He continued, “Despite the apparent weakness in our third quarter results, we do not see any major changes in our markets that impact our solid, long-term outlook, although we have adjusted expectations for the short term. We continue to believe we have excellent prospects based on organizational and technical performance, and we expect to expand beyond our records of success in the near future.”
Consolidated Review
Third Quarter 2016 Results
Consolidated sales were down $45.0 million from the same period last year. Aerospace segment sales of $125.2 million were down $13.5 million and Test Systems segment sales of $29.9 million were down $31.5 million.
Lower consolidated gross margin was the result of lower volume. Engineering and Development (“E&D”) costs were $22.2 million in the quarter, down slightly from $22.5 million of E&D costs in last year’s third quarter. As a percent of sales, E&D was 14.3% and 11.3% in the third quarters of 2016 and 2015, respectively.
Selling, general and administrative (“SG&A”) expenses decreased $1.2 million compared with the 2015 third quarter, due primarily to lower commissions on lower sales volumes in the third quarter of 2016 compared with 2015.
The effective tax rate for the quarter was 26.5%, compared with 31.2% in the third quarter of 2015. The third quarter 2016 tax rate was favorably impacted by the permanent reinstatement of the federal research and development tax credit in the fourth quarter of 2015.
Net income was $12.1 million, or $.41 per diluted share.
Year-to-Date 2016 Results
Consolidated sales for the first nine months of 2016 decreased by $55.9 million, or 10.4%, to $479.1 million. Aerospace segment sales were down 1.8% year-over-year to $406.0 million, while Test Systems segment sales were down 40.0% to $73.1 million.
Lower consolidated gross margin was the result of lower volume, partially offset by improved operational efficiencies. Engineering and Development (“E&D”) costs were $67.5 million in the first nine months of 2016, up slightly from $66.1 million of E&D costs in the same period last year. As a percent of sales, E&D was 14.1% and 12.4% in the first nine months of 2016 and 2015, respectively.
SG&A expenses were $65.2 million, or 13.6% of sales, in the first nine months of 2016 compared with $66.2 million, or 12.4% of sales, in the same period last year. The first nine months of 2015 benefited from a $1.6 million reduction to the contingent consideration liability related to prior acquisitions. The decline in SG&A expenses was due primarily to reduced commissions resulting from lower volumes.
The effective tax rate for the first nine months of 2016 was 29.3%, compared with 33.0% in the first nine months of 2015. The tax rate in the first nine months of 2016 was favorably impacted by the permanent reinstatement of the federal research and development tax credit in the fourth quarter of 2015.
Net income for the first nine months of 2016 totaled $38.5 million, or $1.28 per diluted share.
During the third quarter, the Company repurchased approximately 157,000 shares at an aggregate cost of $5.3 million under its share repurchase program. Since the inception of the program in February 2016, the Company has repurchased approximately 517,000 shares at an aggregate cost of $17.5 million.
Aerospace Segment Review (refer to sales by market and segment data in accompanying tables)
Aerospace Third Quarter 2016 Results
Aerospace segment sales decreased by $13.5 million, or 9.8%, when compared with the prior year’s third quarter to $125.2 million.
The majority of the reduction in Aerospace sales was with Avionics products. Avionics declined $6.7 million, largely due to lower sales of satellite antenna systems, which have new products in the certification process, and in-flight entertainment/cabin management systems for VVIP aircraft, which has been impacted by the decline in the global oil and gas industry, primarily in the Middle East. Additionally, Systems Certification sales declined $3.5 million on lower project activity. Electrical Power & Motion sales declined $2.9 million, as lower sales of in-seat power products were partially offset by an improvement in sales of seat motion products.
Aerospace operating profit for the third quarter of 2016 was $17.6 million, or 14.0% of sales, compared with $23.1 million, or 16.6% of sales, in the same period last year. The decrease in operating profit was the result of lower volumes. Aerospace E&D costs were $18.9 million in the quarter compared with $19.3 million in the same period last year.
Aerospace orders in the third quarter of 2016 were $122.8 million, compared with orders of $129.8 million in the 2015 third quarter. The Aerospace segment book to bill ratio for the quarter was 0.98. Backlog was $233.4 million at the end of the third quarter of 2016.
Mr. Gundermann commented, “We had record Aerospace sales, operating profit, and bookings in the trailing second quarter. To follow it up with our third quarter results is disappointing, but we believe the results are more due to timing and circumstances rather than any fundamental changes in our markets, our competitive advantages or our leadership position with our products.”
Aerospace Year-to-Date 2016 Results
Aerospace segment sales decreased by $7.3 million, or 1.8%, when compared with the prior year’s first nine months to $406.0 million.
Electrical Power & Motion sales grew $10.6 million, or 5.1%, largely driven by higher sales of in-seat power products and seat motion products, which were up $7.2 million and $4.9 million, respectively. Sales of Structures products were up $3.1 million and Lighting & Safety products were up $1.6 million. These increases were offset by an $18.9 million decline in Avionics products, which was largely due to lower sales of satellite antenna systems and lower VVIP in-flight entertainment/cabin management systems, and a $3.9 million decrease in System Certification sales.
Aerospace operating profit for the first nine months of 2016 was $61.1 million, or 15.0% of sales, compared with $66.7 million, or 16.1% of sales, in the same period last year. The decrease in operating profit was the result of lower volume, coupled with higher E&D costs and a general increase in operating costs. E&D costs for Aerospace were $58.3 million and $57.3 million in the first nine months of 2016 and 2015, respectively. Aerospace SG&A expense increased $1.1 million in the first nine months of 2016 as compared with 2015. The first nine months of 2015 included inventory step-up costs of $1.0 million that reduced normal operating margins for that period.
Test Systems Segment Review (refer to sales by market and segment data in accompanying tables)
Test Systems Third Quarter 2016 Results
Sales in the third quarter of 2016 decreased approximately $31.5 million to $29.9 million compared with the same period in 2015, a decrease of 51.3%. Sales to the Semiconductor market decreased $33.1 million compared with the same period in 2015, which was partially offset by increased sales of $1.6 million to the Aerospace & Defense market.
Operating profit was $3.2 million, or 10.8% of sales, compared with $17.0 million or 27.6% of sales in last year’s third quarter. E&D costs remained relatively consistent at $3.3 million and $3.2 million in the third quarters of 2016 and 2015, respectively.
Orders for the Test Systems segment in the quarter were $13.7 million, down $1.7 million, or 10.8%, over the prior year period. Backlog was $41.8 million at the end of the third quarter of 2016.
Test Systems Year-to-Date 2016 Results
Sales in the first nine months of 2016 decreased 40.0% to $73.1 million compared with sales of $121.7 million for the same period in 2015, due to lower shipments to the Semiconductor market. Sales to the Semiconductor market decreased $52.3 million compared with the same period in 2015, which was partially offset by increased sales of $3.7 million to the Aerospace & Defense market.
