Astronics Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing reports the full fiscal year; fourth-quarter figures are noted separately below. Astronics supplies aerospace, defense, electronics and semiconductor markets through its Aerospace and Test Systems segments.
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $624.5 million | $633.1 million | Down 1.4% |
| Gross margin | 22.0% | 25.2% | Down 3.2 percentage points |
| Operating income | $30.4 million | $73.1 million | Down 58.5% |
| Net income | $19.7 million | $48.4 million | Down 59.4% |
| Diluted EPS | $0.67 | $1.61 | Down 58.4% |
| Operating cash flow | $37.8 million | $48.9 million | Down $11.1 million |
| Capital expenditures | $13.5 million | $13.0 million | Up $0.4 million |
The company recorded a $16.2 million goodwill impairment charge against the Armstrong reporting unit in Q4. Q4 net loss was $5.7 million, compared with net income of $9.9 million in Q4 2016. The full-year effective tax rate was 21.3%, versus 29.6% in 2016.
Segments and material changes
- Aerospace: Sales were $534.6 million, essentially flat year over year. Operating profit fell to $38.9 million from $78.0 million; margin declined to 7.3% from 14.6%. Results reflected lower cabin-power volume and pricing, the Armstrong impairment and an $8.4 million operating loss at CCC.
- Test Systems: Sales declined 9.3% to $89.9 million as shipments decreased in both semiconductor and aerospace and defense markets. Operating profit fell to $7.4 million from $8.5 million; margin was 8.2%, versus 8.6%.
- Two Aerospace acquisitions were completed: CCC in April for approximately $10.2 million and CSC in December for approximately $103.8 million. Acquired businesses contributed $15.5 million in 2017 sales; management reported a combined $6.9 million net loss for the acquired businesses included in the year’s results.
- Backlog rose to $393.7 million at year-end from $258.0 million. Approximately $346.7 million was expected to ship during 2018.
Liquidity, debt and capital
- Year-end cash was $17.9 million; working capital was $212.4 million, compared with $168.5 million in 2016.
- Total debt was $271.8 million, up from $148.1 million. Of the debt, $262.0 million was floating-rate revolving credit borrowings. The company reported a 2.91-to-1 leverage ratio and compliance with covenants at December 31, 2017.
- On February 16, 2018, after year-end, the company extended and amended its revolving facility: $500 million capacity, an additional $150 million accordion option and maturity in February 2023. The filing reported $236.9 million available at year-end, net of letters of credit.
- Operating cash flow was $37.8 million; investing activities used $129.6 million, including $114.0 million for acquisitions. Financing activities provided $91.4 million, including net debt borrowings and $32.4 million of share repurchases.
- Contractual obligations totaled $528.7 million, including $271.8 million of debt, $178.1 million of purchase obligations and $45.2 million of estimated future debt interest. No material off-balance-sheet arrangements were reported. The company had no cash dividend plans.
Outlook, risks and unusual items
- Management expected 2018 consolidated sales of $745–$815 million, Aerospace sales of $630–$680 million and Test Systems sales of $115–$135 million. Expected 2018 capital spending was $24–$28 million and engineering and development spending $110–$115 million.
- Management cited aircraft production and airline upgrade spending, government defense funding, semiconductor demand, new-program execution, productivity and cost control as important drivers. Business-jet production was not expected to increase significantly in 2018.
- Customer concentration is significant: Panasonic represented 19.1% of 2017 sales and Boeing 16.8%. Fixed-price contracts comprise almost all sales, exposing margins to cost overruns and delivery delays. Government contracts may be terminated or lose funding.
- Most debt was variable-rate; management estimated a 1 percentage-point rate increase would reduce annual net income by approximately $2.6 million before tax. Other material risks include cyclical end markets, acquisition integration, supplier performance, cybersecurity, product liability, foreign exchange and goodwill or intangible-asset impairment.
- Lufthansa patent litigation remained pending in Germany, with estimated potential exposure of $1–$3 million; no liability was recorded because loss was not considered probable. New cases were filed in France and the UK, with loss neither probable nor estimable. The U.S. case was dismissed and the dismissal affirmed on appeal.
- The 2017 tax law resulted in provisional tax effects, including about $1.4 million of repatriation tax expense and a $0.9 million deferred-tax revaluation benefit. The company expected approximately $1.3 million of additional federal cash tax on deemed repatriated earnings, payable over eight years, plus about $0.1 million of state tax.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Previously reported material weaknesses in financial statement close and IT change controls were reported remediated in Q4; controls at the two 2017 acquisitions were excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether 2018 sales and backlog conversion met management’s outlook, and whether the sharp year-over-year profit and margin decline reversed.
- Whether CCC and CSC integration, profitability and expected acquisition benefits developed as planned, and whether Armstrong required further impairment.
- Debt levels, floating-rate exposure, covenant headroom and availability under the amended credit facility.
- Developments in the German, French and UK patent disputes, including any change in estimated exposure or recorded liability.
- How customer concentration, fixed-price contract costs and the adoption of the new revenue standard affected reported results and cash conversion.