Astronics Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. Amounts are in U.S. dollars.
Business context and results
Astronics supplies aerospace, defense and electronics technologies through its Aerospace and Test Systems segments. On February 13, 2019, it sold its semiconductor test business within Test Systems.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $208.2 million | $179.1 million |
| Gross profit / margin | $52.1 million / 25.0% | $37.1 million / 20.7% |
| Income from operations | $22.9 million | $6.6 million |
| Gain on business sale | $80.1 million | — |
| Net income | $78.1 million | $3.3 million |
| Diluted EPS | $2.35 | $0.10 |
| Cash provided by (used for) operations | $11.4 million | $(1.1) million |
Reported earnings include the $80.1 million pretax sale gain; management said the gain is expected to contribute $58.8 million after tax. Sales rose 16.3%, primarily from Aerospace growth. SG&A declined to $29.2 million, or 14.0% of sales, from $30.5 million, or 17.0%. Interest expense, net, was $1.8 million versus $2.3 million. The effective tax rate was 22.6%, compared with 16.1%; the 2019 rate was affected by the divestiture gain, state taxes and the federal R&D credit.
Segments and material changes
- Aerospace: Sales increased 14.5% to $188.5 million; operating profit rose to $25.8 million from $13.1 million, and margin improved to 13.7% from 8.0%. Growth came particularly from Electrical Power & Motion, Lighting & Safety, military and business jet markets. Three challenged businesses collectively recorded a $10.7 million operating loss, including a $2.0 million inventory reserve and $1.7 million additional loss on a development contract.
- Test Systems: Net sales increased to $19.7 million from $14.5 million, and operating profit was $2.2 million versus a $1.9 million loss. Higher Aerospace & Defense sales more than offset lower semiconductor sales; the divested semiconductor business was included in the prior-year comparison.
- The divestiture generated $103.8 million in proceeds. Astronics used $122.0 million for long-term debt payments and ended the quarter with substantially lower debt. Future sale-related earnouts are possible but were not recognized because their amounts were uncertain; the first is capped at $35 million and the second has no stated cap.
Financial position and liquidity
At March 30, 2019, cash was $16.0 million, accounts receivable $188.6 million, inventory $139.1 million and total assets $780.5 million. Total debt, including current maturities, was $115.3 million, down from $234.0 million at December 31, 2018. Shareholders’ equity was $466.0 million. Operating cash flow improved year over year; investing cash flow was $100.3 million, principally reflecting sale proceeds, while financing cash flow was negative $112.3 million, principally reflecting debt repayment. Capital expenditures were $3.5 million in the quarter.
The $500 million revolving credit facility matures February 16, 2023. At quarter-end, $115.0 million was outstanding and $383.9 million remained available, net of letters of credit. The company reported compliance with its leverage covenant. Its forecast funding needs for the remainder of 2019 are expected to be met by operating cash flow, cash balances and, if needed, the revolving facility. Adoption of the lease standard resulted in recognition of operating right-of-use assets and liabilities; management said adoption did not materially affect the financial statements.
Outlook, risks and contingencies
- Management reiterated 2019 consolidated sales guidance of $760–$805 million: $710–$745 million for Aerospace and $50–$60 million for Test Systems. Expected 2019 capital spending is $22–$28 million. The expected effective tax rate is 18%–22%, excluding the divestiture gain.
- Backlog was $400.2 million at quarter-end, with approximately $335.5 million expected to be recognized as revenue in 2019. Bookings were $205.0 million and the consolidated book-to-bill ratio was 0.98:1. Aerospace book-to-bill was 1.02:1; Test Systems was 0.68:1.
- Management began restructuring at certain locations in Q2; it expects severance charges of $0.2 million in Aerospace and $2.0 million in Test Systems. A restructuring at one challenged Aerospace business is intended to reduce fixed costs by approximately $3.5 million.
- Two customers each represented more than 10% of quarterly sales (14% and 13%); together they accounted for approximately $43.4 million of receivables at quarter-end. Management warns that losing either customer could significantly harm sales and earnings.
- Risks include cyclical aircraft production and refurbishment, dependence on military funding and new program wins, Test Systems’ lumpy project timing, challenged businesses and contract/inventory exposures, and foreign-currency and floating-rate debt exposure. Management said currency impacts had not been significant.
- Lufthansa litigation in Germany remains relevant: a direct-sales damages claim seeks approximately $6.2 million plus interest; Astronics estimates potential exposure of $1–$3 million and had recorded a $1 million reserve. Separate indirect-sales litigation has unquantified damages and no recorded liability because loss was not considered probable or estimable. The U.S. case was dismissed, with the dismissal affirmed on appeal.
- Management stated that ordinary-course legal matters are not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Investor facts to verify
- How recurring operating performance compares with reported earnings after separating the $80.1 million divestiture gain and associated tax effects.
- Whether the challenged Aerospace businesses improve, and whether the stated restructuring savings and severance charges materialize.
- Backlog conversion, bookings trends and achievement of 2019 sales and capital-spending guidance, particularly in Test Systems.
- Resolution and potential financial exposure from the Lufthansa direct- and indirect-sales claims.
- Cash generation, debt repayment, covenant headroom and the extent to which customer concentration persists.