Astronics Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 28, 2019; comparative quarter ended September 29, 2018. Astronics supplies technology and products to aerospace and defense markets through its Aerospace and Test Systems segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Third-quarter revenue: $177.0 million, down 16.8% from $212.7 million. Gross profit was $36.8 million and gross margin was 20.8%, versus $46.3 million and 21.8%. Operating income declined to $5.1 million from $18.3 million.
- Third-quarter earnings: Net income was $1.2 million, or $0.04 per diluted share, compared with $17.0 million, or $0.52 per diluted share. Results included a $1.3 million loss on the Airfield Lighting asset sale, a $1.7 million incremental reserve for a patent dispute, tariffs, and a $2.2 million CCC contract charge.
- Nine-month revenue: $574.3 million, down 4.3% from $600.3 million. Gross profit was $129.2 million and gross margin was 22.5%, compared with $133.0 million and 22.2%. SG&A increased to $90.7 million from $87.9 million.
- Nine-month earnings: Net income was $86.1 million, or $2.61 per diluted share, versus $34.3 million, or $1.04 per diluted share. The 2019 result includes an $80.1 million pretax gain from selling the semiconductor test business; management said the gain was expected to add $58.8 million to net income after tax. Excluding that gain, reported net income is not presented as a separate figure in the filing.
- Cash flow and investment: Nine-month operating cash flow was $30.2 million, versus $15.4 million. Investing activities provided $74.2 million, principally reflecting $103.8 million in divestiture proceeds, partly offset by the $21.8 million FCT acquisition and $8.9 million of capital expenditures. Financing activities used $97.9 million, including $50.0 million of share repurchases and $47.1 million of net debt repayments.
- Liquidity and debt: September 28 cash was $22.8 million, compared with $16.6 million at year-end 2018. Revolver debt was $180.0 million; $318.9 million remained available, net of letters of credit. The company reported compliance with its debt covenant. Current assets were $352.9 million and current liabilities $119.1 million.
- Balance sheet: Total assets were $778.0 million and shareholders’ equity $425.8 million. Long-term debt, including current maturities, was approximately $180.2 million. Operating and finance lease liabilities were $25.4 million and $5.2 million, respectively.
Material changes and segment trends
- Third-quarter Aerospace sales fell 7.0% to $157.7 million; segment operating margin declined to 5.6% from 9.6%. Lower avionics demand and tariffs contributed. Nine-month Aerospace sales rose 4.0% to $520.5 million, while margin was 9.4% versus 9.5%.
- Third-quarter Test Systems sales fell to $19.3 million from $43.1 million, largely because the semiconductor test business was divested. Aerospace and Defense market sales increased. Nine-month segment sales were $53.8 million versus $100.0 million; operating margin fell to 7.7% from 10.2%.
- Consolidated third-quarter bookings were $176.6 million, with a 1.00:1 book-to-bill ratio; backlog was $379.4 million. Approximately $175.0 million of backlog was expected to ship during the remainder of 2019.
- Key transactions: the semiconductor test business was sold in February for $103.8 million; FCT was acquired in July for $21.8 million; and Airfield Lighting assets were sold in July for $1.0 million. After quarter-end, Astronics acquired Diagnosys for $7.0 million, with a potential earn-out of up to $13.0 million.
Outlook, risks and contingencies
- 2019 guidance: Revenue of $750–$770 million, comprising $680–$690 million Aerospace and $70–$80 million Test Systems. The company expected a 21%–25% effective tax rate excluding the semiconductor sale gain, and $14–$19 million in capital spending.
- 2020 guidance: Revenue of $770–$820 million, comprising $690–$730 million Aerospace and $80–$90 million Test Systems; expected effective tax rate of 18%–22%. The filing describes midpoint revenue growth of 5% over the 2019 guidance midpoint.
- AeroSat experienced project delays and losses. Management was evaluating projects and planned restructuring initiatives; resulting charges could include severance, inventory write-downs, asset impairments, and contract cancellation costs, and could be material. CCC also had delays and losses on a development project; further delays could cause additional losses.
- For a Lufthansa patent-related German direct-sales damages claim, Astronics estimated exposure of $2.7–$6.3 million, including interest, and had recorded a $2.7 million reserve. Separate indirect-sales litigation had unspecified, unquantifiable damages, with no liability recorded because exposure was not considered probable or estimable at the filing date. UK and French matters also had no recorded liability on that basis.
- Two customers each represented more than 10% of sales; together they accounted for 27% of nine-month 2019 sales, and receivables from them totaled approximately $39.7 million. Management identified the loss of either customer as a significant risk.
- Other notable costs included $6.8 million of tariffs, $3.6 million of inventory charges, and $3.9 million of program charges in the first nine months. The company also cited cyclical aircraft production and upgrade spending, and potential volatility in multi-year Test Systems projects.
Important facts for investors to verify
- Underlying earnings and margins excluding the $80.1 million semiconductor divestiture gain, including the related tax impact.
- Progress against 2019 and 2020 revenue guidance, backlog conversion, and bookings—especially Test Systems demand after the semiconductor business sale.
- Costs, timing, and impairment implications of AeroSat restructuring and the CCC development project.
- Outcomes and reserve adequacy for the Lufthansa litigation, including the direct-sales decision and unquantified indirect-sales exposure.
- Customer concentration, tariff exposure, and the effect of project and inventory charges on cash generation and margins.
- Use of remaining repurchase authorization, debt repayment, and liquidity following the Diagnosys acquisition and potential earn-out.