consideration estimates.