Astronics Corporation — Q2 2017 Form 10-Q
Business and period: The filing covers the quarter and six months ended July 1, 2017. Astronics supplies aerospace, defense, electronics and semiconductor products through its Aerospace and Test Systems segments. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $151.1 million | $164.4 million | $303.5 million | $324.0 million |
| Gross profit / margin | $34.2 million / 22.6% | $44.8 million / 27.3% | $72.5 million / 23.9% | $84.3 million / 26.0% |
| Operating income | $11.7 million | $22.6 million | $28.4 million | $40.2 million |
| Net income | $7.7 million | $15.0 million | $19.3 million | $26.5 million |
| Diluted EPS | $0.26 | $0.50 | $0.64 | $0.87 |
| Operating cash flow | Not stated separately | Not stated separately | $4.5 million | $23.3 million |
Q2 sales fell 8.1% year over year; first-half sales fell 6.3%. First-half SG&A was essentially flat at $44.1 million, but rose to 14.5% of sales from 13.6%. First-half net interest expense was $2.3 million. The effective tax rate was 27.3% for Q2 and 26.0% for the first half, versus 30.5% in the comparable 2016 periods; the 2017 rate benefited from share-based compensation tax benefits, lower foreign tax rates and the federal R&D credit.
Segments and operating trends
- Aerospace: First-half sales were $266.4 million, down 5.1%; operating profit was $33.7 million, down from $43.5 million, and margin contracted to 12.7% from 15.5%. Q2 sales declined 9.1% and margin fell to 10.8% from 17.4%. Management cited weaker electrical power and motion sales, slower wide-body retrofit and new-build activity, delayed airline entertainment decisions, lower organic volume, higher engineering costs and CCC’s operating loss.
- Test Systems: First-half sales were $37.1 million, down 13.9%, mainly due to lower semiconductor sales; operating profit declined to $1.8 million from $3.3 million. Q2 sales were nearly flat year over year and operating margin improved to 6.6% from 4.9%.
- Backlog was $265.6 million at July 1, 2017, versus $293.8 million a year earlier and $258.0 million at December 31, 2016. Q2 orders were $134.8 million in Aerospace and $23.9 million in Test Systems.
Cash, balance sheet and capital
- Cash was $8.3 million at July 1, down from $17.9 million at year-end. First-half operating cash flow fell to $4.5 million from $23.3 million, primarily reflecting lower net income and increased operating assets and liabilities, including inventory and receivables.
- First-half investing cash use was $15.8 million, including $10.2 million for the CCC acquisition and $5.8 million of capital expenditures. Financing provided $1.5 million: $22.0 million of debt proceeds were partly offset by $7.3 million of repayments and $13.5 million of share repurchases.
- Total debt was approximately $163.0 million, including current maturities. The company had $152.0 million drawn on its $350 million revolving facility and $196.9 million available, net of letters of credit. The facility matures January 2021. Leverage was 1.77x against a 3.5x maximum; interest coverage was 24.2x against a 3.0x minimum.
- Current assets were $277.5 million and current liabilities $84.1 million. Inventory increased to $134.4 million from $116.6 million at year-end; receivables rose to $120.4 million from $109.4 million.
- CCC, a cabin management and in-flight entertainment systems provider, was acquired April 3, 2017 for approximately $10.2 million net of cash acquired. Its purchase price allocation remained preliminary. The company repurchased $9.1 million of shares during Q2; $18.9 million remained under the $50 million authorization.
Outlook, risks and notable items
- Management forecast 2017 consolidated sales of $625–$645 million, lowered from the prior range’s high end. It expected $535–$550 million from Aerospace and $90–$95 million from Test Systems. The filing attributes the more cautious outlook to Aerospace program timing, slower wide-body retrofit and new-build activity, delayed airline entertainment decisions, and slower-than-anticipated Test Systems program decisions.
- Management expected a 28%–31% full-year effective tax rate, $21–$25 million of 2017 capital spending, and $96–$99 million of engineering and development costs, including CCC. Of $265.6 million backlog, approximately $204.6 million was expected to ship in 2017.
- Two Aerospace customers each represented more than 10% of consolidated sales. Together they accounted for 38% of first-half 2017 sales; receivables from them totaled approximately $32.1 million. Management warned that losing either customer would significantly harm sales and earnings.
- A German patent case brought by Lufthansa against subsidiary AES had been upheld on appeal; AES petitioned for leave to appeal to Germany’s Federal Supreme Court. Estimated potential exposure was $1–$3 million, but management said loss was not probable and recorded no liability. Lufthansa’s separate U.S. case was dismissed with prejudice; an appeal remained pending.
- Disclosure controls were deemed ineffective at July 1, 2017 because of a material weakness involving IT change controls and deficiencies in financial-statement consolidation review controls. Management said the statements fairly present the company’s results, expected no adjustments to previously issued statements, and targeted remediation by December 31, 2017. Amendments to the 2016 Form 10-K and Q1 2017 Form 10-Q were planned to reflect the control conclusions.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Management said it could accelerate revenue recognition for certain customized products but was still assessing the impact.
Investor verification priorities
- Track sales, gross margin and Aerospace profitability against the lowered 2017 forecast, especially the cited retrofit, new-build and airline decision delays.
- Monitor operating cash conversion, inventory and receivables growth, debt levels, facility availability and covenant headroom.
- Assess whether the concentration in two Aerospace customers and the lower backlog create material demand or earnings exposure.
- Confirm remediation of the disclosed material weakness and review the planned amendments to prior filings.
- Follow the Lufthansa German appeal and U.S. appeal, including any change in estimated exposure or probability of loss.
- Check the finalized CCC purchase accounting and the quantified effects of adopting the revenue-recognition standard.