Astronics Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are to the periods ended July 1, 2017. Astronics supplies technology and systems to aerospace, defense, electronics and semiconductor markets through its Aerospace and Test Systems segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Sales | $208.6 | $151.1 | $387.7 | $303.5 |
| Gross profit / margin | $49.6 / 23.8% | $34.2 / 22.6% | $86.7 / 22.4% | $72.5 / 23.9% |
| Income from operations | $20.1 | $12.1 | $26.8 | $29.0 |
| Net income | $14.0 | $7.7 | $17.3 | $19.3 |
| Diluted EPS | $0.49 | $0.26 | $0.60 | $0.64 |
| Interest expense, net | $2.5 | $1.2 | $4.8 | $2.3 |
| Effective tax rate | 18.4% | 27.3% | 18.0% | 26.0% |
Q2 sales rose 38%, including $26.9 million from the Telefonix/PDT acquisition; organic revenue increased 20%. H1 sales grew 27.7%, including $52.0 million of acquired revenue. H1 net income declined despite higher sales, reflecting increased SG&A, interest and acquisition-related costs, among other items.
- Segments: Q2 Aerospace revenue was $166.2 million, up 28.3% (7.5% organic); operating margin was 11.0% versus 10.8%. H1 Aerospace revenue was $330.8 million, with operating margin down to 9.5% from 12.7%. Q2 Test Systems revenue rose to $42.4 million from $21.6 million, with operating margin of 14.7% versus 6.6%; semiconductor demand drove the growth.
- Cash flow: H1 operating cash flow was $8.1 million versus $4.5 million. Investing used $8.5 million, primarily capital expenditures; financing used $6.6 million. Cash decreased $7.3 million to $10.6 million.
- Balance sheet and debt: At June 30, cash was $10.6 million, current assets $353.5 million and current liabilities $115.8 million. Total debt, including current maturities, was approximately $265.3 million. The company had $257.0 million outstanding on its revolver and $241.9 million available, net of letters of credit. Leverage was 2.80x against a maximum covenant ratio of 3.75x (temporarily higher after qualifying acquisitions).
Material changes, outlook and management commentary
- Management forecast 2018 sales of $765–815 million: $650–680 million Aerospace and $115–135 million Test Systems. Expected 2018 tax rate was 18–21%; capital spending $24–28 million; engineering and development costs $110–115 million.
- Backlog was $376.9 million at quarter-end, down from $393.7 million at December 31, 2017, but up from $265.6 million a year earlier. Management expected approximately $309.1 million of remaining performance obligations to be recognized as 2018 revenue. Q2 bookings were $186.9 million, with a 0.90:1 consolidated book-to-bill ratio.
- The February 2018 credit agreement increased and extended the revolving facility to $500 million, with maturity in February 2023 and a possible $150 million increase. Management expected remaining-2018 cash needs to be met through operating cash flow, cash balances and, if needed, the revolver.
- Adoption of the new revenue standard on January 1, 2018 increased opening retained earnings by $3.3 million. It accelerated recognition for certain customer-specific contracts; management did not expect a material impact on full-year 2018 net earnings. Reported Q2 revenue was $2.5 million lower than it would have been without adoption; H1 reported revenue was $1.3 million lower.
- Unusual costs included a $3.6 million H1 charge (including $1.5 million in Q2) for revised estimated costs on a CCC long-term contract, $1.3 million of acquired-inventory step-up expense in Q1, and a $1.0 million reserve for Lufthansa patent litigation. Acquisition-related amortization and other purchase-accounting expenses also weighed on Aerospace results.
Risks, contingencies and other notable items
- Two Aerospace customers each accounted for more than 10% of sales; together they represented 31% of H1 2018 sales. Receivables from them totaled approximately $31.5 million. The filing warns that losing either would materially hurt sales and earnings.
- Lufthansa’s German direct-sales damages claim was approximately $6.2 million plus interest; Astronics estimated potential exposure of $1–3 million and recorded a $1.0 million reserve. Other Lufthansa claims involving indirect sales and UK/France matters had no recorded liability because exposure was not then considered probable or estimable. The U.S. case was dismissed with prejudice and the appeal affirmed.
- Management cited dependence on aircraft production and retrofit activity, military funding, product design wins, and large, uneven Test Systems project orders. The filing also notes foreign-exchange exposure, though management said 2018 impacts had not been significant.
- The Lufthansa patent ruling and damages determination in Germany remained pending. The filing also states that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether the 2018 sales outlook and expected backlog conversion were achieved, particularly given the below-1.0 Q2 book-to-bill ratio.
- Whether Aerospace margins recover as acquisition-related costs and the CCC contract charge diminish, and whether the revised contract estimates prove adequate.
- Cash generation and working-capital needs: receivables and inventory increased, while H1 operating cash flow remained modest.
- Debt, covenant headroom and interest costs under the variable-rate credit facility.
- Developments in Lufthansa litigation, including the recorded reserve versus the claimed amount and unquantified claims.
- Customer concentration and semiconductor-driven Test Systems growth; confirm the revenue-standard timing effects when comparing periods.