Astronics Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Astronics supplies aerospace, defense, and test-system products through its Aerospace and Test Systems segments.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $772.7 million | $803.3 million |
| Gross margin | 20.2% | 22.5% |
| Operating income | $1.7 million | $63.7 million |
| Net income | $52.0 million | $46.8 million |
| Diluted EPS | $1.60 | $1.41 |
| Cash from operations | $42.7 million | $54.9 million |
| Cash and cash equivalents | $31.9 million | $16.6 million |
| Total debt | $188.2 million | $234.0 million |
| Working capital | $222.4 million | $246.1 million |
Revenue declined 3.8%. Net income rose despite sharply lower operating income, primarily because of the $78.8 million net gain on business sales, principally the semiconductor test-business divestiture. The $80.1 million pretax sale gain was partly offset by a $1.3 million loss on the Airfield Lighting sale. The effective tax rate was 23.8%, versus 10.5% in 2018. Capital expenditures were $12.1 million; operating cash flow less capital expenditures was approximately $30.6 million.
Fourth-quarter revenue was $198.4 million, compared with $202.9 million a year earlier. The quarter recorded a $34.1 million net loss, including $28.8 million of AeroSat restructuring and impairment charges and increased legal reserves. Full-year Aerospace operating margin fell to 2.4% from 10.3%; Test Systems margin fell to 5.6% from 8.4%.
Material changes and business developments
- Aerospace revenue increased 2.5% to $692.6 million, while operating profit dropped to $16.7 million from $69.8 million. Reported pressures included $19.6 million of incremental patent-litigation reserves, $5.9 million of tariffs, and $28.8 million of AeroSat charges.
- Test Systems revenue declined to $80.1 million from $127.6 million, largely reflecting the semiconductor test-business sale; the divested business contributed $84.3 million of 2018 revenue and $9.7 million in 2019 before its sale.
- The semiconductor business was sold for $103.8 million in February 2019. Astronics acquired Freedom Communication Technologies for $21.8 million and Diagnosys for $7.0 million plus estimated contingent consideration of $2.5 million.
- AeroSat was restructured to narrow its focus primarily to near-term business-jet connectivity opportunities and reduce operating costs. The company recorded $11.1 million of impairment losses and $28.8 million in total related restructuring and impairment charges.
- Backlog was $359.6 million at year-end, down from $415.5 million reported in 2018; excluding the sold semiconductor business, 2018 backlog was $403.3 million. Management expected $300.9 million of year-end 2019 performance obligations to convert to revenue in 2020.
Outlook, risks, and contingencies
- Management temporarily withdrew full-year 2020 revenue guidance because of the Boeing 737 MAX grounding. It forecast first-quarter sales of $155 million to $165 million, described the first quarter as the lightest, and expected results to strengthen through the year. Expected 2020 capital spending was $22 million to $25 million; the expected tax rate was 18% to 22%.
- Management had not estimated the potential effect of COVID-19, citing uncertainty around airline demand, customer spending, and supply chains. The filing warns prolonged disruption could materially affect the business.
- Boeing and Panasonic represented 13.6% and 13.0% of 2019 sales, respectively. The 737 MAX production pause and reduced airline capacity also affected retrofit demand. Consolidated backlog and customer concentration expose results to program timing and cancellations.
- Astronics accrued approximately $20.6 million, including interest, for Lufthansa patent claims in Germany: $4.5 million for direct sales and $16.1 million as management’s estimate for indirect sales. The direct-sales judgment was appealed; Lufthansa indicated it intended to enforce the first-instance judgment. UK and France claims remained unresolved, with losses not then reasonably estimable.
- Debt was predominantly floating-rate, with $188.0 million outstanding on a $500 million revolving facility due February 2023 and $310.9 million available at year-end. The company reported covenant compliance. A 1 percentage-point rate increase was estimated to reduce annual net income by about $1.9 million before tax.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The internal-control assessment excluded the 2019 acquisitions of Freedom and Diagnosys.
Most important facts for investors to verify
- Underlying earnings and cash generation excluding the semiconductor divestiture gain, restructuring and impairment charges, and unusual legal and investment charges.
- Current 737 MAX production and delivery trends, their effect on Astronics’ content and aftermarket demand, and whether management has reinstated full-year guidance.
- Progress and remaining exposure in the Lufthansa proceedings, including appeals, enforcement, interest accrual, and the separate UK and France cases.
- Backlog conversion, cancellations, and customer concentration, particularly exposure to Boeing and Panasonic.
- AeroSat’s operating performance after restructuring, and the extent to which acquisitions contribute profitable growth relative to their purchase and integration costs.
- Floating-rate debt, covenant headroom, available borrowing capacity, and the cash impact of share repurchases and other capital commitments.