Astronics Corporation — Q3 2023 Form 10-Q
Business context and reporting period
Astronics supplies aerospace, defense, and electronics technologies through its Aerospace and Test Systems segments. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are to the quarter and nine months ended October 1, 2022. Amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $162.9 | $131.4 | $493.9 | $376.7 |
| Gross profit / margin | $20.6 / 12.7% | $14.4 / 10.9% | $80.8 / 16.4% | $50.0 / 13.3% |
| Operating loss | $14.5 | $14.3 | $14.5 | $26.9 |
| Net loss | $17.0 | $14.9 | $33.4 | $29.0 |
| Diluted loss per share | $0.51 | $0.46 | $1.02 | $0.90 |
Revenue increased 24.0% in Q3 and 31.1% year to date, led by Aerospace, especially commercial transport. Gross margin improved year over year, but Q3 net loss widened, including the effects of customer-bankruptcy reserves and higher interest expense. Nine-month operating loss improved, while net loss increased in part because interest expense rose and the prior-year period included a larger business-sale earnout gain.
For the first nine months, operating cash flow was negative $22.3 million, compared with negative $39.1 million a year earlier. Investing cash flow was negative $2.6 million; capital expenditures were $6.0 million. Financing cash flow was positive $18.8 million, including ATM equity proceeds. Cash and restricted cash totaled $7.7 million at September 30. Management reported net debt of $166.1 million, versus $150.2 million at year-end 2022. Balance-sheet debt was approximately $169.0 million, including $9.0 million current maturities.
Under its credit facilities, the company had $86.0 million outstanding on the revolving facility and $33.7 million of availability, net of letters of credit. The term loan’s weighted-average rate on current maturities was 14.1%. The company reported compliance with covenants at quarter-end, but noted that maintaining liquidity and meeting future covenants depend on achieving expected operating results.
Material changes and operating trends
- Aerospace sales rose 26.7% in Q3; the segment recorded a $7.5 million operating loss, including $11.1 million of receivables and inventory reserves tied to a customer bankruptcy announced in November. Year-to-date Aerospace operating profit was $10.3 million, compared with a $7.1 million loss in the prior-year period.
- Test Systems Q3 sales increased to $20.8 million, and its operating loss narrowed to $1.8 million. Year-to-date operating loss widened to $8.5 million. A $5.8 million reversal of an acquired deferred-revenue liability boosted reported sales; excluding that benefit, management said year-to-date segment sales fell $1.9 million and operating loss was $14.3 million.
- Q3 bookings were $176.0 million, a 1.08 book-to-bill ratio. Backlog was $604.3 million after removing $19.9 million related to the bankrupt customer; approximately $505.3 million was expected to be recognized as revenue over the next 12 months.
- Interest expense was $6.0 million in Q3 and $17.4 million year to date, principally reflecting higher rates on the facilities refinanced in January. Floating-rate debt was approximately $173.7 million; management estimated a 1 percentage-point rate increase would raise annual pretax loss by about $1.7 million.
Outlook, risks, contingencies, and unusual items
The filing provides no specific consolidated sales or earnings guidance. Management expects sales growth, working-capital reductions, and revolving-credit availability to support operations, and estimated 2023 capital spending of $7–$9 million. It remains positive on aerospace demand but said recovery, particularly in the widebody market, may take longer than previously expected. Supply-chain disruption, labor availability and cost, inflation, customer order timing, aircraft production rates, and defense funding remain important uncertainties.
The company must maintain at least $20 million of liquidity through delivery of the compliance certificate for Q1 2024 and $10 million thereafter. Minimum trailing-four-quarter EBITDA requirements rise over coming quarters; a 1.10-to-1.00 fixed-charge coverage test begins in Q1 2024. Management characterized covenant compliance as challenging and said an unexpected operating shortfall could impair liquidity or financing access and permit lenders to accelerate debt.
Other notable items include a $3.4 million earnout gain from the 2019 semiconductor-test business divestiture; a $1.8 million reversal of an equity-investment liability; and a $1.2 million refund and $1.3 million reserve reduction arising from a German patent-litigation ruling. Lufthansa litigation reserves included approximately $16.9 million for German indirect damages and $7.1 million for the UK matter; a UK damages trial was scheduled for October 2024. A separate Teradyne copyright claim remained in litigation, with no loss accrued because exposure was not considered probable and estimable. The company also identified Defense Contract Audit Agency reviews as a risk to government-contract costs and profitability.
Management cited ongoing COVID-19-related and supply-chain effects and uncertainty from the Russia-Ukraine conflict. These factors could affect orders, costs, cash flow, and liquidity. No material changes to other risk factors were reported.
Key facts for investors to verify
- Whether aerospace growth and backlog convert into shipments and cash, given supply-chain and labor constraints.
- The effect of the bankrupt customer’s reserves, any further recoveries or losses, and customer credit concentration; Boeing represented 11.1% of year-to-date sales.
- Cash generation, revolving-facility availability, and compliance with escalating EBITDA and liquidity covenants.
- Whether Test Systems can improve profitability after the one-time deferred-revenue reversal and amid litigation costs and lower-volume fixed-cost absorption.
- Potential changes in the Lufthansa and Teradyne matters, and the impact of variable interest rates on borrowing costs.