Astronics Corporation Reports 2019 Third Quarter Financial Results

• Sales for the quarter were $177.0 million
• Consolidated orders for the quarter were $176.6 million
• Backlog at the end of the quarter was $379.4 million
• Initiates 2020 sales guidance in the range of $770 million to $820 million
• Announces restructuring plan for antenna business

EAST AURORA, N.Y.--(BUSINESS WIRE)-- Astronics Corporation (Nasdaq: ATRO), a leading supplier of advanced technologies and products to the global aerospace, defense and other mission critical industries, today reported financial results for the three and nine months ended September 28, 2019. Financial results include the divestiture of the Test Systems’ semiconductor business on February 13, 2019.

Peter J. Gundermann, President and Chief Executive Officer, commented, "As expected, third quarter revenue was light, due in part to the continued grounding of the 737 MAX and the resulting capacity challenge affecting the global airline industry. Beyond this, we faced some headwinds that impacted our bottom line significantly. The headwinds included continued losses from the three struggling businesses discussed in previous quarters, higher tariff costs, a non-cash loss on the sale of the airfield lighting product line, and an increased reserve for a legal proceeding in Europe. In total, the detrimental impact of these issues on the quarter’s results was $15.4 million."

He added, "We are implementing a number of strategic initiatives to alleviate several headwinds and to set up for a successful 2020. We are consolidating operations, rearranging supply chains and pushing development programs to completion. We expect our actions will begin to show positively in the first quarter, and become even more evident as the year progresses."

For comparability purposes, in addition to reporting consolidated and segment results of operations on a basis consistent with U.S. generally accepted accounting principles ("GAAP"), this press release also contains certain financial information regarding consolidated sales, operating income and net income, as well as Test Systems segment sales and operating profit, adjusted to remove the sales and direct expenses of the divested semiconductor business from all periods presented. Management believes these non-GAAP measures are useful to investors in understanding the performance of the ongoing business. The reconciliation of GAAP measures to non-GAAP measures is contained in the section labeled "Reconciliation to Non-GAAP Performance Measures".

* Adjusted to remove the sales and direct costs of the divested semiconductor business which was sold in February 2019.

Consolidated Review

Third Quarter 2019 Results (compared with the prior-year period, unless noted otherwise)

Consolidated sales were down $35.7 million including sales of the semiconductor business which was divested in the first quarter of 2019. Excluding the divestiture, adjusted consolidated sales were down 2.4%, or $4.3 million.

Consolidated operating income decreased to $5.1 million compared with $18.3 million in the prior-year period. Adjusted consolidated income from operations excluding the sales and direct expenses attributable to the divested semiconductor test business was $3.2 million, or 1.8% of adjusted consolidated sales, compared with $8.0 million, or 4.5% of adjusted consolidated sales, in the prior-year period.

Impacts to operating income and margin included tariff expenses of $3.2 million and a $1.7 million increase to a legal reserve for a long-term patent dispute. Also impacting operating income were operating losses of $9.2 million related to the three challenged Aerospace businesses, which included a program charge of $2.2 million. Operating losses related to the three challenged Aerospace businesses were $11.2 million in the third quarter of 2018 and $7.7 million in the preceding second quarter of 2019.

The third quarter had a $1.3 million loss on the sale of a business related to the sale of intellectual property and certain assets associated with the Airfield Lighting product line which was divested in July.

The effective tax rate for the quarter was 31.3%, compared with a tax benefit recorded in the third quarter of 2018. The 2019 third quarter tax rate was unfavorably impacted by the tax associated with the gain on the sale of the semiconductor business.

Net income was $1.2 million, or $0.04 per diluted share, compared with $17.0 million, or $0.52 per diluted share in the prior year.

Bookings were $176.6 million, for a book-to-bill ratio, excluding semiconductor activity, of 1.01:1. Backlog at the end of the quarter was $379.4 million. Approximately $175.0 million of backlog is expected to ship in the remainder of 2019.

During the quarter, under a share repurchase plan approved in December 2017, the Company repurchased 1.8 million shares at cost of $50 million completing that share repurchase plan. The average share price purchased under the plan was $27.42. Following the completion of the December 2017 stock repurchase plan, Astronics’ Board of Directors approved a new $50 million share repurchase program in September 2019, authorizing the Company to repurchase, in the aggregate, up to another $50 million of its outstanding stock.

Year-to-Date 2019 Results (compared with the prior-year period, unless noted otherwise)

Consolidated sales were down $26.0 million including sales of the semiconductor business which was divested in the first quarter of 2019. Excluding sales of the semiconductor business, adjusted consolidated sales were up 7.2%, or $38.2 million, demonstrating growth in both the Aerospace and Test Systems segments.

Consolidated operating income declined to $38.6 million compared with the prior-year period.

Adjusted consolidated operating income was $33.6 million, or 5.9% of adjusted consolidated sales, compared with $23.9 million, or 4.5% of adjusted consolidated sales, in the prior-year period. Margin expansion was driven by higher volume, which more than offset tariff expenses of 
$6.8 million and the previously-mentioned $1.7 million litigation charge. The challenged Aerospace businesses had $27.6 million of operating losses, including $3.9 million in program charges and $3.6 million of inventory reserves. Losses from the challenged Aerospace businesses, including program charges in the first nine months of 2018, were $28.3 million.

The effective tax rate for the first nine months of 2019 was 22.9%, compared with 6.5% in the same period of 2018. The tax rate was unfavorably impacted by the tax associated with the gain on the sale of the semiconductor business.

Net income was $86.1 million, or $2.61 per diluted share, compared with $34.3 million, or $1.04 per diluted share in the prior year. The $80.1 million pre-tax gain on the sale of the semiconductor test business contributed $58.8 million to net income after taxes. Adjusted net income, excluding the divested semiconductor test business, was $22.5 million in the first nine months of 2019 compared with $17.7 million in the prior-year period.

Aerospace Segment Review (refer to sales by market and segment data in accompanying tables)

Aerospace Third Quarter 2019 Results (compared with the prior-year period, unless noted otherwise)

Aerospace segment sales decreased $11.9 million, or 7.0%, to $157.7 million.

Avionics sales were down $11.2 million compared with the prior-year period due to lower demand in the quarter for inflight entertainment and connectivity (“IFEC”) products and lower antenna sales. System Certification sales increased $1.0 million, or 42.6%.

Aerospace operating profit was $8.8 million, or 5.6% of sales, compared with $16.2 million, or 9.6% of sales, in the same period last year. Aerospace operating profit was down on lower volume, and was impacted by $3.2 million in tariffs and the $9.2 million of operating losses related to the challenged Aerospace businesses, which included a $2.2 million program charge.

Aerospace bookings in the third quarter of 2019 were $155.3 million, for a book-to-bill ratio of 0.98:1. Backlog was $308.2 million at the end of the third quarter of 2019.

Aerospace Year-to-Date 2019 Results (compared with the prior-year period, unless noted otherwise)

Aerospace segment sales increased by $20.1 million, or 4.0%, to $520.5 million when compared with the prior year’s first nine months.

Electrical Power & Motion sales increased $36.1 million, or 16.5%, and Lighting & Safety sales increased $10.3 million. Sales of Avionics products were down $20.9 million to $79.4 million for similar reasons as in the quarter. Systems Certification sales decreased $3.0 million compared with the first nine months of 2018.

Aerospace operating profit was $48.9 million, or 9.4% of sales, compared with $47.5 million, or 9.5% of sales, in the same period last year. Aerospace operating profit in the first nine months of 2019 benefited from higher volume and $2.3 million lower amortization expense related to acquired intangible assets. These benefits were offset by $6.8 million in tariffs and $27.6 million in operating losses related to the three challenged Aerospace businesses, which included $3.6 million in inventory reserve and $3.9 million in program charges. Operating profit in the first nine months of 2018 was negatively impacted by $28.3 million in operating loss from challenged Aerospace businesses and $1.4 million in acquisition-related inventory step-up expense.

Mr. Gundermann commented, “We believe we are on the verge of drastically reducing the losses we have seen at our three stragglers. One of them, Armstrong Aerospace, is no longer generating significant losses and is in the process of consolidating into our Connectivity Systems & Certification organization, which we refer to as CSC.

The second, CCC, is on track to wrap up the development program during the current quarter that has been driving its losses. As development expense drops off in early 2020, we expect that business will be essentially break-even for the year and profitable in the second half.

We have made the decision as well to consolidate the third, AeroSat, into CSC during the first half of 2020. We intend to narrow the focus of the company such that we continue to pursue the most promising market opportunities while minimizing costs. We will maintain an office in New Hampshire for certain engineering, program management, and sales functions, but the manufacturing operations will transition to our new CSC facility in Chicago. We are doing an assessment of that business’s initiatives to determine which we will continue and which we will not, and those decisions will drive our transition plan and timing. In any event, we expect the transition to be complete by the end of the second quarter of 2020 at the latest.”

Mr. Gundermann continued, “We also are taking actions regarding tariffs, which affect us because part of our supply chain is in China. We incurred $3.2 million in tariff expense in the third quarter and $6.8 million through the nine-month period. We are adjusting our supply base such that our tariff exposure in 2020 will be reduced by half for the full year, and significantly reduced by year-end, assuming the rules do not change.”

Test Systems Segment Review (refer to sales by market and segment data in accompanying tables)

Test Systems Third Quarter 2019 Results (compared with the prior-year period, unless noted otherwise)

Test Segment sales decreased to $19.3 million as a result of the divestiture of the semiconductor business. Adjusted Test Systems segment sales, excluding the semiconductor test business from both periods, were up $7.6 million, or 80.0%, to $17.1 million. Freedom Communications Technologies (“FCT”), acquired in July 2019, contributed $3.0 million in sales in the third quarter.

The Test segment operating profit was $2.1 million, or 10.7% of sales, compared with operating profit of $5.8 million, or 13.5% of sales, in last year’s third quarter. Adjusted for the sale of the semiconductor business, the Test segment had operating income of $0.1 million compared with an operating loss of $4.5 million in the prior-year period. Operating income in 2019 included the results of the acquired FCT business. Operating profit for the third quarter was negatively impacted by $0.4 million in acquisition-related inventory step-up expense.

Bookings for the Test Systems segment in the quarter were $21.2 million, for a book-to-bill ratio, excluding semiconductor activity, of 1.22:1 for the quarter. Backlog was $71.1 million at the end of the third quarter of 2019.

Mr. Gundermann commented, “It has been a year of transition for our Test business. We sold the semiconductor portion in February and added Freedom Communications Technologies in July and, most recently, added Diagnosys in October. The two acquisitions complement our offerings in expanding markets: Radio test for Freedom and Transit test for Diagnosys. These are niche markets where we believe we can be successful in the immediate future.”

Test Systems Year-to-Date 2019 Results (compared with the prior-year period, unless noted otherwise)

Test Segment sales decreased to $53.8 million compared with the prior-year period. Excluding the semiconductor test business from both periods, adjusted Test Systems segment sales were $46.0 million, up 64.9% compared with the prior year, driven by growth in the Aerospace & Defense market. FCT contributed $3.0 million in sales.

Operating profit for the segment was $4.2 million, or 7.7% of sales, compared with operating income of $10.2 million in the prior-year period. Adjusted for the sale of the semiconductor business, there was an operating loss for the segment of $0.8 million which was mostly the result of $2.0 million in restructuring costs incurred in the second quarter. Operating loss in the prior-year period adjusted for the divestiture of the semiconductor business was $11.1 million.

2019 Outlook

We expect fourth quarter sales to be $175 to $195 million, which will result in consolidated sales for 2019 to be in the range of $750 million to $770 million. Of the total, $680 million to $690 million is expected from the Aerospace segment and $70 million to $80 million is expected from the Test segment.

Mr. Gundermann concluded, “We expect volume to step up in the fourth quarter, providing momentum as we close out the year. We will, however, incur a reserve related to the AeroSat consolidation. The reserve could be significant depending on our final plan, which will be determined by the end of the quarter. We expect the reserve to be at least $5 million and could be above $10 million.”

Consolidated backlog at September 28, 2019 was $379.4 million. Approximately 46% of the backlog is expected to ship in 2019.

The effective tax rate for 2019 is expected to be in the range of 21% to 25%, which reflects the higher tax rate on the gain on the sale of the semiconductor business.

Capital equipment spending in 2019 is expected to be between $14 million to $19 million.

2020 Outlook

The Company is initiating revenue guidance for 2020, expecting consolidated sales in the range of $770 million to $820 million. The Aerospace segment is expected to generate $690 million to 
$730 million, and the Test segment is expected to see sales of $80 million to $90 million. The midpoint of revenue guidance for 2020 is $795 million, a 5% increase over the midpoint of revenue guidance for 2019.

The effective tax rate for 2020 is expected to be in the range of 18% to 22%.

Mr. Gundermann added, “This is obviously an early look at 2020, but we are optimistic about the future and believe we are well positioned. We believe our plans with CCC, AeroSat, and our supply chain will substantially improve our bottom line performance. We did assume that the 737 MAX is flying again at or near year-end 2019. We will update these numbers, of course, as time passes or if anything material changes in our market position.”

Third Quarter 2019 Webcast and Conference Call

The Company will host a teleconference today at 11:00 a.m. ET. During the teleconference, management will review the financial and operating results for the period and discuss Astronics’ corporate strategy and outlook. A question-and-answer session will follow.

The Astronics conference call can be accessed by calling (201) 493-6784. The listen-only audio webcast can be monitored at www.astronics.com. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13694912. The telephonic replay will be available from 2:00 p.m. on the day of the call through Tuesday, November 19, 2019. A transcript will also be posted to the Company’s Web site once available.

About Astronics Corporation

Astronics Corporation (Nasdaq: ATRO) serves the world’s aerospace, defense, and other mission critical industries with proven, innovative technology solutions. Astronics works side-by-side with customers, integrating its array of power, connectivity, lighting, structures, interiors, and test technologies to solve complex challenges.  For over 50 years, Astronics has delivered creative, customer-focused solutions with exceptional responsiveness. Today, global airframe manufacturers, airlines, military branches, completion centers, and Fortune 500 companies rely on the collaborative spirit and innovation of Astronics. The Company’s strategy is to increase its value by developing technologies and capabilities that provide innovative solutions to its targeted markets. For more information on Astronics and its solutions, visit Astronics.com.

Safe Harbor Statement

This news release contains forward-looking statements as defined by the Securities Exchange Act of 1934. One can identify these forward-looking statements by the use of the words “expect,” “anticipate,” “plan,” “may,” “will,” “estimate” or other similar expressions. Because such statements apply to future events, they are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the statements. Important factors that could cause actual results to differ materially from what may be stated here include the success of results at addressing headwinds and eliminating losses at the three challenged Aerospace operations, the continuation of the trend in growth with passenger power and connectivity on airplanes, the ability of the Company to advance its Test business and have it succeed in niche markets, the success of the Company achieving its sales expectations and improving its profitability, the state of the aerospace and defense industries, the market acceptance of newly developed products, internal production capabilities, the timing of orders received, the status of customer certification processes and delivery schedules, the demand for and market acceptance of new or existing aircraft which contain the Company’s products, the need for new and advanced test and simulation equipment, customer preferences and other factors which are described in filings by Astronics with the Securities and Exchange Commission. The Company assumes no obligation to update forward-looking information in this news release whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.

FINANCIAL TABLES FOLLOW

Reconciliation to Non-GAAP Performance Measures

The Company’s press release contains financial information regarding consolidated sales, operating income and net income, as well as Test Systems segment sales and operating profit, as adjusted to remove the direct effects of the semiconductor business from all periods presented. Each of these adjusted balances are non-GAAP performance measures. Management believes these non-GAAP measures are useful to investors in understanding the performance of the ongoing business.

* The non-GAAP adjustment eliminates all semiconductor test sales and associated direct costs from all periods presented. There are significant indirect costs, overheads, and other general and administrative costs that are not included in the non-GAAP adjustment, as such functions benefited all operations and products within the Test Systems segment and have not been eliminated as a result of the divestiture. The non-GAAP adjustment to net income for the three-month and nine-month period ended September 28, 2019 also eliminates the impact of the gain on the sale of the semiconductor business, net of tax at the forecasted consolidated tax rate for 2019.

View source version on businesswire.com: https://www.businesswire.com/news/home/20191105005505/en/

David C. Burney, Chief Financial Officer
Phone: (716) 805-1599, ext. 159
Email: david.burney@astronics.com

Investor Relations:
Deborah K. Pawlowski, Kei Advisors LLC
Phone: (716) 843-3908
Email: dpawlowski@keiadvisors.com

Source: Astronics Corporation

Released November 5, 2019