Astronics Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019. Dollar amounts are in millions unless noted. Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $189.1 | $208.6 | $397.3 | $387.7 |
| Gross profit | $40.4 | $49.6 | $92.4 | $86.7 |
| Gross margin | 21.3% | 23.8% | 23.3% | 22.4% |
| Operating income | $10.6 | $20.1 | $33.5 | $26.8 |
| Net income | $6.7 | $14.0 | $84.9 | $17.3 |
| Diluted EPS | $0.20 | $0.42 | $2.56 | $0.52 |
Six-month net income included an $80.1 million pretax gain on the semiconductor test business divestiture; the company estimated the gain contributed $58.8 million after tax. Excluding this one-time gain, reported year-to-date earnings materially overstate earnings from ongoing operations.
- Cash flow: Six-month operating cash flow was $9.1 million, versus $8.1 million a year earlier. Investing cash flow was positive $96.9 million, principally from $103.8 million of divestiture proceeds; capital expenditures were $6.9 million. Financing cash flow was negative $105.5 million, including $132.1 million of debt payments and $27.0 million of new borrowings.
- Liquidity and debt: Cash was $17.1 million at June 29, 2019. Total debt was approximately $122.3 million, down from $234.0 million at year-end 2018. The $500 million revolving facility had $376.9 million available, net of letters of credit. The company reported compliance with its financial covenant.
- Balance sheet: Total assets were $767.3 million and shareholders’ equity was $475.0 million. Current assets were $354.6 million and current liabilities were $119.6 million.
Material changes and segment results
- Q2 consolidated sales fell 9.4% year over year, mainly because the semiconductor test business was sold. Aerospace sales increased 4.9% to $174.3 million; Test Systems sales fell to $14.8 million from $42.4 million.
- Aerospace Q2 operating profit was $14.4 million, down from $18.2 million, and margin declined to 8.3% from 11.0%. Higher volume was offset by $2.3 million of tariffs and $7.7 million of operating losses in challenged businesses, including a $1.6 million inventory reserve.
- Test Systems reported a Q2 operating loss of $0.1 million, compared with $6.2 million operating profit a year earlier. Results reflected the divestiture and $2.0 million of restructuring-related severance.
- For the first six months, sales rose 2.5%; Aerospace growth more than offset the divestiture-related decline in Test Systems. Aerospace operating margin improved to 11.1% from 9.5%; Test Systems margin declined to 6.0% from 7.6%.
- Backlog was $379.7 million at quarter-end, versus $415.5 million at December 31, 2018 (or $403.3 million excluding the divested business). Approximately $263.9 million was expected to be recognized as revenue during the remainder of 2019.
Outlook, risks and notable items
- 2019 guidance: Sales of $740–$775 million, including $680–$700 million from Aerospace and $60–$75 million from Test Systems. The company expected a 15%–19% effective tax rate excluding the semiconductor sale gain and $22–$28 million in capital spending.
- Management expected about $3 million in annual Aerospace restructuring savings and $5–$6 million in Test Systems savings beginning in Q3 2019. Tariffs were a material cost headwind; reported tariff expense was $2.3 million in Q2 and $4.0 million year to date.
- On July 1, 2019, after quarter-end, Astronics acquired Freedom Communication Technologies for $22.0 million cash. On July 12, it sold Airfield Lighting product-line assets for $1.0 million and expected to record an approximately $1.3 million loss in Q3.
- Two customers each represented more than 10% of consolidated sales; together they accounted for 27% of first-half sales, and receivables from them totaled approximately $44.6 million. Management noted that losing either customer could significantly harm sales and earnings.
- Business performance is exposed to aircraft production, military funding, customer upgrade spending and economic cycles; Test Systems can experience fluctuations due to large, multi-year projects. The filing also identifies challenged Aerospace businesses and competitive and execution risks.
- Legal contingency: Lufthansa claims approximately $6.2 million plus interest in a German direct-sales patent damages action. Astronics estimated exposure of $1–$3 million and had recorded a $1 million reserve. Separate indirect-sales claims had no specified, estimable damages and no liability was recorded; hearings were scheduled for September 2019.
- Management stated disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether full-year sales guidance and planned restructuring savings were achieved, especially as backlog and bookings convert to revenue.
- Ongoing Aerospace and Test Systems profitability after adjusting for divestiture effects, tariffs, severance, inventory reserves and other unusual items.
- Cash generation, debt levels and revolver availability following the $22.0 million post-quarter acquisition.
- Customer concentration, challenged-business losses, and the outcomes or updated reserves for the Lufthansa litigation.
- The actual tax impact and any contingent earnout proceeds from the semiconductor business sale; the earnouts were not recognized because future sales were uncertain.