Astronics Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 results are noted below. Amounts are in U.S. dollars.
Business context
Astronics designs and manufactures aerospace, defense and electronics products, including aircraft electrical power and motion systems, lighting and safety systems, avionics, aircraft structures and automated test systems. It reports Aerospace and Test Systems segments. Its 2018 growth included contributions from the 2017 acquisitions of CCC and CSC.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Sales | $803.3 million | $624.5 million |
| Gross margin | 22.5% | 22.0% |
| Income from operations | $63.7 million | $32.1 million |
| Net income | $46.8 million | $19.7 million |
| Diluted EPS | $1.41 | $0.58 |
| Operating cash flow | $54.9 million | $37.8 million |
| Capital expenditures | $16.3 million | $13.5 million |
- Sales rose 28.6%; management attributed $94.0 million of growth to organic sales and $84.8 million to acquired Aerospace businesses. SG&A rose to $117.0 million, or 14.6% of sales, from $88.8 million, or 14.2%.
- Aerospace sales grew 26.4% to $675.6 million; segment operating margin improved to 10.3% from 7.3%. Test Systems sales rose 42.0% to $127.6 million; segment margin was 8.4% versus 8.2%.
- Reported Q4 sales were $202.9 million and net income was $12.5 million, or diluted EPS of $0.37. Q4 2017 included a $16.2 million goodwill impairment and a net loss of $5.7 million.
- At year-end, cash was $16.6 million, working capital $246.1 million, total debt $234.0 million and shareholders’ equity $386.6 million. Debt was mainly variable-rate; $227.0 million was outstanding on the revolving facility, with $271.9 million available net of letters of credit. The leverage ratio was 2.04x against a 3.75x covenant limit.
- Cash used in investing activities was $19.7 million; cash used in financing was $36.1 million, principally reflecting net debt repayments. The company paid no cash dividend and reported no material off-balance-sheet arrangements.
Changes, outlook and material items
- Compared with 2017, net income improved, but the comparison is affected by the prior-year $16.2 million Armstrong goodwill impairment. The 2018 effective tax rate was 10.5%, versus 21.3%, including R&D credits and a benefit from a revised state tax filing position. Management cautions that some tax benefits are discrete.
- On February 13, 2019, Astronics completed the sale of its semiconductor test business for approximately $103.5 million, including $100 million cash at closing. It expected an approximately $80 million pretax gain and $22 million related tax expense in Q1 2019. Potential earnouts are contingent and were not included as proceeds pending realization.
- For 2019, management forecast consolidated sales of $760–$805 million, including Aerospace sales of $710–$745 million and Test Systems sales of $50–$60 million. The consolidated forecast excludes the disposed semiconductor business; midpoint implied organic growth of approximately 8% on the stated comparison basis. Expected capital spending was $22–$28 million and the expected tax rate, excluding the sale gain, was 18%–22%.
- Year-end backlog was $416 million, or $403 million excluding the semiconductor business; $352.4 million of remaining performance obligations was expected to be recognized in 2019. Aerospace backlog was $326 million and continuing Test Systems backlog was $77 million.
- Key risks include reliance on Panasonic and Boeing, which represented 14.4% and 14.3% of 2018 sales; aircraft-market cyclicality; government funding and contract awards; fixed-price contract cost overruns; variable interest rates; and customer, supplier, cybersecurity and product-liability risks.
- Lufthansa patent litigation remained pending in Germany and other European jurisdictions. Astronics recorded a $1 million reserve against estimated direct-sales exposure of $1–$3 million; separate indirect-sales and UK/France exposures were not estimable and no liability was recorded. The U.S. patent case had been dismissed with prejudice. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether 2019 guidance and backlog conversion were achieved, particularly after excluding the semiconductor test business.
- The realized gain, tax impact and any earnout receipts from the semiconductor-business sale.
- Whether Aerospace margins and acquired-business performance improve, and how acquisition-related amortization and operating losses evolve.
- Progress and potential financial exposure in the Lufthansa proceedings.
- Debt covenant headroom and sensitivity to variable interest rates; management estimated a 1 percentage-point rate change could affect annual pretax income by approximately $2.3 million.