Business Context and Reporting Period
Company: Astronics Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2003
Business Overview: Astronics provides electronic systems for the military, commercial transport, and business jet markets. The reporting period is significantly impacted by the conclusion of a major U.S. Air Force F-16 night vision lighting contract and the prior spin-off of its MOD-PAC CORP. subsidiary.
Key Financial Metrics
| Metric | 9 Months 2003 | 9 Months 2002 | Q3 2003 | Q3 2002 |
|---|---|---|---|---|
| Net Sales | $24,855 | $34,185 | $7,607 | $10,754 |
| Net Income (Loss) | $552 | $3,972 | $(297) | $1,281 |
| Income from Continuing Ops | $240 | $3,442 | $(280) | $1,009 |
| Operating Cash Flow | $953 | $5,475 | N/A | N/A |
| Cash & Equivalents (End) | $11,174 | $12,170 | $11,174 | $12,170 |
| Total Debt (Current + Long-term) | $13,726 | $13,983 | $13,726 | $13,983 |
| EPS (Diluted, Net) | $0.07 | $0.48 | $(0.04) | $0.16 |
Note: All dollar figures in thousands unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 27.3% year-to-date and 29.3% in Q3 compared to 2002. The primary driver was the completion of the F-16 night vision contract, which contributed $9.6 million in sales during the first nine months of 2002 versus only $0.7 million in 2003.
- Margin Compression: Cost of products sold as a percentage of sales increased significantly to 85.5% in Q3 2003 from 70.6% in Q3 2002. This was due to fixed production costs not decreasing proportionately with the drop in sales volume.
- Profitability Shift: The company reported a net loss of $297,000 for Q3 2003, compared to a net income of $1.28 million in Q3 2002. Income from continuing operations turned negative in Q3 2003.
- Discontinued Operations: Results include income from discontinued operations (MOD-PAC spin-off and Electroluminescent Lamp group). The MOD-PAC spin-off was completed in March 2003, removing $21.0 million in net assets from the balance sheet.
Outlook, Risks, and Management Commentary
- Market Conditions: Management cites reduced government spares procurement and a depressed commercial transport market as factors in the sales decline, excluding the F-16 contract completion.
- Liquidity: The company holds $11.2 million in cash and has an unused $8.0 million line of credit. Management believes current cash balances and operating cash flow are adequate to meet operational and capital expenditure requirements for the remainder of 2003.
- Backlog: Backlog stood at $17.0 million as of September 27, 2003, down from $17.8 million in the prior year, largely due to the absence of the completed F-16 program backlog.
- Interest Rate Risk: The company has approximately $13.6 million in floating rate debt. An interest rate swap fixes the rate on $5.95 million of this debt. A 1% change in interest rates would impact annual net income by less than $100,000.
- Accounting Policy: The company uses the intrinsic value method for stock-based compensation. Pro forma adjustments for fair value accounting would have resulted in a net loss for the nine months ended September 27, 2003.
Investor Verification Checklist
- F-16 Contract Replacement: Verify if new contracts have been secured to replace the revenue lost from the concluded F-16 night vision program.
- Fixed Cost Structure: Assess management's plan to reduce fixed production and development costs to improve margins given the lower sales volume.
- Commercial Market Recovery: Monitor trends in the commercial transport and airline industries, which management cites as "soft" and a contributor to sales declines.
- Debt Covenants: Confirm continued compliance with financial performance covenants on the $8 million line of credit, especially given the recent operating losses.
- Discontinued Operations: Review the final settlement of the MOD-PAC spin-off and the ongoing losses from the Electroluminescent Lamp Business Group.