Astronics Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are to the three months ended March 30, 2019 unless otherwise noted. Astronics supplies aerospace, defense, and electronics products through its Aerospace and Test Systems segments. Results reflect the early effects of COVID-19 and a prior-year gain from selling its semiconductor test business.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $157.6 million | $208.2 million |
| Gross profit / margin | $35.7 million / 22.7% | $52.1 million / 25.0% |
| Operating income (loss) | $(67.6) million | $22.9 million |
| Net income (loss) | $(67.0) million | $78.1 million |
| Diluted earnings (loss) per share | $(2.17) | $2.35 |
| Cash provided by operating activities | $23.3 million | $11.4 million |
- Sales fell $50.6 million, or about 24%, with Aerospace down $47.4 million and Test Systems down $3.2 million. Sales were affected by the 737 MAX production halt and COVID-related disruption.
- Operating results included a $74.4 million non-cash impairment charge, of which $73.7 million was goodwill impairment in four Aerospace reporting units and about $0.7 million was a right-of-use asset impairment. The goodwill charge’s after-tax impact was $68.8 million, or $2.23 per diluted share.
- Aerospace reported a $63.1 million operating loss and a 44.8% negative margin, versus $25.8 million operating profit and a 13.7% margin. Test Systems operating profit was $0.7 million, with a 4.4% margin, versus $2.2 million and 11.1%.
- Q1 2019 net income included an $80.1 million pre-tax gain on the semiconductor test business divestiture. The prior-period comparison is therefore affected by both that gain and the current-period impairment.
- The effective tax rate was 3.3%, versus 22.6%. The current-period rate reflected non-deductible goodwill impairment and a roughly $7.0 million partial federal valuation allowance; the company also recorded a $0.7 million CARES Act-related tax benefit.
Cash, debt, and liquidity
- Cash and equivalents were $188.4 million at March 28, 2020, versus $31.9 million at year-end 2019. Long-term debt was $333.0 million, compared with $188.0 million; current debt maturities were $0.2 million. Operating cash flow was $23.3 million; investing activities used $2.8 million and financing activities provided $136.8 million.
- Under the then-existing $500 million revolving facility, $333.0 million was drawn and $165.5 million remained available, net of letters of credit and guarantees. The company reported compliance with its leverage covenant at quarter-end.
- On May 4, 2020, after quarter-end, Astronics amended the facility: the revolver was reduced to $375 million, with an option to increase it by up to $150 million. Leverage-ratio testing is suspended through Q2 2021, subject to minimum liquidity of $180 million and minimum interest-coverage requirements. The amendment increases borrowing costs during the suspension period, restricts acquisitions and share repurchases, and requires repayments when cash exceeds $100 million. Management expected a mandatory repayment in Q2 2020.
- Shareholders’ equity was $313.8 million, down from $388.9 million at December 31, 2019. The company repurchased about 282,000 shares for $7.7 million before terminating its repurchase plan in February; the amended facility restricts further repurchases.
Outlook, risks, and contingencies
- Management said 2020 revenue could decline 30%–35% from 2019 sales of $773 million, while noting that other outcomes are possible. It said the business had been restructured to be cash-flow positive at that level; this is an expectation, not a guarantee.
- COVID-19 cost actions included workforce reductions of about 30% to approximately 2,000 employees, furloughs and layoffs, suspended bonuses and wage increases, lower discretionary spending, and reduced capital spending. Management estimated $55–$60 million of annual cost reductions beginning in Q2. Planned 2020 capital expenditures were reduced to about $8 million from an initial $20–$25 million.
- Bookings were $167.4 million, for a 1.06 book-to-bill ratio. Backlog was $369.4 million, with approximately $268.1 million expected to be recognized as revenue during the remainder of 2020. Subsequent COVID-related cancellations removed $3.0 million of Aerospace backlog from expected revenue. Backlog at March 28, 2019 was $400.2 million.
- Management expected a 2020 effective tax benefit rate of 2%–6%. It warned that pandemic duration, airline spending, aircraft production, customer creditworthiness, supply-chain disruption, and further order cancellations could materially affect results and cash flows. Future impairment charges are possible if operating forecasts or economic conditions deteriorate.
- Patent litigation with Lufthansa remains material. Astronics accrued approximately $4.7 million, including interest, for direct-sale damages and $16.2 million for indirect-sale claims in Germany; the indirect claim is subject to appeal and further damages proceedings. Separate UK and French claims could result in additional losses, but the company said it could not reasonably estimate a range and recorded no liability for those matters.
- The company has significant customer concentration: two customers represented 17% and 9% of Q1 2020 sales, primarily in Aerospace. The filing also states that losing either major customer would significantly harm sales and earnings.
Key facts for investors to verify
- Whether demand, cancellations, and production rates support management’s 30%–35% revenue-decline and positive-cash-flow assumptions.
- Compliance with the amended facility’s $180 million minimum-liquidity and interest-coverage requirements, and the effect of required repayments and higher borrowing costs.
- Whether the remaining PECO goodwill or other assets require further impairment, given the disclosed sensitivity to discount rates and revenue growth.
- The final outcomes, timing, and cash costs of Lufthansa litigation, including German appeals and the unquantified UK and French claims.
- Whether backlog converts to revenue as expected and whether major-customer exposure or customer credit deterioration increases.