Astronics Corporation (NASDAQ: ATRO) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 1, 2022; comparable periods ended October 2, 2021. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $131.4 million | $111.8 million | $376.7 million | $328.9 million |
| Gross profit / margin | $14.4 million / 10.9% | $17.2 million / 15.4% | $50.0 million / 13.3% | $46.9 million / 14.3% |
| Operating loss | $14.3 million | $4.5 million | $26.9 million | $19.9 million |
| Net loss | $14.9 million | $7.2 million | $29.0 million | $27.2 million |
| Diluted loss per share | $0.46 | $0.23 | $0.90 | $0.88 |
- Q3 sales rose 17.5% year over year, led by Aerospace, but gross margin fell as material and labor inflation, supply constraints, production inefficiencies and delayed pricing actions outpaced the benefit of higher volume.
- Q3 SG&A was $28.7 million, including $4.6 million for litigation, a customer accommodation dispute and a lease termination settlement. The company expects approximately $1.5 million of indemnification related to the litigation, likely in Q4.
- Nine-month results included an $11.3 million gain on the semiconductor test business earnout. The period also included $6.0 million of AMJP government grant benefit recorded as a reduction to product costs.
- Operating cash flow was negative $39.1 million for the first nine months, versus negative $18.5 million a year earlier. Receivables and inventory growth were major cash uses. Investing cash flow was positive $17.7 million, including $22.0 million of earnout proceeds; capital expenditures were $4.3 million.
- At October 1, cash was $2.6 million, current assets $347.3 million and current liabilities $133.5 million. Revolver debt was $159.0 million; reported availability was $19.9 million, subject to the minimum-liquidity covenant. Total liabilities were $361.8 million.
Segments, demand and outlook
- Aerospace: Q3 sales increased 17.1% to $112.2 million, while the segment posted a $6.9 million operating loss versus $1.9 million profit a year earlier. Commercial transport and general aviation improved; military sales declined. Backlog was $464.3 million, with $375.2 million expected to convert to revenue over the next 12 months.
- Test Systems: Q3 sales rose to $19.3 million from $16.1 million, but the segment recorded a $2.3 million operating loss. Nine-month sales fell to $53.9 million from $62.5 million and operating loss widened to $4.1 million. Backlog was $82.8 million.
- Consolidated Q3 bookings were $184.2 million and book-to-bill was 1.40:1. Backlog reached $547.1 million, up from $415.7 million at year-end 2021; approximately $426.5 million was expected to be recognized within 12 months.
- Management forecast Q4 2022 sales of $140–$150 million and 2022 sales growth of approximately 17% versus 2021. Its initial 2023 sales outlook was $640–$680 million, citing $686 million of bookings over the prior four quarters and record backlog. Planned 2022 capital expenditures were $9–$10 million.
- The company said it was selected by the U.S. Army in a major radio-test competition; contract terms remained under negotiation. Management estimated potential sales of $150–$200 million over coming years, subject to final contract terms.
Financing, risks and contingencies
- Credit amendments followed covenant noncompliance: lenders waived enforcement relating to the company’s failure to meet maximum net leverage and minimum liquidity covenants as of September 30, 2022. A November 14 amendment extended facility maturity to November 30, 2023, eliminated the leverage covenant, and imposed minimum-liquidity and minimum-Adjusted-EBITDA covenants. It also restricts dividends and share repurchases.
- Borrowing costs were SOFR (minimum 1.00%) plus 5.50%, rising to SOFR plus 8.50% effective January 17, 2023. Management was evaluating replacement long-term financing and warned that failure to refinance or extend the facility could materially harm liquidity and could create substantial doubt about the company’s ability to continue as a going concern. A going-concern statement would itself constitute an event of default under an amendment.
- Management cited supply-chain and labor pressures, inflation, variable commercial-aircraft demand and a slower-than-anticipated widebody recovery. It said improving supply conditions and sales growth should support operations, but liquidity depends on achieving expected results.
- The company recorded a $24.1 million reserve for Lufthansa patent-related matters at October 1; it considered payment unlikely within 12 months. In a separate former-customer product-defect matter, a $2.0 million settlement was reflected in the period, with approximately $1.5 million expected to be recovered. Teradyne litigation continued after the patent claims were invalidated in an inter partes review; no loss was accrued because exposure was not considered probable or estimable.
- Management maintained a valuation allowance against certain deferred tax assets, citing recent cumulative losses and uncertainty about future taxable income. A 100-basis-point increase in SOFR was estimated to reduce annual income by approximately $1.6 million before tax.
Important facts for investors to verify
- Progress and terms of refinancing before the amended credit facility’s November 2023 maturity, including compliance with liquidity and Adjusted EBITDA covenants.
- Cash conversion and working-capital trends, particularly inventory, receivables and the ability to meet near-term obligations with low cash and limited revolver availability.
- Whether supply-chain improvement, pricing actions and sales growth restore gross margins and achieve Q4 2022 and 2023 sales outlooks.
- Final contract award, timing and realized value of the U.S. Army radio-test opportunity.
- Outcomes and potential cash costs of Lufthansa and other legal matters, and receipt of the expected indemnification.