Astronics Corporation — Q3 2015 Form 10-Q
Business and period: Astronics supplies aerospace, defense, electronics and semiconductor products through its Aerospace and Test Systems segments. This unaudited quarterly report covers the three and nine months ended October 3, 2015; comparisons are with the periods ended September 27, 2014. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $200.1 | $179.4 | $534.9 | $495.0 |
| Gross profit / margin | $59.4 / 29.7% | $51.3 / 28.6% | $149.0 / 27.9% | $124.5 / 25.2% |
| Income from operations | $37.1 | $25.8 | $82.8 | $61.9 |
| Net income | $24.7 | $17.1 | $53.1 | $37.7 |
| Diluted EPS | $0.94 | $0.65 | $2.02 | $1.45 |
- Q3 sales rose 11.5%; management attributed $6.5 million to Armstrong and $14.2 million to organic growth. Nine-month sales increased 8.1%, including $20.3 million from Armstrong and 4.0% organic growth.
- Q3 gross margin improved, while Aerospace operating margin declined to 16.6% from 18.0%. Test Systems margin increased to 27.6% from 10.0%, with prior-year acquisition-related costs and workforce-realignment charges contributing to the comparison.
- For the first nine months, Aerospace sales rose 12.9% to $413.3 million and operating margin was 16.1% versus 16.5%. Test Systems sales fell 5.5% to $121.7 million, but operating margin rose to 20.2% from 6.2%. Semiconductor weakness weighed on Test Systems year to date; Aerospace and Defense sales partially offset it.
Cash, liquidity and debt
- Nine-month operating cash flow was $43.2 million, down from $68.5 million, principally reflecting increased net operating assets. Investing used $71.1 million, including $52.6 million for Armstrong and $15.9 million in capital expenditures. Financing provided $29.9 million; cash increased $1.2 million to $22.4 million.
- At October 3, 2015, current assets were $286.4 million and current liabilities $113.1 million. Long-term debt was $205.8 million, with $2.7 million current maturities; the credit-facility balance was $193.0 million. The company reported $155.9 million of facility availability, net of letters of credit.
- The company was in compliance with its debt covenants; reported leverage was 1.5x and interest coverage 39.6x, against limits of 3.5x maximum leverage and 3.0x minimum interest coverage.
- Backlog was $297.0 million, down from $370.7 million at December 31, 2014 and $301.4 million a year earlier. Management expected $147.9 million to ship during 2015.
Outlook, commentary and risks
- 2015 sales guidance: $690–$705 million overall, including $553–$564 million Aerospace and $137–$141 million Test Systems. Capital spending was expected to be $20–$25 million.
- Initial 2016 sales guidance was $690–$750 million: $572–$616 million Aerospace and $118–$134 million Test Systems. These are forward-looking estimates, not guarantees.
- Management cited aircraft production, military funding, aircraft upgrades and refurbishments, and global economic conditions as important business drivers. Test Systems can have significant order and sales fluctuations because it pursues large, multiyear projects.
- A component supplier issue reduced Avionics sales; the company expected some rebound in Q4. Higher engineering and development spending pressured Aerospace margins.
- Three customers each accounted for more than 10% of sales; together they represented 50% of nine-month sales. Receivables from these customers totaled approximately $58.9 million. Management warned that losing any one could significantly harm sales and earnings.
- A German court found an AES power-supply product infringed a Lufthansa patent. Astronics appealed; Lufthansa sought sales information to support a damages estimate, and a potential German distribution restriction could follow if required guarantees are provided. Astronics had recorded no liability because exposure was not then probable or estimable. A related U.S. patent suit was in early discovery, with exposure also not estimable.
- Currency effects were described as not significant. The filing reported no goodwill or intangible-asset impairment indicators. Revenue-recognition guidance was under evaluation for fiscal 2018 implementation; early adoption of the debt-issuance-cost presentation guidance was planned with no material impact expected.
Key facts for investors to verify
- Whether 2015 and initial 2016 revenue guidance is supported by backlog conversion, demand and the timing of large Test Systems projects.
- Customer concentration, receivable collection and the effect of any customer program changes.
- Developments in the Lufthansa German appeal and U.S. litigation, including potential damages or product-distribution restrictions.
- Whether the Test Systems margin improvement is sustainable given lower year-to-date sales and prior-year acquisition-related comparison items.
- Working-capital trends, operating cash generation, borrowing levels and compliance with credit-facility covenants.