Astronics Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparative period ended April 2, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Astronics supplies aerospace, defense, electronics and semiconductor markets through its Aerospace and Test Systems segments. Quarterly sales declined 4.5% to $152.4 million, largely reflecting lower Test Systems sales. Net income edged up to $11.6 million from $11.5 million; diluted EPS was $0.38 in both periods.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $152.4 million | $159.5 million |
| Gross profit / margin | $38.3 million / 25.1% | $39.5 million / 24.7% |
| Operating income | $16.6 million | $17.6 million |
| Income before taxes | $15.5 million | $16.5 million |
| Effective tax rate | 25.2% | 30.4% |
| Net income | $11.6 million | $11.5 million |
| Diluted EPS | $0.38 | $0.38 |
| Cash from operations | $6.4 million | $0.5 million |
| Capital expenditures | $2.8 million | $2.5 million |
Segment performance and changes
- Aerospace: Sales fell 1.1% to $136.8 million. Segment operating profit rose to $19.8 million from $18.7 million, and margin improved to 14.4% from 13.5%. Lower Electrical Power & Motion and Systems Certification sales were partly offset by growth in Lighting & Safety and Avionics.
- Test Systems: Sales declined 26.6% to $15.6 million, with lower sales to both semiconductor and aerospace and defense markets. Operating profit fell to $0.3 million from $2.2 million, and margin declined to 2.0% from 10.4%, primarily due to lower volume.
- Consolidated gross margin improved 0.4 percentage points, while SG&A as a share of sales increased to 14.2% from 13.7%. Engineering and development costs were $22.9 million, versus $23.3 million.
Financial position and liquidity
- At April 1, 2017, cash was $10.8 million, total assets $603.3 million, and shareholders’ equity $346.1 million.
- Total balance-sheet debt was approximately $141.5 million, including $130.0 million drawn on the revolving facility. An additional $218.9 million was available net of letters of credit. The facility matures January 13, 2021.
- Reported leverage ratio was 1.34 to 1 versus a maximum covenant level of 3.5 to 1; interest coverage was 28.6 to 1 versus a 3.0 to 1 minimum.
- Cash declined $7.1 million during the quarter. Financing used $10.8 million, including $6.7 million of debt repayments and $4.4 million of treasury-share purchases.
- Backlog was $252.7 million, down from $258.0 million at year-end 2016 and $276.8 million a year earlier.
Outlook, risks and notable items
- Management forecast 2017 sales of $635 million to $690 million: $545 million to $580 million for Aerospace and $90 million to $110 million for Test Systems. The consolidated range was described as lower at the high end than the prior forecast; the prior range is not stated in the provided filing text.
- Management expected a 2017 effective tax rate of 28%–31%, capital spending of $21 million–$25 million, and engineering and development costs of $93 million–$95 million, excluding the acquired Custom Control Concepts business.
- Backlog at quarter-end included approximately $218.7 million expected to ship in 2017. Segment-level shipments expected during the remainder of 2017 were $179.7 million for Aerospace and $39.1 million for Test Systems.
- On April 3, 2017, after quarter-end, Astronics acquired substantially all assets and certain liabilities of Custom Control Concepts LLC for approximately $11 million in cash. Purchase-price allocation was not finalized.
- Two Aerospace customers each represented more than 10% of sales; together they accounted for 42% of Q1 sales, and receivables from them totaled approximately $39.8 million. Management warned that losing either could significantly harm sales and earnings.
- A German patent case brought by Lufthansa Technik resulted in rulings against the subsidiary; Astronics sought leave to appeal. Estimated potential exposure was $1 million–$3 million, but no liability was recorded because loss was not considered probable. A separate U.S. case was dismissed with prejudice, with Lufthansa’s appeal pending.
- The 2017 tax rate benefited from stock-option tax benefits, lower foreign tax rates and the federal R&D credit. Adoption of the new revenue-recognition standard was planned for January 1, 2018; management said it could accelerate revenue recognition for certain customer-specific products and was still assessing the impact.
Important facts for investors to verify
- Whether the lower Test Systems volume and margins recover, and whether the 2017 segment sales forecasts are achieved.
- Customer concentration, customer receivables and the sensitivity of results to the loss or reduced orders of either major customer.
- Developments and potential financial consequences in the German patent litigation, including the appeal process and any change in loss assessment.
- Final purchase-price allocation and contribution from Custom Control Concepts, including any goodwill or intangible assets recognized.
- Cash conversion and working-capital trends, planned capital spending, share repurchases and debt reduction.
- The impact of adopting the revenue-recognition standard and whether actual tax rates remain within management’s forecast range.