Astronics Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparisons are with the three months ended March 29, 2014, unless otherwise noted. Astronics supplies aerospace, defense, electronics and semiconductor products through its Aerospace and Test Systems segments. The quarter includes Armstrong, acquired January 14, 2015.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $161.6 | $141.0 | +14.7% |
| Gross profit / margin | $40.2 / 24.8% | $30.0 / 21.3% | Margin +3.5 percentage points |
| SG&A / percent of sales | $22.6 / 14.0% | $16.4 / 11.6% | Expense +$6.2 |
| Income from operations | $17.5 | $13.6 | +$3.9 |
| Interest expense, net | $1.2 | $2.3 | -$1.1 |
| Net income | $10.7 | $7.5 | +42.3% |
| Basic / diluted EPS | $0.49 / $0.47 | $0.35 / $0.33 | Higher year over year |
| Cash from operations | $26.8 | $2.6 | +$24.2 |
Segments and operating drivers
- Aerospace: Sales were $142.4 million, up 16.3%; operating profit was $23.4 million, with a 16.4% margin versus 14.3%. Organic sales increased 10.9%; Armstrong contributed $6.6 million of sales. Commercial transport growth was the main market driver.
- Test Systems: Net sales were $19.3 million versus $18.6 million. Operating loss widened to $2.2 million from $1.7 million, and margin was negative 11.5% versus negative 9.1%. Lower commercial-electronics sales were offset by military sales; a follow-on order from a major customer was expected to begin shipping in Q2 or Q3.
- Consolidated organic sales increased $14.0 million, or 9.9%; Armstrong added $6.6 million. Gross margin improved in part because prior-year cost of products sold included approximately $8.7 million of inventory step-up expense, versus $0.6 million in Q1 2015. Engineering and development costs rose to $22.2 million from $17.2 million.
Financial position and liquidity
- At April 4, 2015, cash was $22.6 million; current assets were $237.3 million and current liabilities $105.6 million. Working capital was approximately $131.7 million.
- Total debt was approximately $216.8 million, including $2.7 million current maturities and $214.1 million long-term debt, compared with $183.0 million at December 31, 2014. The company reported $200.0 million drawn on its revolving credit facility and approximately $148.9 million available, net of letters of credit.
- The credit facility matures September 26, 2019. At quarter-end, the leverage ratio was 1.5x against a maximum of 3.5x (temporarily 4.0x following a permitted acquisition); interest coverage was 22.8x against a 3.0x minimum. The company reported compliance with its covenants.
- Operating cash flow increased to $26.8 million, helped by higher earnings and working-capital movements, including an $18.6 million cash benefit from accounts receivable. Investing used $60.0 million, including $52.6 million for Armstrong and $7.1 million in capital expenditures. Financing provided $35.4 million, including $40.0 million of borrowing and $5.7 million of debt repayments. Cash increased $1.4 million to $22.6 million.
- Total assets were $600.3 million, up from $562.9 million at year-end. Goodwill was $119.6 million and net intangible assets $112.0 million; both increased mainly in connection with Armstrong.
Outlook, risks and notable items
- Management forecast 2015 consolidated sales of $680 million to $740 million: $550 million to $580 million Aerospace and $130 million to $160 million Test Systems. Capital spending was expected to be $20 million to $27 million, and engineering and development costs $75 million to $80 million.
- Backlog at April 4 was $378.5 million, compared with $370.7 million at December 31, 2014; approximately $314.1 million was expected to ship in 2015. Segment backlog was $234.0 million Aerospace and $144.5 million Test Systems.
- Management said 2015 cash needs for working capital, debt service and capital equipment were expected to be met by operating cash flow and cash balances, with the revolving facility available if needed. Forecasts are subject to risks including aircraft production and retrofit cycles, government military funding, customer demand, and the timing and variability of large Test Systems projects.
- Two Aerospace customers accounted for 24% and 15% of Q1 sales, respectively; together they represented 39% of sales. Management warned that losing either could significantly harm sales and earnings. Receivables from these customers were approximately $21.2 million.
- Lufthansa Technik patent litigation is a significant contingency. A German court ruled in February 2015 that AES infringed a patent; Astronics appealed. Any recall exposure would concern products in German distribution channels if Lufthansa provides required guarantees. A related U.S. patent case was in early discovery. The company said potential losses were not then probable or estimable and recorded no liability for either matter.
- Foreign currency translation produced a $3.6 million comprehensive loss in Q1, and management noted exposure to the euro and Canadian dollar, though it did not consider 2015 exchange-rate effects significant. No derivative instruments were outstanding at quarter-end. Management reported no goodwill or intangible-asset impairment indicators.
- The company acquired Armstrong for approximately $52.6 million in cash. Its initial purchase accounting remained subject to finalization. Management also noted that the new revenue-recognition standard could affect timing for certain transactions; its impact was under evaluation.
Most important facts for investors to verify
- Whether the $680 million to $740 million annual sales outlook and segment forecasts remain achievable, particularly given Test Systems’ operating loss and shipment timing.
- How much reported growth and margin improvement reflect organic performance versus acquisitions and the prior-year inventory step-up comparison.
- Debt levels, available revolver capacity, covenant headroom, and the effect of acquisition funding and future cash requirements.
- Customer concentration and the status, potential remedies and financial exposure of the Lufthansa patent cases.
- Conversion of backlog into revenue and cash, and whether planned capital spending and engineering costs remain within management’s ranges.