Astronics Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2022. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $129.1 | $111.2 | $245.3 | $217.0 |
| Gross profit / margin | $15.7 / 12.2% | $15.4 / 13.8% | $35.6 / 14.5% | $29.7 / 13.7% |
| Operating loss | $(8.4) | $(5.9) | $(12.6) | $(15.4) |
| Net loss | $(11.0) | $(8.1) | $(14.1) | $(20.0) |
| Diluted loss per share | $(0.34) | $(0.26) | $(0.44) | $(0.65) |
Q2 sales increased 16.2% year over year, led by Aerospace growth; gross margin declined as inflation, supply constraints and production inefficiencies offset higher volume. First-half results included an $11.3 million gain from a semiconductor-test-business earnout. The six-month tax provision was $8.8 million despite a pretax loss, contributing to the net loss; the reported effective tax rate was (165.0)%. The tax rate reflects, among other factors, a valuation allowance on deferred tax assets associated with newly capitalized R&D costs for tax purposes.
- Aerospace: Q2 sales rose 22.5% to $109.3 million, while the segment recorded a $3.3 million operating loss versus $2.7 million a year earlier. First-half sales rose 23.5% to $210.7 million; operating loss narrowed to $0.2 million from $8.3 million, aided in part by a $6.0 million AMJP grant benefit.
- Test Systems: Q2 sales declined to $19.8 million from $21.9 million; operating loss was nearly break-even at $0.03 million. First-half sales fell to $34.6 million from $46.4 million, and the segment swung to a $1.8 million operating loss from $0.2 million of profit, primarily due to lower defense and mass-transit volume.
Cash flow, debt and liquidity
Cash used in operating activities was $10.3 million in the first half, compared with $2.3 million used a year earlier. Higher receivables and inventory absorbed cash. Investing activities provided $19.5 million, including $22.0 million of earnout proceeds, partly offset by $2.5 million of capital expenditures. Financing activities used $27.7 million, including $27.0 million of net debt repayments. Cash decreased by $19.1 million to $10.7 million.
At July 2, 2022, long-term debt was $136.0 million, with no current maturities reported; $87.9 million of revolving capacity was available, subject to the minimum-liquidity covenant and net of letters of credit. The facility required minimum liquidity of $35 million, and the company reported compliance with financial covenants at quarter-end. The March 2022 amendment reduced the revolver to $225 million and extended maturity to May 30, 2023. A subsequent August 9 amendment reduced capacity in stages to $170 million and extended maturity to August 31, 2023. Interest is based on SOFR plus a leverage-dependent spread.
Management was evaluating longer-term financing, including asset-based lending and monetization of real estate. The filing warns that failure to refinance, replace or extend the facility could materially harm liquidity and could raise substantial doubt about the company’s ability to continue as a going concern if adequate repayment resources are not reasonably assured. The filing’s covenant descriptions are not fully consistent across sections; verify the governing amendment and covenant thresholds.
Backlog, outlook and management commentary
Consolidated backlog was $494.4 million at quarter-end, up from $415.7 million at year-end 2021 and $312.7 million a year earlier. Q2 bookings were $148.4 million, with a 1.15:1 book-to-bill ratio. Management expected approximately $278.0 million, or 56% of backlog, to convert to revenue during the remainder of 2022.
Management revised 2022 revenue guidance to $550–$580 million, citing ongoing supply-chain challenges. The midpoint implies 27% growth over 2021 and average quarterly revenue of about $160 million in the second half, with the ramp weighted toward Q4. Planned 2022 capital expenditures were $9–$10 million. Management described Aerospace demand and backlog as stable and growing, but said recovery—particularly in widebody commercial aviation—was taking longer than previously anticipated. Test Systems awards sought for the second half had been delayed; management’s plans for 2023 and beyond assumed awards would be made soon.
- Risks include labor and supply constraints, inflation, uneven aircraft production and customer demand, COVID-19-related disruption, and dependence on major customers. Boeing represented 11% of Q2 sales and 12% of first-half sales.
- The company recorded a $24.4 million reserve for Lufthansa patent-litigation matters, classified as non-current; payment was not expected within twelve months. In a separate Teradyne matter, the PTAB invalidated all asserted patent claims on July 20, 2022, subject to appeal; remaining claims were expected to proceed after a stay was lifted.
- Government assistance recognized in the first half included $6.0 million of AMJP benefit. The company expected the remaining grant proceeds in 2022, subject to confirmation of its commitments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Progress, terms and availability of refinancing before the amended facility’s August 31, 2023 maturity, including covenant headroom and the filing’s inconsistent covenant disclosures.
- Whether supply-chain and labor constraints permit the second-half revenue ramp required to achieve $550–$580 million of 2022 sales, and whether delayed Test Systems awards are secured.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside cash balances and usable revolver availability.
- The sustainability of gross-margin improvement, excluding temporary grant assistance, and the impact of inflation, R&D spending and the unusual tax provision.
- Developments in Lufthansa and Teradyne litigation, and the effect of customer concentration and commercial-aviation recovery on demand.