Astronics Corporation — Q1 2018 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2018, compared with the three months ended April 1, 2017. Astronics supplies advanced technologies to aerospace, defense, electronics and semiconductor markets. Its segments are Aerospace and Test Systems. The quarter included $25.1 million of revenue from acquired businesses, principally CSC, acquired in December 2017.
Financial performance
| Metric | Q1 2018 | Prior-year quarter |
|---|---|---|
| Sales | $179.1 million | $152.4 million |
| Gross profit / margin | $37.1 million / 20.7% | $38.3 million / 25.1% |
| Income from operations | $6.6 million | $16.9 million |
| Net income | $3.3 million | $11.6 million |
| Diluted EPS | $0.11 | $0.38 |
| Operating cash flow | $(1.1) million | $6.4 million |
| Capital expenditures | $4.3 million | $2.8 million |
Revenue increased 17.5%, but organic revenue rose only 1%. Aerospace sales grew 20.3% to $164.6 million, including acquired-business revenue; organic Aerospace sales increased 2%. Aerospace operating profit fell to $13.1 million from $19.8 million, and its margin declined to 8.0% from 14.4%. Test Systems sales declined 7.1% to $14.5 million; the segment reported a $1.9 million operating loss versus $0.3 million of profit. Consolidated SG&A rose to $30.5 million from $21.4 million. Interest expense increased to $2.3 million from $1.1 million. The effective tax rate was 16.1%, versus 25.2%.
Cash used in operations reflected lower earnings and increases in operating assets, including receivables and inventory. Cash was $16.4 million at quarter-end, down from $17.9 million at year-end 2017. Long-term debt was $273.6 million, with $2.5 million of current maturities; $267.0 million was outstanding on the revolving facility. The amended $500 million facility had $231.9 million available, net of letters of credit. The leverage ratio was 3.19:1, against a maximum of 3.75:1 under the agreement.
Changes, unusual items and outlook
- Margin and earnings pressure reflected product mix, cabin-power pricing pressure, higher engineering and development costs, and a $2.1 million estimated-cost charge on a long-term contract assumed with CCC. Q1 also included $1.3 million of acquired-inventory fair-value step-up expense and $3.4 million of acquired-intangible amortization, as well as a $1.0 million litigation reserve.
- Astronics adopted the new revenue recognition standard using the modified retrospective method. The adoption increased opening retained earnings by $3.3 million and increased reported Q1 net income by $1.0 million versus results without adoption. About 5% of Q1 revenue was recognized over time.
- Bookings were $196.2 million, with a 1.10:1 book-to-bill ratio. Backlog reached a record $398.6 million, of which approximately $356.1 million was expected to be recognized as revenue in 2018.
- Management forecast 2018 sales of $765–$815 million: $650–$680 million for Aerospace and $115–$135 million for Test Systems. It expected an 18%–21% effective tax rate, $24–$28 million of capital spending, and $110–$115 million of engineering and development costs. Management said working-capital, debt-service and capital needs for the rest of 2018 were expected to be met through operating cash flow, cash balances and, if needed, the revolving facility.
- Risks include dependence on two Aerospace customers, which represented 20% and 16% of consolidated sales, and the cyclical nature of aircraft production and upgrades. Test Systems results may fluctuate with timing of large multi-year projects. The company also faces Lufthansa patent litigation: a $6.2 million German direct-sales damages claim was disputed; management estimated exposure of $1–$3 million and recorded a $1.0 million reserve. Separate indirect-sales, French and UK matters had no recorded liability because exposure was not considered probable or estimable. The U.S. case was dismissed and the appeal affirmed.
Important facts for investors to verify
- Whether Aerospace margins recover as acquisition-related charges decline, and whether cabin-power pricing pressure persists.
- Whether the Test Systems segment returns to profitability and converts its backlog into revenue.
- How much of reported growth and earnings reflected acquisitions and the new revenue standard, compared with underlying organic performance.
- Operating cash conversion, working-capital needs, leverage and covenant headroom as the company executes its sales and capital-spending outlook.
- Developments in Lufthansa litigation, including the German damages proceedings and claims in other European jurisdictions.