Astronics Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020. Astronics supplies aerospace, defense and electronics products through its Aerospace and Test Systems segments. Results were heavily affected by COVID-19 disruption to commercial aviation.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Sales | $123.7 million | $189.1 million | $281.3 million | $397.3 million |
| Gross profit / margin | $26.8 million / 21.7% | $40.4 million / 21.3% | $62.6 million / 22.2% | $92.4 million / 23.3% |
| Operating income (loss) | $(18.7) million | $10.6 million | $(86.2) million | $33.5 million |
| Net income (loss) | $(23.6) million | $6.7 million | $(90.5) million | $84.9 million |
| Diluted EPS | $(0.77) | $0.20 | $(2.94) | $2.56 |
| Operating cash flow | Not separately reported | Not separately reported | $41.5 million | $9.1 million |
Cash and equivalents were $46.6 million at quarter-end, versus $31.9 million at December 31, 2019. Long-term debt was $173.0 million, plus $0.2 million of current maturities. The amended revolver had $200.5 million available, subject to covenant terms. The company reported compliance with its financial covenants.
First-half investing cash use was $2.3 million, including $3.9 million of capital expenditures; financing cash use was $24.0 million. Operating cash flow benefited from collections of receivables and non-cash impairment charges. Backlog was $307.2 million, down from $359.6 million at year-end 2019 and $379.7 million a year earlier.
Material changes and segment results
- Consolidated sales fell 34.6% in Q2 and 29.2% in the first half year over year, principally from Aerospace declines. Aerospace sales decreased 41.1% in Q2 and 32.8% in the first half. The Test Systems segment grew sales and reported Q2 operating profit of $2.6 million, versus a small loss a year earlier.
- Aerospace recorded operating losses of $17.1 million in Q2 and $80.2 million in the first half, including goodwill impairment charges of $12.6 million and $86.3 million, respectively. Total first-half impairment expense was $87.0 million, including a $0.7 million right-of-use asset impairment.
- Prior-year comparisons include an $80.1 million pre-tax gain on the 2019 sale of the semiconductor test business. Excluding this unusual gain, the year-over-year net income comparison is less directly comparable.
- First-half SG&A increased to $61.8 million from $59.0 million; Q2 SG&A was $32.9 million versus $29.8 million. COVID-related restructuring and severance charges were $5.0 million for the first half. A $3.5 million equity investment impairment was recorded in other expense.
Outlook, risks and unusual items
- Management estimated 2020 revenue of $500 million to $525 million and stated it believed the company could remain cash-positive at that level. This outlook was expressly uncertain and dependent on the duration and effects of COVID-19. The company expected weak airline investment to persist at least into 2021.
- Management expected 2020 capital expenditures of approximately $8 million, reduced from an initial $20 million to $25 million plan, and estimated cost reductions of $55 million to $60 million for the year. Workforce reductions had lowered headcount by approximately 20%, to about 2,300 employees.
- Approximately $178.3 million of backlog was expected to be recognized as revenue in 2020. Q2 bookings were $61.5 million, a consolidated book-to-bill ratio of 0.50:1. The effective tax benefit rate was forecast at 2% to 6% for 2020.
- The May 2020 credit amendment reduced the revolving commitment from $500 million to $375 million, suspended leverage-ratio testing through Q2 2021, and imposed minimum liquidity of $180 million and minimum interest coverage requirements. It also restricts certain actions, including acquisitions and share repurchases, and provides for mandatory prepayments when cash exceeds $100 million during the suspension period. The company reported approximately $160 million of facility prepayments after the amendment.
- Goodwill impairment reflected lower aerospace forecasts; PECO remained particularly sensitive to customer order reductions and valuation assumptions. A further 100-basis-point increase in the discount rate or decrease in normalized revenue growth could have caused additional PECO impairment of $7.6 million or $3.5 million, respectively.
- Patent litigation with Lufthansa remains a contingency. Astronics paid approximately $4.7 million, including interest, on a German direct-sales judgment and appealed. It accrued $16.4 million for a German indirect-sales claim, also subject to appeal. A UK court found patent validity and infringement on some claims; potential damages were not estimable, and no damages liability was recorded. French and UK proceedings could result in additional exposure that the company could not reasonably estimate.
Important facts for investors to verify
- Whether commercial aircraft production, airline aftermarket spending and customer order patterns support the $500 million to $525 million revenue outlook and cash-positive expectation.
- Liquidity and covenant headroom under the amended credit facility, including the $180 million minimum liquidity requirement and future leverage tests.
- Whether PECO or other reporting units require additional impairment as forecasts and customer demand change.
- The outcomes and potential financial impact of Lufthansa litigation, particularly the unestimated UK and French claims and appeals of German rulings.
- Whether backlog converts to revenue on the expected schedule, and whether customer credit risks, inventory exposure or further restructuring charges increase.