Astronics Corporation — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 29, 2018. Astronics supplies aerospace and defense technologies and automated test systems through its Aerospace and Test Systems segments. Results include the December 2017 CSC acquisition; management identifies approximately $20.8 million of acquired sales in the quarter and $72.8 million year to date.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $212.7 million | $149.6 million | $600.3 million | $453.1 million |
| Gross profit / margin | $46.3 million / 21.8% | $32.5 million / 21.7% | $133.0 million / 22.2% | $105.0 million / 23.2% |
| Operating income | $18.3 million | $10.4 million | $45.1 million | $39.4 million |
| Net income | $17.0 million | $6.1 million | $34.3 million | $25.3 million |
| Diluted EPS | $0.52 | $0.18 | $1.04 | $0.74 |
| Operating cash flow | Nine months: $15.4 million | Prior-year nine months: $22.3 million |
- Quarterly sales rose 42%; management reported organic revenue growth of 28%. Year-to-date sales increased 32.5%, reflecting organic growth and acquisitions.
- Year-to-date gross margin declined 1.0 percentage point. Aerospace operating margin fell to 9.5% from 11.8% year to date, while Test Systems margin improved to 10.2% from 4.9%. In Q3, those segment margins were 9.6% and 13.5%, respectively.
- Quarterly consolidated operating income and net income improved year over year. The unusually low reported tax rates materially benefited net income; see tax items below.
- At September 29, cash was $4.9 million, current assets $366.0 million, and current liabilities $117.7 million. Total debt was $259.6 million, comprising $252.0 million drawn on the revolver and $2.0 million current maturities. The filing reports $246.9 million of facility availability, net of letters of credit, and a 2.59-to-1 leverage ratio.
- Operating cash flow was below the prior-year period, principally because of increased operating assets, including receivables. Capital expenditures were $12.4 million year to date. Cash decreased $13.0 million to $4.9 million during the nine months.
Material changes and unusual items
- Test Systems sales more than doubled in Q3, led by semiconductor demand; year-to-date semiconductor sales increased substantially. Aerospace growth included acquired revenue and organic gains, particularly in commercial transport and avionics.
- A CCC long-term contract generated a $3.9 million Q3 cost charge and a $7.5 million year-to-date loss, following revised estimates of costs to complete. The filing also cites lower CCC margins, acquisition-related amortization and a $1.3 million first-quarter inventory fair-value step-up expense.
- The company recorded a $4.0 million discrete tax benefit from a revised state tax filing position, net of a $1.7 million uncertain-tax-position reserve, and an approximately $0.4 million benefit related to provisional repatriation tax. Without the disclosed discrete adjustments, management said the tax rate would have been 19.3% for Q3 and 18.5% year to date.
- Revenue-standard adoption increased opening retained earnings by $3.3 million. For the nine months, adoption increased reported sales by $1.8 million and net income by $0.3 million versus amounts without adoption.
- Backlog was $398.1 million, versus $393.7 million at December 31, 2017 and $302.3 million a year earlier. Q3 bookings were $233.8 million, with a 1.10 book-to-bill ratio; Test Systems’ quarterly book-to-bill was 0.86.
Outlook, risks and contingencies
- Management forecast Q4 sales of $190–$200 million and 2018 sales of $790–$800 million. Segment estimates for 2018 were $670–$675 million for Aerospace and $120–$125 million for Test Systems.
- Management expected a Q4 effective tax rate of 18%–21% and a full-year rate of 10%–13%, inclusive of the stated tax adjustments. Planned 2018 capital spending was revised down to $18–$22 million; expected engineering and development costs were raised to $115–$120 million.
- Management cited aircraft production and refurbishment cycles, military funding, product design wins, and the timing of large Test Systems projects as business drivers. Three customers each represented more than 10% of nine-month sales; together they accounted for approximately $74.1 million of receivables. Losing a major customer could significantly affect sales and earnings.
- Lufthansa patent litigation remains a contingency. For the German direct-sales damages claim, Lufthansa sought approximately $6.4 million plus interest after increasing its claim in October 2018; Astronics estimated exposure of $1–$3 million and recorded a $1 million reserve. Separate indirect-sales litigation had no recorded liability because loss was not considered probable or estimable. Certain European matters also remained unresolved. The U.S. case was dismissed, with the dismissal affirmed on appeal.
- The $500 million revolving facility matures February 16, 2023, is secured by substantially all company and guarantor assets, and includes leverage and other covenants. Management said operating cash flows, cash balances and, if needed, revolver availability were expected to fund remaining 2018 needs.
Important facts for investors to verify
- Whether the CCC contract’s estimated completion costs, charges and future profitability change.
- Whether semiconductor-driven Test Systems growth and bookings convert into sustained revenue and backlog.
- How much reported growth and margin performance reflect acquisitions versus organic operations, and how acquisition-related costs evolve.
- Cash conversion and working-capital trends, particularly receivables, alongside debt, interest expense and covenant headroom.
- Final outcomes of Lufthansa litigation and tax accounting, including completion of the provisional Tax Cuts and Jobs Act accounting.
- Delivery timing and realization of the $398.1 million backlog and management’s full-year sales and tax forecasts.