Astronics Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. The filing attributes the sharp deterioration in aerospace demand primarily to COVID-19 and continued delays in Boeing 737 MAX recertification.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $106.5 million | $177.0 million | $387.8 million | $574.3 million |
| Gross profit / margin | $15.2 million / 14.2% | $36.8 million / 20.8% | $77.7 million / 20.0% | $129.2 million / 22.5% |
| Operating income (loss) | $(9.0) million | $5.1 million | $(95.2) million | $38.6 million |
| Net income (loss) | $(5.3) million | $1.2 million | $(95.8) million | $86.1 million |
| Diluted EPS | $(0.17) | $0.04 | $(3.11) | $2.61 |
- Segment trends: Q3 Aerospace sales fell 47.7% to $82.5 million and the segment recorded a $6.3 million operating loss, versus $8.8 million profit a year earlier. Test Systems sales rose to $24.0 million from $19.3 million, but operating margin fell to 3.9% from 10.7%, partly due to $1.3 million of legal expenses and inventory reserves.
- Cash flow: Operating activities provided $31.5 million in the first nine months, versus $30.2 million in 2019. Investing activities used $4.0 million; financing activities used $29.5 million. Cash declined by $2.0 million to $29.9 million. Capital expenditures were $5.6 million.
- Balance sheet and debt: Total assets were $637.5 million, down from $782.7 million at year-end 2019; shareholders’ equity was $289.8 million, down from $388.9 million. Long-term debt was $168.0 million, compared with $188.0 million at year-end; current maturities were $0.2 million.
- Backlog and orders: Backlog was $282.2 million, versus $359.6 million at year-end 2019 and $379.4 million a year earlier. Q3 bookings were $81.6 million and book-to-bill was 0.77:1. Management expected $115.5 million, or 41% of backlog, to convert to revenue during the remainder of 2020.
Material changes and unusual items
- Nine-month results include $87.0 million of non-cash impairment charges, principally $86.3 million of goodwill impairment in four Aerospace reporting units. The company also recorded a $0.7 million right-of-use asset impairment. The after-tax impact of impairment was $81.4 million, or $2.64 per diluted share.
- COVID-19-related workforce reductions and other cost actions included an approximately 20% headcount reduction. Management estimated these measures would lower costs by $55 million to $60 million for 2020. Savings were partly offset by $5.6 million of severance charges in the first nine months.
- Nine-month 2019 results included an $80.1 million pre-tax gain on the sale of the semiconductor test business, affecting year-over-year comparisons. 2019 also included the Freedom acquisition; Diagnosys was acquired in October 2019.
- The 2020 effective tax rate was affected by permanently non-deductible goodwill impairment, a $7.5 million federal valuation allowance and a $3.1 million benefit from a revised state tax filing position. A CARES Act-related benefit of $1.5 million was also recorded.
- A $3.5 million impairment of an equity investment was recorded in other expense during the first nine months.
Liquidity, outlook and risks
- The May 2020 credit-facility amendment reduced the revolving commitment from $500 million to $375 million and suspended leverage-ratio testing through Q2 2021, followed by phased leverage limits. At September 26, $205.7 million was available, subject to covenants and net of letters of credit and bank guarantees. The agreement requires minimum liquidity of $180 million through Q3 2021 and includes a minimum interest-coverage covenant through Q2 2021. Astronics reported compliance at quarter-end. The facility is secured by substantially all company and guarantor assets and temporarily restricts, among other things, acquisitions and share repurchases.
- Management projected 2020 revenue at or slightly above $500 million, positive cash flow for the year, adjusted EBITDA margin of approximately 5%–7%, and capital expenditures of approximately $8 million. It expected to use excess free cash flow to reduce debt and forecast a 2020 effective tax benefit rate of 6%–10%. These projections are subject to substantial COVID-19 uncertainty.
- Management expected low airline investment to continue at least into 2021. Commercial aircraft production reductions, weak airline aftermarket demand and delayed or cancelled aircraft deliveries remain key risks. Astronics said it did not anticipate significant 737 MAX deliveries until the second half of 2021. Defense and government demand was described as relatively stable; general aviation outlook was mixed.
- Legal contingency: The company accrued $16.5 million, including interest, for Lufthansa’s German indirect-sales patent claim; appeals and potential damages proceedings remain pending. A separate German direct-sales judgment resulted in approximately $4.7 million paid and is under appeal. In the UK, a first-instance court found some patent claims valid and infringed; potential monetary relief was not yet estimable, so no damages liability was recorded. Further exposure in the UK and France was considered reasonably possible but not estimable.
- Other risks include customer concentration, customer credit deterioration, supply-chain disruption, possible further impairments, and changes in pandemic conditions. Two customers represented 12% and 9% of nine-month sales, respectively.
Key facts for investors to verify
- Whether commercial aerospace demand, aircraft production and airline aftermarket spending recover in line with management’s revenue and adjusted EBITDA outlook.
- Backlog conversion, new bookings and the timing of 737 MAX-related deliveries; assess the low Q3 book-to-bill ratio.
- Cash generation, debt reduction and compliance with minimum-liquidity, interest-coverage and future leverage covenants.
- Whether further goodwill or other asset impairments become necessary, particularly at the PECO reporting unit.
- Developments in Lufthansa proceedings, including the unestimated UK and France exposure and the appeal of the German claims.
- Customer concentration and the collectability of receivables as customers face pandemic-related financial pressure.