ASTRONICS CORP annual report, FY2020

Astronics Corporation — FY2020 Form 10-K

Reporting period: Year ended December 31, 2020. Astronics supplies advanced systems and products to aerospace, defense, and other mission-critical markets through its Aerospace and Test Systems segments. Results were heavily affected by COVID-19’s disruption of commercial aviation and by the continued Boeing 737 MAX grounding.

Financial results and position

• Sales fell 35.0%, primarily from a $274.6 million decline in Aerospace; Test Systems sales rose $4.5 million. Aerospace operating loss was $89.8 million (margin of negative 21.5%), while Test Systems operating profit was $5.5 million (6.6% margin).
• The company recorded $87.0 million in impairment losses, including $86.3 million of Aerospace goodwill impairment, and $5.3 million in restructuring-related severance charges. The after-tax impact of the impairment loss was $81.4 million.
• The effective tax rate was negative 3.0%, affected by a valuation allowance against deferred tax assets and nondeductible goodwill impairments. The tax note reports a $23.3 million partial federal deferred-tax-asset valuation allowance; management’s summary also cites a $21.5 million tax charge related to valuation allowances.
• Backlog declined to $283.4 million from $359.6 million. Management expects $216.9 million of year-end backlog to be recognized as 2021 revenue.

Material changes and business developments

• Commercial transport sales were $262.6 million, down from $523.9 million, reflecting airline spending cuts, lower aircraft production, and weak aftermarket demand. Commercial transport represented 52.3% of consolidated sales.
• Panasonic and Boeing accounted for 11.1% and 9.5% of 2020 sales, respectively, compared with 13.0% and 13.6% in 2019.
• COVID-19 cost actions included workforce reductions of approximately 20%, benefit and bonus suspensions, lower discretionary spending, and reduced capital spending. Management estimated these actions lowered costs by $55–$60 million for the year beginning in the second quarter.
• Research, development, and engineering costs decreased to $86.8 million from $108.9 million. Employees numbered approximately 2,200 at year-end, down from 2,800.
• In 2019, the semiconductor test business sale generated an $80.1 million pretax gain. In February 2021, the purchaser reported $10.7 million potentially payable under contingent earnouts for 2020; review was ongoing, and Astronics expected to recognize any agreed amount in first-quarter 2021.

Outlook, liquidity, and risks

• Astronics did not provide full-year 2021 guidance, citing uncertainty. It expected first-half demand to be similar to second-half 2020, first-quarter sales of about $100 million, and improving activity later in the year. Management expected commercial transport improvement in the second half, while wide-body production and usage could remain depressed for several years.
• Management expected to generate cash in 2021 and reduce debt, and stated that liquidity should be sufficient through the pandemic. It expected covenant compliance at least through 2021 based on its outlook. Planned 2021 capital spending was $10–$11 million.
• The amended $375 million revolving facility had $173.0 million drawn and $200.9 million available at year-end, subject to the facility’s minimum-liquidity covenant. The agreement requires at least $180 million of liquidity through third-quarter 2021, imposes leverage and interest-coverage tests, restricts certain acquisitions and share repurchases, and requires certain mandatory prepayments. Astronics was covenant-compliant at year-end.
• Key risks include a slower aviation recovery, further customer production cuts or order cancellations, customer concentration, variable-rate debt and LIBOR transition, supply-chain disruption, and impairment risk at the PECO reporting unit. The company also disclosed probable losses related to Lufthansa patent litigation: a $16.7 million liability for German indirect-sales claims, with additional UK and French exposure possible but not estimable. A separate Teradyne patent and copyright case remained in discovery; no loss was accrued because exposure was not considered probable or estimable.
• The company paid no cash dividends and had no plans to begin doing so. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Investor verification priorities

1. Track commercial aviation recovery, aircraft build rates, airline retrofit spending, and the 737 MAX program’s effect on sales and margins.
2. Monitor cash generation, debt reduction, available revolver capacity, and compliance with the amended facility’s liquidity and financial covenants.
3. Verify the resolution and timing of the $10.7 million semiconductor-sale earnout calculation and its recognition in 2021.
4. Follow Lufthansa appeals and potential damages, the Teradyne case, and any resulting changes to recorded or unrecorded contingencies.
5. Assess further goodwill or long-lived-asset impairment risk, particularly at PECO, and the recoverability of deferred tax assets.