Astronics Corporation — Q2 2016 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended July 2, 2016; comparisons are to the periods ended July 4, 2015. Astronics supplies aerospace, defense, electronics, and semiconductor markets through its Aerospace and Test Systems segments. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $164.4 | $173.2 | $324.0 | $334.8 |
| Gross profit / margin | $44.8 / 27.3% | $49.5 / 28.6% | $84.3 / 26.0% | $89.6 / 26.8% |
| Income from operations | $22.6 | $28.2 | $40.2 | $45.7 |
| Net income | $15.0 | $17.7 | $26.5 | $28.4 |
| Diluted EPS | $0.57 | $0.67 | $1.00 | $1.08 |
- Sales declined 5.0% in Q2 and 3.2% year to date. Q2 net income declined about 15% and six-month net income about 7%.
- SG&A was $22.2 million in Q2 and $44.1 million year to date; as a share of sales it rose to 13.5% and 13.6%, respectively. Engineering and development expense was $21.9 million in Q2 and $45.2 million year to date.
- The effective tax rate was 30.5% in both 2016 periods, versus 34.6% in Q2 2015 and 34.5% for the first half of 2015. The company attributed the lower rate to reinstatement of the federal R&D tax credit.
- Operating cash flow was $23.3 million for the first half, versus $20.9 million. Capital expenditures were $6.2 million; cash used in investing was $7.0 million. Cash increased $1.9 million to $20.4 million.
- At July 2, cash was $20.4 million, total debt was approximately $166.6 million, and shareholders’ equity was $318.4 million. The company had $153.0 million drawn on its $350 million revolving facility and $195.9 million available net of letters of credit. Working capital was approximately $165.1 million.
Material changes and segment results
- Aerospace: Q2 sales rose 7.8% to $142.5 million and segment operating profit rose to $24.9 million, with margin improving to 17.4% from 15.3%. First-half sales increased 2.3% to $280.8 million, while operating profit was nearly flat at $43.5 million and margin slipped to 15.5% from 15.9%. Strength in electrical power and motion, including in-seat power, and lighting and safety was partly offset by weaker avionics.
- Test Systems: Q2 sales fell 46.5% to $21.9 million and operating profit fell to $1.1 million from $9.9 million. First-half sales fell 28.4% to $43.1 million and operating profit fell to $3.3 million from $7.6 million. The primary driver was lower semiconductor-market shipments; aerospace and defense sales increased.
- Consolidated backlog was $293.8 million, versus $274.4 million at year-end 2015 and $352.0 million a year earlier. The filing says $199.9 million was expected to ship during 2016.
- Q2 2015 SG&A benefited from a $1.3 million reduction in contingent consideration related to prior acquisitions, affecting the year-over-year comparison.
Outlook, risks, and contingencies
- Management forecast 2016 sales of $655 million to $685 million, including $560 million to $580 million from Aerospace and $95 million to $105 million from Test Systems. The expected Test Systems range was described as relatively unchanged.
- The company expected a 2016 effective tax rate of approximately 29% to 32%, capital spending of $17 million to $20 million, and engineering and development costs similar to 2015.
- Key business sensitivities include aircraft production and refurbishment cycles, military-program funding, winning design placements, and the timing of large, multi-year Test Systems projects. Management noted that Test Systems sales, profits, and backlog can fluctuate materially between orders.
- Two Aerospace customers each represented more than 10% of consolidated sales; together they accounted for 37% of first-half 2016 sales. Receivables from these customers were approximately $25.9 million. The filing warns that losing either could significantly harm sales and earnings.
- A German Lufthansa patent case against subsidiary AES had an infringement ruling, which AES appealed; the appeal was scheduled for October 12, 2016. Potential exposure was not estimable and no liability was recorded. Separately, after quarter-end, a U.S. court dismissed Lufthansa’s claims with prejudice on July 20, 2016; Lufthansa indicated it would appeal.
- The company reported compliance with its credit covenants at quarter-end: leverage ratio was 1.30-to-1 against a maximum of 3.5-to-1, and interest coverage was 34.5-to-1 against a minimum of 3.0-to-1. The facility is secured by liens on substantially all company and guarantor assets.
- Management said contractual obligations had not changed materially from the 2015 Form 10-K and that foreign-exchange effects in 2016 had not been significant. Adoption effects of new accounting standards for share-based payments, leases, and revenue recognition were still being evaluated.
Important facts for investors to verify
- Whether Aerospace growth and margin performance can offset continuing weakness in semiconductor-related Test Systems shipments.
- Progress toward the 2016 revenue forecast, including the timing and conversion of backlog into shipments.
- Customer concentration and the effect of any changes in demand from the two major Aerospace customers.
- Developments in the German patent appeal and the U.S. appeal, including any change in the potential financial exposure.
- Cash generation, debt repayment, and the remaining authorization under the $50 million share-repurchase program; approximately $12.2 million had been spent by July 2, 2016.