UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from__________ to __________ | |
For the Fiscal Year Ended December 31, 20172019
Commission File Number 0-7087
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Astronics Corporation
(Exact Name of Registrant as Specified in its Charter)
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New York | | 16-0959303 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
130 Commerce Way, East Aurora, N.Y.NY 14052
(Address of principal executive office)
Registrant’s telephone number, including area code (716) 805-1599
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock; $.01 par value Class B Stock
(Title of Class) | | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $.01 par value per share | ATRO | NASDAQ Stock Market |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
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Large accelerated filer | x | Accelerated filer | ¨ |
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Non-accelerated filer | ¨☐ | Smaller Reporting Company | ¨☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No x☒
As of February 16, 2018, 28,066,76424, 2020, 30,720,701 shares were outstanding, consisting of 21,273,97923,205,729 shares of Common Stock $.01 par value and 6,792,7857,514,972 shares of Class B Stock $.01 par value. The aggregate market value, as of the last business day of the Company’s most recently completed second fiscal quarter, of the shares of Common Stock and Class B Stock of Astronics Corporation held by non-affiliates was approximately $731,000,000$1,107,000,000 (assuming conversion of all of the outstanding Class B Stock into Common Stock and assuming the affiliates of the Registrant to be its directors, executive officers and persons known to the Registrant to beneficially own more than 10% of the outstanding capital stock of the Corporation).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the 20182020 Annual Meeting of Shareholders to be held May 31, 201821, 2020 are incorporated by reference into Part III of this Report.
Table of Contents
ASTRONICS CORPORATION
Index to Annual Report
on Form 10-K
Year Ended December 31, 20172019
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FORWARD LOOKING STATEMENTS
Information included or incorporated by reference in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in this report.
PART I
ITEM 1. BUSINESS
Astronics Corporation (“Astronics” or the “Company”) is a leading providersupplier of advanced technologies and products to the global aerospace defense, electronics and semiconductordefense industries. Our products and services include advanced, high-performance electrical power generation and distribution andsystems, seat motion systems,solutions, lighting &and safety systems, avionics products, aircraft structures, systems certification and automated test systems.
We have principal operations in the United States (“U.S.”), Canada, France and France.the United Kingdom (“UK”), as well as engineering offices in the Ukraine and India. We design and build our products through our wholly owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Armstrong Aerospace, Inc. (“Armstrong”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”); Astronics Connectivity Systems and Certification Corp. (“CSC”); Astronics Custom Control Concepts Inc. (“CCC”); Astronics Connectivity Systems and Certification Corp. and subsidiaries (“CSC”); Diagnosys Inc. and its affiliates (“Diagnosys”); Astronics DME LLC (“DME”); Freedom Communication Technologies, Inc. (“Freedom”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc. (“Max-Viz”); Peco, Inc. (“Peco”); and PGA Electronic s.a. (“PGA”).
Acquisitions
On January 14, 2015,July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Armstrong,Freedom Communication Technologies, Inc. Freedom, located in Itasca, Illinois. ArmstrongKilgore, Texas, is a leading provider of engineering, design and certification solutionsleader in wireless communication testing, primarily for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrongthe civil land mobile radio market. Freedom is included in our AerospaceTest Systems segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially all the assets and certain liabilities of Custom Control Concepts LLC, located in Kent, Washington. CCC is a provider of cabin management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was approximately $10.2$21.8 million, net of $0.5$0.6 million in cash acquired. CCC
On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus contingent purchase consideration (“earn-out”) estimated at a fair value of $2.5 million. Diagnosys is included in our AerospaceTest Systems segment.
On December 1, 2017, Astronics acquired substantially all Diagnosys is a developer and manufacturer of the assetscomprehensive automated test equipment providing test, support, and repair of Telefonix Inc.high value electronics, electro-mechanical, pneumatic and a related company, Product Development Technologies, LLC and its subsidiaries, to become CSC, primarily located in Waukegan and Lake Zurich, Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design consultancy services forprinted circuit boards focused on the global aerospace industry. Under themass transit and defense markets. The terms of the Agreement,acquisition allow for a potential earn-out of up to an additional $13.0 million over the next three years based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India.
Divestitures
On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The business was not core to the future of the Test Systems segment. The total considerationproceeds received for the transaction was approximatelysale amounted to $103.8 million, netmillion. The Company recorded a pre-tax gain on the sale of $0.2$80.1 million in cash acquired. CSCthe first quarter of 2019. The Company recorded income tax expense relating to the gain of $19.7 million.
The transaction also includes two elements of contingent earnouts. The “First Earnout” is includedcalculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in oureach annual period from 2019 through 2022. The First Earnout may not exceed $35.0 million in total. The “Second Earnout” is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for each annual period from 2019 through 2022. The Second Earnout is not capped. For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, no amounts will be paid relative to such annual period; the sales in such annual period do not carry over to the next annual period. Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company will recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. No amounts were due under the First Earnout.
On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. The Airfield Lighting product line, part of the Aerospace Segment.segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million.
Products and Customers
Our Aerospace segment designs and manufactures products for the global aerospace and defense industry. Product lines include lighting and safety systems, electrical power generation, distribution and motions systems, aircraft structures, avionics products, systems certification, connectivity and other products. Our Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft
for the commercial, military and general aviation markets, suppliers to those OEM’s, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S. Department of Defense as well as the Federal Aviation Administration and airport operators.Defense. During 2017,2019, this segment’s sales were divided 78%76% to the commercial transport market, 11% to the military aircraft market, 8%10% to the business jet market and 3% to other markets. Most of this segment’s sales are a result of contracts or purchase orders received from customers, placed on a day-to-day basis or for single year procurements rather than long-term multi-year contract commitments. On occasion, the Company does receive contractual commitments or blanket purchase orders from our customers covering multiple-year deliveries of hardware to our customers.
Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the semiconductor, aerospace, communications and weapons test systems as well as training and simulation devices for both commercial and military applications. In the Test Systems segment, Astronics’ products are sold to a global customer base including OEMs and prime government contractors for both electronics and military products. During 2017, this segment’s sales were divided 36% to the semiconductor market and 64% to the aerospace & defense market.
Sales by segment, geographic region, major customer and foreign operations are provided in Note 1720 of Item 8, Financial Statements and Supplementary Data in this report.
We have a significant concentration of business with two major customers; The Boeing Company (“Boeing”) and Panasonic Avionics Corporation (“Panasonic”). Sales to Boeing accounted for 13.6% of sales in 2019, 14.3% of sales in 2018, and The Boeing Company (“Boeing”).16.8% of sales in 2017. Sales to Panasonic accounted for 13.0% of sales in 2019, 14.4% of sales in 2018, and 19.1% of sales in 2017, 21.6% of sales in 2016, and 21.0% of sales in 2015. Sales to Boeing accounted for 16.8% of sales in 2017, 15.2% of sales in 2016, and 13.0% of sales in 2015.2017.
Strategy
Our strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and use those capabilities to provide innovative solutions to the aerospace &and defense semiconductor and other markets where our technology can be beneficial.
Practices as to Maintaining Working Capital
Liquidity is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Liquidity and Capital Resources section of this report.
Competitive Conditions
We experience considerable competition in the market sectors we serve, principally with respect to product performance and price, from various competitors, many of which are substantially larger and have greater resources. Success in the markets we serve depends upon product innovation, customer support, responsiveness and cost management. We continue to invest in developing the technologies and engineering support critical to competing in our markets.
Government Contracts
All U.S. government contracts, including subcontracts where the U.S. government is the ultimate customer, may be subject to termination at the election of the government. Our revenue stream relies on military spending. Approximately 19%13% of our consolidated sales were made to the military aircraft and military test systems markets combined.
Raw Materials
Materials, supplies and components are purchased from numerous sources. We believe that the loss of any one source, although potentially disruptive in the short-term, would not materially affect our operations in the long-term.
Seasonality
Our business is typically not seasonal.
Backlog
At December 31, 2017,2019, our consolidated backlog was $393.7 million$359.6 million. At December 31, 2016,2018, our backlog was $258.0$415.5 million. Excluding backlog related to the divested semiconductor business, our backlog was $403.3 million at December 31, 2018. Backlog in the Aerospace segment was $298.6$275.8 million at December 31, 2017,2019, of which $271.4$249.6 million is expected to be realizedrecognized as revenue in 2018.2020. Backlog in the Test Systems segment was $95.1$83.8 million at December 31, 2017,2019. The Test Systems segment expects to recognize as revenue $51.4 million of which $75.3 million is expected to be realizedbacklog in 2018.2020.
Patents
We have a number of patents. While the aggregate protection of these patents is of value, our only material business that is dependent upon the protection afforded by these patents is our cabin power distribution products. Our patents and patent applications relate to electroluminescence, instrument panels, cord reels and handsets, and a broad patent covering the cabin power distribution technology. We regard our expertise and techniques as proprietary and rely upon trade secret laws and contractual arrangements to protect our rights. We have trademark protection in our major markets.
Research, Development and Engineering Activities
We are engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of our existing technologies. These costs are expensed when incurred and included in cost of sales. Research, development and engineering costs amounted to approximately $108.9 million in 2019, $114.3 million in 2018 and $95.0 million in 2017, $88.9 million in 2016 and $90.3 million in 2015.
2017.
Employees
We employed approximately 2,5002,800 employees at December 31, 2017.2019. We consider our relations with our employees to be good. We have approximately 200165 hourly production employees at Peco who are subject to collective bargaining agreements.
Available information
We file our financial information and other materials as electronically required with the Securities and Exchange Commission (“SEC”). These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our website at www.astronics.com.
ITEM 1A.RISK FACTORS
The loss of PanasonicBoeing or BoeingPanasonic as major customers or a significant reduction in sales tobusiness with either of those customers would reduce our sales and earnings. In 2017,2019, we had a concentration of sales to PanasonicBoeing and BoeingPanasonic representing approximately 19.1%13.6% and 16.8%13.0% of our sales, respectively. The loss of either of these customers or a significant reduction in sales tobusiness with them would significantly reduce our sales and earnings.
The amountIn October 2018 and March of debt2019, two commercial aircraft accidents led to the grounding by the Federal Aviation Administration and other regulators of the Boeing 737 MAX aircraft, on which we have outstanding, as well as any debtsignificant content. The grounding of the Boeing 737 MAX, which started in March of 2019, has caused the production rate of that aircraft to be lower than expected in fiscal year 2019. The ongoing 737 MAX grounding affects our business both because of the production pause, impacting our line-fit content, and because it leaves many of our airline customers short of capacity, which makes them reluctant to take other aircraft out of service to install the types of retrofit products they buy from us. Although we may incurexpect, based on information that Boeing has made publicly available, that deliveries of the 737 MAX program will resume and that the demand for the aircraft in the future,long-term has not changed, a prolonged or permanent grounding of the Boeing 737 MAX could substantially decrease our Aerospace segment sales in the near or long-term, which could have ana material adverse effect on our operationalbusiness, financial condition, results of operations, and financial flexibility. Ascash flows. Even if deliveries of December 31, 2017, we had approximately $271.8 million of debt outstanding, of which $269.1 million is long-term debt. Changes to our level of debt subsequent to December 31, 2017 could have significant consequences to our business, including the following:
Depending on interest rates and debt maturities, a substantial portion of our cash flow from operations737 MAX program resume, demand for the aircraft could be dedicatedlower than was expected prior to paying principal and interest on our debt, thereby reducing funds available for our acquisition strategy, capital expenditures or other purposes;
A significant amount of additional debt could make us more vulnerable to changes in economic conditions or increases in prevailing interest rates;
Our ability to obtain additional financing for acquisitions, capital expenditures or for other purposes could be impaired;
The increase in the amount of debt we have outstanding increases the risk of non-compliance with someinitial grounding of the covenants in our debt agreements which require us to maintain specified financial ratios; andaircraft.
We may be more leveraged than some of our competitors, which may result in a competitive disadvantage.
We are subject to debt covenant restrictions. Our credit facility contains several financial and other restrictive covenants. A significant decline in our operating income could cause us to violate our covenants. A covenant violation would require a waiver by the lenders or an alternative financing arrangement be achieved. This could result in our being unable to borrow under our bank credit facility or being obliged to refinance and renegotiate the terms of our bank indebtedness. Historically both choices have been available to us, however, it is difficult to predict the availability of these options in the future.
We are subject to financing and interest rate exposure risks that could adversely affect our business, liquidity and operating results. Changes in the availability, terms and cost of capital, and increases in interest rates could cause our cost of doing business to increase and place us at a competitive disadvantage. At December 31, 2017, approximately 4% of our debt was at fixed interest rates with the remainder subject to variable interest rates.
Our future operating results could be impacted by estimates used to calculate impairment losses on long lived assets. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant and subjective estimates and assumptions that may affect the reported amounts of long lived assets in the financial statements. These estimates are integral in the determination of whether a potential non-cash impairment loss exists as well as the calculation of that loss. Actual future results could differ from those estimates.
A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth. At December 31, 2017,2019, goodwill and purchasednet intangible assets were approximately 17.1%18.5% and 20.9%16.3% of our total assets, respectively. In 2019, we recorded goodwill and intangible asset impairment charges of $1.6 million and $6.2 million related to our AeroSat antenna business, respectively. Our goodwill and other intangible assets may increase in the future since our strategy includes growing through acquisitions. We may have to write-off all or part of our goodwill or purchased intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge,not result in an outlay of cash, it could reduce our earnings and net worth significantly.
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating results to fluctuate. Demand for our products is, to a large extent, dependent on the demand and success of our customers' products where we are a supplier to an OEM. In our Aerospace segment, demand by the business jet markets for our products is dependent upon several factors, including capital investment, product innovations, economic growth and wealth creation and technology upgrades. In addition, the commercial airline industry is highly cyclical and sensitive to such things as fuel price increases, labor disputes, global economic conditions, availability of capital to fund new aircraft purchases and upgrades of existing aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of air travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would reduce orders for new aircraft and would likely reduce airlines’ spending for cabin upgrades for which we supply products, thus
reducing our sales and profits. A reduction in air travel may also result in our commercial airline customers being unable to pay our invoices on a timely basis or not at all.
We are a supplier on various new aircraft programs just entering or expected to begin production in the future. As with any new program, there is risk as to whether the aircraft or program will be successful and accepted by the market. As is customary for our business, we purchase inventory and invest in specific capital equipment to support our production requirements generally based on delivery schedules provided by our customer. If a program or aircraft is not successful, we may have to write-off all or a part of the inventory, accounts receivable and capital equipment related to the program. A write-off of these assets could result in a significant reduction of earnings and cause covenant violations relating to our debt agreements. This could result in our being unable to borrow additional funds under our bank credit facility or being obliged to refinance or renegotiate the terms of our bank indebtedness.
In our Test Systems segment, the market for our products is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment. In any one reporting period, a single customer or several customers may contribute an even larger percentage of our consolidated revenues.sales. In addition, our ability to increase sales will depend, in part, on our ability to obtain orders from current or new significant customers. The opportunities to obtain orders from these customers may be limited, which may impair our ability to grow revenues.sales. We expect that sales of our Test Systems products will continue to be concentrated with a limited number of significant customers for the foreseeable future. Additionally, demand for some of our test products is dependent upon government funding levels for our products, our ability to compete successfully for those contracts and our ability to develop products to satisfy the demands of our customers.
Our products are sold in highly competitive markets. Some of our competitors are larger, more diversified corporations and have greater financial, marketing, production and research and development resources. As a result, they may be better able to withstand the effects of periodic economic downturns. Our operations and financial performance will be negatively impacted if our competitors:
•develop products that are superior to our products;
•develop products that are more competitively priced than our products;
•develop methods of more efficiently and effectively providing products and services; or
•adapt more quickly than we do to new technologies or evolving customer requirements.
We believe that the principal points of competition in our markets are product quality, price, design and engineering capabilities, product development, conformity to customer specifications, quality of support after the sale, timeliness of delivery and effectiveness of the distribution organization. Maintaining and improving our competitive position will require continued investment in manufacturing, engineering, quality standards, marketing, customer service and support and our distribution networks. If we do not maintain sufficient resources to make these investments, or are not successful in maintaining our competitive position, our operations and financial performance will suffer.
Our future success depends to a significant degree upon the continued contributions of our management team and technical personnel. The loss of members of our management team could have a material and adverse effect on our business. In addition, competition for qualified technical personnel in our industry is intense, and we believe that our future growth and success will depend on our ability to attract, train and retain such personnel.
We may incur losses and liabilities as a result of our acquisition strategy. Growth by acquisition involves risks that could adversely affect our financial condition and operating results, including:
•diversion of management time and attention from our core business;
•the potential exposure to unanticipated liabilities;
•the potential that expected benefits or synergies are not realized and that operating costs increase;
•the risks associated with incurring additional acquisition indebtedness, including that additional indebtedness could limit our cash flow availability for operations and our flexibility;
•difficulties in integrating the operations and personnel of acquired companies; and
•the potential loss of key employees, suppliers or customers of acquired businesses.
In addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not perform as planned, does not increase earnings, or does not prove otherwise to be beneficial to us.
We currently are involved or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition. As an aerospace company, we may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, warranty claims, breach of commercial or government contract or other legal actions. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition.
Currently, our subsidiary, AES is a defendant in actions filed in various jurisdictions by Lufthansa Technik AG relating to an allegation of patent infringement and based on rulings to date we have concluded that losses related to these proceedings are probable. Refer to Note 19 of our Consolidated Financial Statements in Item 8 for discussion on the legal proceedings. If these actions are decided adversely against the Company, the associated damages could result in a material adverse effect on our results of operations or financial condition.
Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our results of operations or financial condition.
The amount of debt we have outstanding, as well as any debt we may incur in the future, could have an adverse effect on our operational and financial flexibility. As of December 31, 2019, we had approximately $188.2 million of debt outstanding of which $188.0 million is long-term debt. Changes to our level of debt subsequent to December 31, 2019 could have significant consequences to our business, including the following:
•Depending on interest rates and debt maturities, a substantial portion of our cash flow from operations could be dedicated to paying principal and interest on our debt, thereby reducing funds available for our acquisition strategy, capital expenditures or other purposes;
•A significant amount of additional debt could make us more vulnerable to changes in economic conditions or increases in prevailing interest rates;
•Our ability to obtain additional financing for acquisitions, capital expenditures or for other purposes could be impaired;
•The increase in the amount of debt we have outstanding increases the risk of non-compliance with some of the covenants in our debt agreements which require us to maintain specified financial ratios; and
•We may be more leveraged than some of our competitors, which may result in a competitive disadvantage.
We are subject to debt covenant restrictions. Our credit facility contains certain financial and other restrictive covenants. A significant decline in our operating income could cause us to violate our covenants. A covenant violation would require a waiver by the lenders or an alternative financing arrangement be achieved. This could result in our being unable to borrow under our bank credit facility or being obliged to refinance and renegotiate the terms of our bank indebtedness. Historically both choices have been available to us, however, it is difficult to predict the availability of these options in the future.
We are subject to financing and interest rate exposure risks that could adversely affect our business, liquidity and operating results. Changes in the availability, terms and cost of capital, and increases in interest rates could cause our cost of doing business to increase and place us at a competitive disadvantage. At December 31, 2019, substantially all of our debt was subject to variable interest rates.
The potential phase out of LIBOR may negatively impact our debt agreements and financial position, results of operations and liquidity. On July 27, 2017, the UK’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or whether different benchmark rates used to price indebtedness will develop. If LIBOR ceases to exist, we may need to renegotiate our debt agreements that extend beyond 2021 that utilize LIBOR as a factor in determining the interest rate, which may negatively impact the terms of such indebtedness. In addition, the overall financial markets may be disrupted as a result of the phase out or replacement of LIBOR. Disruption in the financial markets could have an adverse effect on our financial position, results of operations, and liquidity.
Our future operating results could be impacted by estimates used to calculate impairment losses on long-lived assets. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make significant and subjective estimates and assumptions that may affect the reported amounts of long-lived assets in the
financial statements. These estimates are integral in the determination of whether a potential non-cash impairment loss exists as well as the calculation of that loss. Actual future results could differ from those estimates. As discussed in Note 23 to the Consolidated Financial Statements, we recorded long-lived asset impairment losses of $9.5 million (excluding goodwill impairment, which has been previously discussed) in connection with the AeroSat restructuring.
Future terror attacks, war, or other civil disturbances could negatively impact our business. Continued terror attacks, war or other disturbances could lead to economic instability and decreases in demand for our products, which could negatively impact our business, financial condition and results of operations. Terrorist attacks world-wide have caused instability from time to time in global financial markets and the aviation industry. The long-term effects of terrorist attacks on us are unknown. These attacks and the U.S. government’s continued efforts against terrorist organizations may lead to additional armed
hostilities or to further acts of terrorism and civil disturbance in the U.S. or elsewhere, which may further contribute to economic instability.
General business conditions are vulnerable to the effects of epidemics, such as the COVID-19 coronavirus, which could materially disrupt our business. We are vulnerable to the global economic effects of epidemics and other public health crises, such as the novel strain of COVID-19 virus reported to have surfaced in Wuhan, China in 2019. Due to the recent outbreak of the COVID-19 virus, there has been a substantial curtailment of global travel and business activities which could have an impact on airline spending and demand, and could negatively impact our sales if conditions worsen or extend for a prolonged period of time. China has also limited the shipment of products in and out of its borders, which could negatively impact our ability to receive products from our China-based suppliers and our ability to ship products to customers in that region. Supply chain disruptions could negatively impact our sales. If not resolved quickly, the impact of the epidemic could have a material adverse effect on our business.
Our business and operations could be adversely impacted in the event of a failure of our information technology infrastructure or adversely impacted by a successful cyber-attack. We are dependent on various information technologies throughout our company to administer, store and support multiple business activities. We routinely experience various cybersecurity threats, threats to our information technology infrastructure, unauthorized attempts to gain access to our company sensitive information, and denial-of-service attacks as do our customers, suppliers and subcontractors. We conduct regular periodic training of our employees as to the protection of sensitive information which includes security awareness training intended to prevent the success of “phishing” attacks.
The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries, including nation states, which target us and other defense contractors because we protect sensitive information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures, and depending on the severity of the incident, our customers’ data, our employees’ data, our intellectual property, and other third partythird-party data (such as subcontractors, suppliers and vendors) could be compromised. As a consequence of their persistence, sophistication and volume, we may not be successful in defending against all such attacks. Due to the evolving nature of these security threats, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber securitycybersecurity expertise and safeguards and their relationships with U.S. government contractors, such as Astronics, may increase the likelihood that they are targeted by the same cyber threats we face.
Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete. We rely on patents, trademarks and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our inability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation could result in significant costs and divert our management’s focus away from operations. Refer to the risk factor related to pending patent infringement litigation above and Note 19 to the Consolidated Financial Statements for further discussion.
If we are unable to adapt to technological change, demand for our products may be reduced. The technologies related to our products have undergone, and in the future may undergo, significant changes. To succeed in the future, we will need to continue to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost effective basis. Our competitors may develop technologies and products that are more effective than those we develop or that render our technology and products obsolete or uncompetitive. Furthermore, our products could become unmarketable if
new industry standards emerge. We may have to modify our products significantly in the future to remain competitive, and new products we introduce may not be accepted by our customers.
Our new product development efforts may not be successful, which would result in a reduction in our sales and earnings. We may experience difficulties that could delay or prevent the successful development of new products or product enhancements, and new products or product enhancements may not be accepted by our customers. In addition, the development expenses we incur may exceed our cost estimates, and new products we develop may not generate sales sufficient to offset our costs. If any of these events occur, our sales and profits could be adversely affected.
We depend on government contracts and subcontracts with defense prime contractors and sub-contractorssubcontractors that may not be fully funded, may be terminated, or may be awarded to our competitors. The failure to be awarded these contracts, the failure to receive funding or the termination of one or more of these contracts could reduce our sales. Sales to the U.S. government and its prime contractors and subcontractors represent a significant portion of our business. The funding of these programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change. In addition, government expenditures for defense programs may decline or these defense programs may be terminated. A decline in governmental expenditures or the termination of existing contracts may result in a reduction in the volume of contracts awarded to us. We have resources applied to specific government contracts and if any of those contracts were terminated, we may incur substantial costs redeploying those resources.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted. Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers.
There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor or customer concerns about the subcontractor. Failure by our subcontractors to satisfactorily provide, on a timely basis, the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations with our customer.customer and could result in the assessment of late delivery penalties. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and substantially impair our ability to compete for future contracts and orders. In addition, a delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may have an adverse effect upon our profitability.
Our results of operations are affected by our fixed-price contracts, which could subject us to losses in the event that we have cost overruns. For the year ended December 31, 2017,2019, fixed-price contracts represented almost all of the Company’s sales. On fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Depending on the fixed price negotiated, these contacts may provide us with an opportunity to achieve higher profits based on the relationship between our costs and the contract’s fixed price. However, we bear the risk that increased or unexpected costs may reduce our profit.
Some of our contracts contain late delivery penalties. Failure to deliver in a timely manner due to supplier problems, development schedule slides, manufacturing difficulties, or similar schedule relatedschedule-related events could have a material adverse effect on our business.
The failure of our products may damage our reputation, necessitate a product recall or result in claims against us that exceed our insurance coverage, thereby requiring us to pay significant damages. Defects in the design and manufacture of our products may necessitate a product recall. We include complex system design and components in our products that could contain errors or defects, particularly when we incorporate new technology into our products. If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. We are also exposed to product liability claims. We carry aircraft and non-aircraft product liability insurance consistent with industry norms. However, this insurance coverage may not be sufficient to fully cover the payment of any potential claim. A product recall or a product liability claim not covered by insurance could have a material adverse effect on our business, financial condition and results of operations.
Changes in discount rates and other estimates could affect our future earnings and equity. Our goodwill asset impairment evaluations are determined using valuations that involve several assumptions, including discount rates, cash flow estimates, growth rates and terminal values. Certain of these assumptions, particularly the discount rate, are based on market conditions and are outside of our control. Changes in these assumptions could affect our future earnings and equity.
Additionally, pension obligations and the related costs are determined using actual results and actuarial valuations that involve several assumptions. The most critical assumption is the discount rate. Other assumptions include mortality, salary increases
and retirement age. The discount rate assumptions are based on current market conditions and are outside of our control. Changes in these assumptions could affect our future earnings and equity.
Contracting in the defense industry is subject to significant regulation, including rules related to bidding, billing and accounting kickbacks and false claims, and any non-compliance could subject us to fines and penalties or possible debarment. Like all government contractors, we are subject to risks associated with this contracting. These risks include the potential for substantial civil and criminal fines and penalties. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by government agencies. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in suspension or debarment from future government contracts.
If we fail to meet expectations of securities analysts or investors due to fluctuations in our revenuesales or operating results, our stock price could decline significantly. Our revenuesales and earnings may fluctuate from quarter to quarter due to a number of factors, including delays or cancellations of programs. It is likely that in some future quarters our operating results may fall below the expectations of securities analysts or investors. In this event, the trading price of our stock could decline significantly.
Our operations in foreign countries expose us to political and currency risks and adverse changes in local legal and regulatory environments. In 2017,2019, approximately 8.6%11% of our sales were made by our subsidiaries in foreign countries, predominately in our subsidiaries in France and Canada. Net assets held by these two subsidiaries total $47.4$64.3 million at December 31, 2017.2019. Approximately 25% of our consolidated sales in 2019 were made to customers outside of the United States. Our financial results may be adversely affected by
fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars. We expect international operations and export sales to continue to contribute to our earnings for the foreseeable future. Both the sales from international operations and export sales are subject in varying degrees to risks inherent in doing business outside of the U.S. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations, changes in tariff and trade barriers and import or export licensing requirements, and political or economic reprioritization, insurrection, civil disturbance or war.
Government regulations could limit our ability to sell our products outside the U.S. and could otherwise adversely affect our business. Certain of our sales are subject to compliance with U.S. export regulations. Our failure to obtain, or fully adhere to the limitations contained in, the requisite licenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the salesales of our products outside the U.S. Compliance with these government regulations may also subject us to additional fees and operating costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices and anti-boycott provisions. Our failure, or failure by an authorized agent or representative that is attributable to us, to comply with these laws and regulations could result in administrative, civil or criminal liabilities and could, in the extreme case, result in monetary penalties, suspension or debarment from government contracts or suspension of our export privileges, which would have a material adverse effect on us.
Our stock price is volatile. For the year ended December 31, 2017,2019, our stock price ranged from a low of $25.13$26.08 to a high of $43.87.$44.20. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:
•quarterly variations in operating results;
•variances of our quarterly results of operations from securities analyst estimates;
•changes in financial estimates;
•announcements of technological innovations and new products;
•news reports relating to trends in our markets; and
•the cancellation of major contracts or programs with our customers.
In addition, the stock market in general, and the market prices for companies in the aerospace &and defense industry in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.
We may incur losses and liabilities as a result of our acquisition strategy. Growth by acquisition involves risks that could adversely affect our financial condition and operating results, including:
diversion of management time and attention from our core business;
the potential exposure to unanticipated liabilities;
the potential that expected benefits or synergies are not realized and that operating costs increase;
the risks associated with incurring additional acquisition indebtedness, including that additional indebtedness could limit our cash flow availability for operations and our flexibility;
difficulties in integrating the operations and personnel of acquired companies; and
the potential loss of key employees, suppliers or customers of acquired businesses.
In addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not perform as planned, does not increase earnings, or does not prove otherwise to be beneficial to us.
We currently are involved or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition. As an aerospace company, we may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, warranty claims, breach of commercial or government contract or other legal actions. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results of operations and financial condition.
We are a defendant in actions filed in the Regional State Court of Mannheim, Germany (Lufthansa Technik AG v. Astronics Advanced Electronics Systems Corp.) and the United States District for the Western District of Washington relating to an allegation of patent infringement. On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES sold, marketed and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does not require AES to recall products that are already installed in aircraft or have been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been issued to date. As of December 31, 2017 there are no products in the distribution channels in Germany.
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Court issued its ruling and upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the Federal Supreme Court. The Company believes it has valid defenses to refute the decision. Should the Federal Supreme Court decide to hear the case, the appeal process is estimated to extend up to two years. We estimate AES’s potential exposure related to this matter to be approximately $1 million to $3 million. As loss exposure is not probable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2017.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2017.
Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our financial condition or results of operations.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B.UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
On December 31, 2017,2019, we own or lease 1.21.4 million square feet of space, distributed by segment as follows:
| | | | | | | | | | | | | | | | | |
| Owned | | Leased | | Total |
Aerospace | 749,000 | | | 445,000 | | | 1,194,000 | |
Test Systems | — | | | 158,000 | | | 158,000 | |
Total Square Feet | 749,000 | | | 603,000 | | | 1,352,000 | |
We have principal operations in the U.S., Canada, France and France, distributedthe UK, as follows:
|
| | | | | | | | |
| Owned | | Leased | | Total |
Aerospace: | | | | | |
Clackamas, OR | 237,000 |
| | — |
| | 237,000 |
|
Kirkland, WA | 97,000 |
| | 39,000 |
| | 136,000 |
|
East Aurora, NY | 125,000 |
| | — |
| | 125,000 |
|
Ft. Lauderdale, FL | 96,000 |
| | — |
| | 96,000 |
|
Lebanon, NH | 83,000 |
| | — |
| | 83,000 |
|
Montierchaume, France* | — |
| | 80,000 |
| | 80,000 |
|
Itasca, IL | 49,000 |
| | — |
| | 49,000 |
|
Amherst, NH | — |
| | 28,000 |
| | 28,000 |
|
Montreal, Quebec, Canada | — |
| | 25,000 |
| | 25,000 |
|
Everett, WA | — |
| | 22,000 |
| | 22,000 |
|
Chicago, IL | — |
| | 2,000 |
| | 2,000 |
|
Kent, WA | — |
| | 65,000 |
| | 65,000 |
|
Waukegan, IL | — |
| | 41,000 |
| | 41,000 |
|
Lake Zurich, IL | — |
| | 36,000 |
| | 36,000 |
|
Lviv City, Ukraine | — |
| | 6,000 |
| | 6,000 |
|
Wheatley, Oxfordshire, UK | — |
| | 3,000 |
| | 3,000 |
|
Carlsbad, CA | — |
| | 1,000 |
| | 1,000 |
|
Aerospace Square Feet | 687,000 |
| | 348,000 |
| | 1,035,000 |
|
Test Systems: | | | | | |
Irvine, CA* | — |
| | 99,000 |
| | 99,000 |
|
Orlando, FL | — |
| | 51,000 |
| | 51,000 |
|
Test Systems Square Feet | — |
| | 150,000 |
| | 150,000 |
|
Total Square Feet | 687,000 |
| | 498,000 |
| | 1,185,000 |
|
* - Capitalized leases.well as engineering offices in the Ukraine and India.
Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for or purchases of alternative locations at market terms. We believe that our properties have been adequately maintained and are generally in good condition.
ITEM 3. LEGAL PROCEEDINGS
On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a StatementCurrently, we are involved in legal proceedings relating to an allegation of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim assertspatent infringement and based on rulings to date we have concluded that our subsidiary, AES sold, marketed and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does not require AES to recall products that are already installed in aircraft or have been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been issued to date. As of December 31, 2017, there are no products in the distribution channels in Germany.
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Court issued its ruling and upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the Federal Supreme Court. The Company believes it has valid defenses to refute the decision. Should the Federal Supreme Court decide to hear the case, the appeal process is estimated to extend up to two years. We estimate AES’s potential exposurelosses related to this matterthese proceedings are probable. For a discussion of contingencies related to be approximately $1 millionlegal proceedings, see Note 19 to $3 million. As loss exposure is not probable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2017.our Consolidated Financial Statements.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in this action alleges that AES manufactures, uses, sells and offers for sale a power supply system that infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that involved in the German action. On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and unenforceable. On July 20, 2016, the U.S. District Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice. Lufthansa appealed the District Court's decision to the United States Court of Appeals for the Federal Circuit. On October 19, 2017, the Federal Circuit affirmed the District Court's decision, holding that the sole independent claim of the patent is indefinite, rendering all claims on the patent indefinite. Lufthansa did not file a petition for en banc rehearing or petition the U.S. Supreme Court for a writ of certiorari. Therefore, there is no longer a risk of exposure from that lawsuit.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2017.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The table below sets forth the range of prices for the Company’s Common Stock, traded on the NASDAQ National Market System, for each quarterly period during the last two years. The approximate number of shareholders of record as of February 16, 2018,24, 2020, was 811726 for Common Stock and 2,1122,003 for Class B Stock.
| | | | | | | | | | | |
2019 | High | | Low |
First | $ | 36.01 | | | $ | 28.55 | |
Second | $ | 44.20 | | | $ | 31.69 | |
Third | $ | 41.86 | | | $ | 26.08 | |
Fourth | $ | 31.50 | | | $ | 27.95 | |
|
| | | | | | | |
2017 | High | | Low |
First | $ | 34.77 |
| | $ | 28.79 |
|
Second | $ | 33.29 |
| | $ | 29.73 |
|
Third | $ | 31.44 |
| | $ | 25.13 |
|
Fourth | $ | 43.87 |
| | $ | 30.15 |
|
| | 2016 | High | | Low | |
2018 | | 2018 | High | | Low |
First | $ | 34.55 |
| | $ | 21.76 |
| First | $ | 41.18 | | | $ | 30.94 | |
Second | $ | 34.22 |
| | $ | 27.65 |
| Second | $ | 34.23 | | | $ | 29.40 | |
Third | $ | 39.17 |
| | $ | 28.05 |
| Third | $ | 40.10 | | | $ | 31.60 | |
Fourth | $ | 40.70 |
| | $ | 30.76 |
| Fourth | $ | 37.80 | | | $ | 28.46 | |
The Company has not paid any cash dividends in the three-year period ended December 31, 2017.2019. The Company has no plans to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance working capital and growth in the business.
On September 26, 2016, the Company announced a three-for-twenty distribution of Class B Stock to holders of both Common and Class B Stock. Stockholders received three shares of Class B Stock for every twenty shares of Common and Class B Stock held on the record date of October 11, 2016. Fractional shares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of this distribution.
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock, (the “Buyback Program”). The Buyback Programwhich allowed the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased approximately 1,675,000 shares and has completed that program.program in 2017. On December 12, 2017, the Company’s Board of Directors authorized an additional repurchase of up to $50 millionmillion. No shares were repurchased in 2018. The Company repurchased approximately 1,823,000 shares and completed that program in the third quarter of common stock. No amounts have been2019. On September 17, 2019, the Company’s Board of Directors authorized an additional repurchase of up to $50 million. An additional 28,000 shares were repurchased under the new program as of December 31, 2017.2019 at a cost of $0.8 million. Subsequent to December 31, 2019, approximately 282,000 additional shares were repurchased at a cost of $7.7 million.
The following graph and table shows the performance of the Company’s common stock compared with the S&P 500 Index — Total Return and the NASDAQ US and Foreign Companies for a $100 investment made December 31, 2012:2014:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Astronics Corp. | Return % | — | | | (15.99) | | | (1.75) | | | 22.55 | | | (13.30) | | | (8.21) | |
| Cum $ | 100.00 | | | 84.01 | | | 82.53 | | | 101.14 | | | 87.69 | | | 80.49 | |
S&P 500 Index - Total Returns | Return % | — | | | 1.38 | | | 11.96 | | | 21.83 | | | (4.38) | | | 31.49 | |
| Cum $ | 100.00 | | | 101.38 | | | 113.51 | | | 138.29 | | | 132.23 | | | 173.86 | |
NASDAQ Stock Market (US and Foreign Companies) | Return % | — | | | 6.99 | | | 8.80 | | | 29.37 | | | (2.95) | | | 35.78 | |
| Cum $ | 100.00 | | | 106.99 | | | 116.42 | | | 150.60 | | | 146.15 | | | 198.45 | |
|
| | | | | | | | | | | | | | | | | | |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
Astronics Corp. | Return % | — |
| | 122.90 |
| | 30.51 |
| | (15.99 | ) | | (1.75 | ) | | 22.55 |
|
| Cum $ | 100.00 |
| | 222.90 |
| | 290.91 |
| | 244.38 |
| | 240.11 |
| | 294.24 |
|
S&P 500 Index - Total Returns | Return % | — |
| | 32.39 |
| | 13.69 |
| | 1.38 |
| | 11.96 |
| | 21.83 |
|
| Cum $ | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
|
NASDAQ Stock Market (US and Foreign Companies) | Return % | — |
| | 40.10 |
| | 14.43 |
| | 6.99 |
| | 8.82 |
| | 8.43 |
|
| Cum $ | 100.00 |
| | 140.10 |
| | 160.32 |
| | 171.53 |
| | 186.65 |
| | 202.39 |
|
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Performance Highlights
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 (6) | | 2018 | | 2017 (3) | | 2016 | | 2015 |
(Amounts in thousands, except for employees and per share data) | | | | | | | | | |
RESULTS OF OPERATIONS: | | | | | | | | | |
Sales | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | | | $ | 633,123 | | | $ | 692,279 | |
Impairment Loss included in Net Income (4) | $ | 11,083 | | | $ | — | | | $ | 16,237 | | | $ | — | | | $ | — | |
Net Gain on Sales of Businesses (5) | $ | 78,801 | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | | | $ | 48,424 | | | $ | 66,974 | |
Net Margin | 6.7 | % | | 5.8 | % | | 3.2 | % | | 7.6 | % | | 9.7 | % |
Diluted Earnings Per Share (1) | $ | 1.60 | | | $ | 1.41 | | | $ | 0.58 | | | $ | 1.40 | | | $ | 1.93 | |
Weighted Average Shares Outstanding – Diluted (1) | 32,459 | | | 33,136 | | | 33,718 | | | 34,537 | | | 34,706 | |
Return on Average Equity | 13.4 | % | | 13.1 | % | | 5.9 | % | | 15.2 | % | | 25.3 | % |
YEAR-END FINANCIAL POSITION: | | | | | | | | | |
Working Capital (2) | $ | 222,441 | | | $ | 246,079 | | | $ | 212,438 | | | $ | 168,513 | | | $ | 145,735 | |
Total Assets | $ | 782,716 | | | $ | 774,640 | | | $ | 735,956 | | | $ | 604,344 | | | $ | 609,243 | |
Indebtedness | $ | 188,224 | | | $ | 233,982 | | | $ | 271,767 | | | $ | 148,120 | | | $ | 169,789 | |
Shareholders’ Equity | $ | 388,857 | | | $ | 386,625 | | | $ | 329,927 | | | $ | 337,449 | | | $ | 300,225 | |
Book Value Per Share (1) | $ | 12.54 | | | $ | 11.86 | | | $ | 10.22 | | | $ | 10.13 | | | $ | 8.93 | |
OTHER YEAR-END DATA: | | | | | | | | | |
Depreciation and Amortization | $ | 33,049 | | | $ | 35,032 | | | $ | 27,063 | | | $ | 25,790 | | | $ | 25,309 | |
Capital Expenditures | $ | 12,083 | | | $ | 16,317 | | | $ | 13,478 | | | $ | 13,037 | | | $ | 18,641 | |
Shares Outstanding (1) | 30,999 | | | 32,593 | | | 32,269 | | | 33,328 | | | 33,635 | |
Number of Employees | 2,828 | | | 2,690 | | | 2,516 | | | 2,304 | | | 2,304 | |
1.Diluted Earnings Per Share, Weighted Average Shares Outstanding - Diluted, Book Value Per Share and Shares Outstanding have been adjusted for the impact of the October 12, 2018 fifteen percent Class B stock distribution, October 11, 2016 fifteen percent Class B stock distribution and the October 8, 2015 fifteen percent Class B stock distribution.
2.Working capital is calculated as the difference between Current Assets and Current Liabilities.
3.Information includes the results of CCC, acquired on April 3, 2017, and CSC, acquired on December 1, 2017, each from the acquisition date forward.
4.The Company recorded impairment charges in conjunction with restructuring, impairment and other activities during the fourth quarter of 2019, as described in Note 23 in our consolidated financial statements. The Company recorded a goodwill impairment charge during the fourth quarter of 2017.
5.The Company recorded a gain of $80.1 million upon the sale of the semiconductor business on February 13, 2019, offset by a $1.3 million loss on the sale of the airfield lighting product line on July 12, 2019.
6.Information includes the results of Freedom, acquired on July 1, 2019, and Diagnosys, acquired on October 4, 2019, each from the acquisition date forward. Information reflects the sale of the semiconductor business, divested on February 13, 2019. Information included in 2019 is impacted by restructuring, impairment and other charges; as described in Note 23 in our consolidated financial statements.
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| | | | | | | | | | | | | | | | | | | |
| 2017 (5) | | 2016 | | 2015 (4) | | 2014 (3) | | 2013 (2) |
(Amounts in thousands, except for employee and per share data) | | | | | | | | | |
RESULTS OF OPERATIONS: | | | | | | | | | |
Sales | $ | 624,464 |
| | $ | 633,123 |
| | $ | 692,279 |
| | $ | 661,039 |
| | $ | 339,937 |
|
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
| | $ | 56,170 |
| | $ | 27,266 |
|
Impairment Loss (6) | $ | 16,237 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net Margin | 3.2 | % | | 7.6 | % | | 9.7 | % | | 8.5 | % | | 8.0 | % |
Diluted Earnings Per Share (1) | $ | 0.67 |
| | $ | 1.61 |
| | $ | 2.22 |
| | $ | 1.87 |
| | $ | 0.94 |
|
Weighted Average Shares Outstanding – Diluted (1) | 29,320 |
| | 30,032 |
| | 30,179 |
| | 29,970 |
| | 29,136 |
|
Return on Average Equity | 5.9 | % | | 15.2 | % | | 25.3 | % | | 28.1 | % | | 18.4 | % |
YEAR-END FINANCIAL POSITION: | | | | | | | | | |
Working Capital | $ | 212,438 |
| | $ | 168,513 |
| | $ | 145,735 |
| | $ | 136,602 |
| | $ | 125,961 |
|
Total Assets | $ | 735,956 |
| | $ | 604,344 |
| | $ | 609,243 |
| | $ | 562,910 |
| | $ | 491,271 |
|
Indebtedness | $ | 271,767 |
| | $ | 148,120 |
| | $ | 169,789 |
| | $ | 183,008 |
| | $ | 200,320 |
|
Shareholders’ Equity | $ | 329,927 |
| | $ | 337,449 |
| | $ | 300,225 |
| | $ | 228,177 |
| | $ | 171,509 |
|
Book Value Per Share (1) | $ | 11.77 |
|
| $ | 11.60 |
|
| $ | 10.21 |
|
| $ | 7.87 |
|
| $ | 6.05 |
|
OTHER YEAR-END DATA: | | | | | | | | | |
Depreciation and Amortization | $ | 27,063 |
| | $ | 25,790 |
| | $ | 25,309 |
| | $ | 27,254 |
| | $ | 11,059 |
|
Capital Expenditures | $ | 13,478 |
| | $ | 13,037 |
| | $ | 18,641 |
| | $ | 40,882 |
| | $ | 6,868 |
|
Shares Outstanding (1) | 28,038 |
| | 29,098 |
| | 29,405 |
| | 29,003 |
| | 28,342 |
|
Number of Employees | 2,516 |
| | 2,304 |
| | 2,304 |
| | 2,041 |
| | 1,715 |
|
| |
(1) - | Diluted Earnings Per Share, Weighted Average Shares Outstanding - Diluted, Book Value Per Share and Shares Outstanding have been adjusted for the impact of the October 11, 2016 fifteen percent Class B stock distribution, October 8, 2015 fifteen percent Class B stock distribution, the September 5, 2014 twenty percent Class B stock distribution and the October 10, 2013 twenty percent Class B stock distribution. |
| |
(2) - | Information includes the results of Peco, acquired on July 18, 2013, AeroSat acquired on October 1, 2013 and PGA acquired December 5, 2013, each from the acquisition date forward. |
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(3) - | Information includes the results of ATS, acquired on February 28, 2014, from the acquisition date forward. |
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(4) - | Information includes the results of Armstrong, acquired on January 14, 2015, from the acquisition date forward. |
| |
(5) - | Information includes the results of CCC acquired on April 3, 2017 and CSC acquired December 1, 2017, each from the acquisition date forward. |
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(6) - | The Company recorded a $16.2 million goodwill impairment charge during the fourth quarter of 2017. Refer to “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Note 5 of our consolidated financial statements for additional information on Goodwill. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Astronics, through its subsidiaries, designs and manufacturesis a leading supplier of advanced, high-performance electrical power generation, distribution and seat motion systems,solutions, lighting &and safety systems, avionics products, systems certification, aircraft structures systems certification and automated test systems.
Our strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and use those capabilities to provide innovative solutions to the aerospace & defense semiconductor and other markets where our technology can be beneficial.
We have two reportable segments, Aerospace and Test Systems. Our Aerospace segment has thirteen principal operating facilities with one located in New York State, Florida, Oregon, Quebec,the United States, Canada and Montierchaume, France; two located in
New Hampshire; and three located in each of Illinois and Washington State.France. Our Test Systems segment has principal operating facilities located in Floridathe United States and California.the United Kingdom. We have engineering offices in the Ukraine and India.
Our Aerospace segment serves three primary markets. They are the military, commercial transport and business jet markets. Our Test Systems segment serves the aerospace & defense and semiconductormass transit markets.
Important factors affecting our growth and profitability are the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy. Once designed into a new aircraft, the spare parts business is frequently retained by the Company. Future growth and profitability of the test business is dependent on developing and procuring new and follow-on business in the semiconductormass-transit market as well as with the military. The nature of our test systemsTest Systems business is such that it pursues large multi-year projects. There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.
Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term. We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.
Challenges which continue to face us include improving shareholder value through increasing profitability. Increasing profitability is dependent on many things, primarily revenuesales growth, both acquired and organic, and the Company’s ability to control operating expenses and to identify means of creating improved productivity. Revenue isSales are driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft and our products, continued government funding of defense programs, the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for new aircraft platforms and continually identifying and winning new business for our Test Systems segment. Our semiconductor test products are highly dependent on winning new and follow-on programs with our current customers as well as developing new customers.
Reduced aircraft build rates driven by a weak economy, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand for our products, which will result in lower profits. Reduction of defense spending may result in fewer opportunities for us to compete, which could result in lower profits in the future. Many of our newer development programs are based on new and unproven technology and at the same time we are challenged to develop the technology on a schedule that is consistent with specific programs. We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.
ACQUISITIONS
On DecemberJuly 1, 2017, Astronics2019, the Company acquired substantially all of the assetsissued and outstanding capital stock of TelefonixFreedom Communication Technologies, Inc. andFreedom, located in Kilgore, Texas, is a related company Product Development Technologies, LLC and its subsidiaries, to become CSC, locatedleader in wireless communication testing, primarily in Waukegan and Lake Zurich, Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design consultancy services for the global aerospace industry. Under the terms of the Agreement, the total consideration for the transaction was approximately $103.8 million, net of $0.2 million in cash acquired. CSCcivil land mobile radio market. Freedom is included in our Aerospace Segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially all the assets and certain liabilities of CCC, located in Kent, Washington. CCC is a provider of cabin management and in-flight entertainment systems for a range of aircraft.Test Systems segment. The total consideration for the transaction was approximately $10.2$21.8 million, net of $0.5$0.6 million in cash acquired. CCC
On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus an earn-out estimated at a fair value of $2.5 million. Diagnosys is included in our AerospaceTest Systems segment. Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets. The terms of the
acquisition allow for a potential earn-out of up to an additional $13.0 million over the next three years based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India. Refer to Note 21 for additional information.
DIVESTITURES
On January 14, 2015,February 13, 2019, the Company purchased 100%completed a divestiture of its semiconductor test business within the Test Systems segment. The business was not core to the future of the equityTest Systems segment. The total proceeds received for the sale amounted to $103.8 million. The Company recorded a pre-tax gain on the sale of Armstrong$80.1 million in the first quarter of 2019. The Company recorded income tax expense relating to the gain of $19.7 million.
The transaction also includes two elements of contingent earnouts. The “First Earnout” is calculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in each annual period from 2019 through 2022. The First Earnout may not exceed $35.0 million in total. The “Second Earnout” is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for approximately $52.3each annual period from 2019 through 2022. The Second Earnout is not capped. For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, no amounts will be paid relative to such annual period; the sales in such annual period do not carry over to the next annual period. Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company will recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. No amounts were due under the First Earnout.
On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. Armstrong, locatedThe Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million.
RESTRUCTURING
In the fourth quarter of 2019, in Itasca, Illinois, isan effort to reduce the significant operating losses at our AeroSat business, we initiated a leading providerrestructuring plan to reduce costs and minimize losses of engineering, designour AeroSat antenna business. The plan narrows the initiatives for the AeroSat business to focus primarily on near-term opportunities pertaining to business jet connectivity. The plan has a downsized manufacturing operation remaining in New Hampshire, with significantly reduced personnel and certification solutions for commercial aircraft, specializingoperating expenses.
The Company's total impairments and restructuring charges recorded in connectivity, in-flight entertainment, and electrical power systems. Armstrongthe fourth quarter of 2019 amounted to $28.8 million all of which is included in ourthe Aerospace segment.
Refer to Note 23 for additional discussion.
MARKETS
Commercial Transport Market
Sales to the commercial transport market include sales of electrical power generation, distribution, andseat motion, products, lighting & safety products, avionics products, systems certification and structures products. Sales to this market totaled approximately $414.5$523.9 million or 66.4%67.8% of our consolidated sales in 2017.2019.
Maintaining and growing sales to the commercial transport market will depend on airlines’ capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines. This spending by the airlines is impacted by their profits, cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers. We expect that new aircraft will be equipped with more passenger and aircraft connectivity and in-seat power than previous generation aircraft.aircraft which drives demand for our avionics and power products. This market has historically experienced strong growth from airlines installing in-seat passenger power systems on their existing and newly delivered aircraft. Although we expect, based on information that Boeing has made publicly available, that deliveries of the 737 MAX program will resume and the demand for the aircraft in the long-term has not changed, a prolonged grounding of the 737 MAX could substantially decrease sales to this market in the near or long term which could have a material adverse effect on our business, financial condition, results of operations and cash flows. The 737 MAX situation affects us not only because it has been our largest production program, but also because the grounding has reduced capacity in the world’s airline fleets, challenging our aftermarket business. Our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines.
Military Aerospace Market
Sales to the military aerospace market include sales of lighting & safety products, avionics products, electrical power & motion products and otherstructures products. Sales to this market totaled approximately 9.8%9.9% of our consolidated revenuesales and amounted to $61.3$76.5 million in 2017.2019.
The military market is dependent on governmental funding which can change from year to year. Risks are that overall spending may be reduced in the future, specific programs may be eliminated or that we fail to win new business through the competitive bid process. Astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss. We believe that we will continue to have opportunities similar to past years regarding this market.
Business Jet Market
Sales to the business jet aerospace market include sales of lighting & safety products, avionics products, and electrical power & motion products. Sales to this market totaled approximately 6.6%8.7% of our consolidated revenuesales in 20172019 and amounted to $41.3$67.5 million.
Sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft. Business jet OEM build rates continue to be significantlyare impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years by global economic uncertainty among prospective buyers. Our sales to the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not expected to increase significantly during 2018. Despite the current market conditions, weprofitability. We continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies in the business jetthis market. There is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts.
Other Aerospace
Sales of our other aerospace products include sales of airfield lighting products and other Peco products. Sales to this market totaled approximately 2.8% of our total revenue or $17.5 million in 2017.
Tests Systems Products
Our Test Systems segment accounted for approximately 14.4%10.4% of our consolidated sales in 20172019 and amounted to $89.9 million. Sales to the semiconductor market were approximately $32.0$80.1 million. Sales to the aerospace & defense market were approximately $57.9$70.4 million in 2017.2019. Sales to the semiconductor market were approximately $9.7 million. The Company completed a divestiture of its semiconductor test business on February 13, 2019.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company’s financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management’s
application of accounting policies, which are discussed in the Notes to Consolidated Financial Statements, Note 1 of Item 8, Financial Statements and Supplementary Data of this report. The critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
Revenue Recognition
Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or services. Sales shown on the Company's Consolidated Statements of Operations are from contracts with customers.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 90 days after the performance obligation has been satisfied; or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales.
The vastCompany recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer. As of December 31, 2019, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year.
The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Condensed Balance
Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. As of December 31, 2019, the Company does not have material capitalized fulfillment costs. Capitalized fulfillment costs were $9.6 million as of December 31, 2018. These costs were associated with a contract that is included in the divestiture of the semiconductor business and as such, the balance is included in Assets Held for Sale in the accompanying consolidated balance sheet at December 31, 2018. Amortization of fulfillment costs recognized within Cost of Products Sold was approximately $1.0 million for the year ended December 31, 2018.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. The majority of our sales agreementscontracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Thus, the contract's transaction price is the revenue recognized when or as that performance obligation is satisfied. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations.
Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus margin approach, under which expected costs are forecast to satisfy a performance obligation and then an appropriate margin is added for that distinct good or service. Shipping and handling activities that occur after the customer has obtained control of the good are considered fulfillment activities, not performance obligations.
Some of our contracts offer price discounts or free units after a specified volume has been purchased. The Company evaluates these options to determine whether they provide a material right to the customer, representing a separate performance obligation. If the option provides a material right to the customer, revenue is allocated to these rights and recognized when those future goods or services are transferred, or when the option expires.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for standard productsgoods or services that are distinct, and, services,therefore, are accounted for as new contracts. The effect of modifications has been reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.
The majority of the Company’s revenue from contracts with revenuecustomers is recognized onat a point in time, when the accrual basiscustomer obtains control of the promised product, which is generally upon delivery and acceptance by the customer. These contracts may provide credits or incentives, which may be accounted for as variable consideration. Variable consideration is estimated at the most likely amount to predict the consideration to which the Company will be entitled, and only to the extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal when estimating the amount of revenue to recognize. Variable consideration is treated as a change to the sales transaction price and based on an assessment of all information (i.e., historical, current and forecasted) that is reasonably available to the Company, and estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Most of our contracts do not contain rights to return product; where this right does exist, it is evaluated as possible variable consideration.
For contracts that are subject to the requirement to accrue anticipated losses, the company recognizes the entire anticipated loss in the period that the loss becomes probable.
For contracts with customers in which the Company promises to provide a product to the customer that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, of shipment of goods,using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of titlecontrol to the customer. Contract costs include labor, material and customer acceptance, where required. There are no significantoverhead.
The Company also recognizes revenue from service contracts allowing for right of return. To a limited extent, certain contracts involve multiple elements (such as equipment and service).(including service-type warranties) over time. The Company recognizes revenue for delivered elements when they have stand-alone value toover time during the term of the agreement as the customer they have been accepted byis simultaneously receiving and consuming the customer, and for which there are only customary refund or return rights. Arrangement consideration is allocated tobenefits provided throughout the deliverables by use of the relative selling price method.Company’s performance. The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used to establish the price to sell the deliverable on a standalone basis.
For prepaid service contracts, salesCompany typically recognizes revenue is recognized on a straight-line basis over the term ofthroughout the contract unless historical evidence indicates the costs are incurred on other than a straight-line basis.period.
Revenue of approximately $21.0 million, $20.7 million and $17.2 million for the years ended December 31, 2017, 2016 and 2015, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. The Company makes significant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods. For contracts with anticipated losses at completion, a charge is taken against income for the amount of the entire loss in the period in which it is estimated.
Reviews for Impairment of Long-Lived Assets
Goodwill Impairment Testing
Our goodwill is the result of the excess of purchase price over net assets acquired from acquisitions. As of December 31, 2017,2019, we had approximately $125.6$145.0 million of goodwill. As of December 31, 2016,2018, we had approximately $115.2$125.0 million of goodwill. The change in goodwill is primarily due to the goodwill recorded associated with the acquisitions of CCC and CSC of $2.3 million and $23.4 million, respectively, offset by a goodwill impairment of $16.2 million at Armstrong.
We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. The Test Systems operating segment is its own reporting unit while the other reporting units are one level below our Aerospace operating segment.
Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units under certain circumstances. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we would consider in determining whether to perform a quantitative test.
When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.
Quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value. We use the discounted cash flow method to estimate the fair value of each of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenuesales growth rates, operating profit margins and cash
flows, the terminal growth rate and the discount rate. Management projects revenuesales growth rates, operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. We early adopted ASU No. 2017-04 on January 1, 2017. Accordingly, goodwillGoodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
In 2017,2019, we performed quantitative assessments for the nine reporting units which had goodwill as of the first day of the fourth quarter. Based on our quantitative assessments of our reporting units,assessment, the Company recorded a full goodwill impairment charge of approximately $16.2$1.6 million in the December 31, 20172019 consolidated statement of operations associated towith the ArmstrongAeroSat reporting unit. The impairment loss was incurred in the Aerospace segment and is reported onwithin the Impairment Loss line of the Consolidated Statements of Operations.
Amortized Intangible Asset Impairment Testing
Amortizable intangible assets with a carrying value of $153.5 million at December 31, 2017 and $98.1 million at December 31, 2016 are amortized over their assigned useful lives. We test these long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The recoverability test consists of comparing the projected undiscounted cash flows associated with the asset to its carrying amount. An impairment loss would then be recognized for the carrying amount in excess of its fair value. There were no impairment charges in 2017, 2016 or 2015.
Depreciable Asset Impairment Testing
Property, plant and equipment with a carrying value of $125.8 million at December 31, 2017 and $122.8 million at December 31, 2016 are depreciated over their assigned useful lives. We test these long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The recoverability test consists of comparing the projected undiscounted cash flows, with its carrying amount. An impairment loss would then be recognized for the carrying amount in excess of its fair value. There were no impairment charges in 2017, 2016 or 2015.
Inventory Valuation
We record valuation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower of cost or net realizable value. In determining the appropriate reserve, management considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that we believe is no longer salable. At December 31, 2017, our reserve for inventory valuation was $18.0 million, or 10.7% of gross inventory. At December 31, 2016, our reserve for inventory valuation was $15.4 million, or 11.7% of gross inventory.
Deferred Tax Asset Valuation Allowances
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. Significant assumptions regarding future profitability is required to estimate the value of these deferred tax assets. We consider allowable tax carryforward periods, historical earnings performance, tax planning strategies and recent earnings projections to determine the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expense and the carrying value of these assets when we determine that these factors have changed.
As of December 31, 2017, we had net deferred tax liabilities of $2.3 million. Included in the net deferred tax liabilities are approximately $15.4 million in deferred tax assets net of a $7.8 million valuation allowance. These deferred tax assets principally relate to employee benefit liabilities, asset reserves, leases, deferred revenue, state and foreign net operating loss carry-forwards, and state general business tax credit carry-forwards.
As of December 31, 2016, we had net deferred tax liabilities of $8.7 million. Included in the net deferred tax liabilities are approximately $24.2 million in deferred tax assets net of a $3.8 million valuation allowance. These deferred tax assets principally relate to employee benefit liabilities, asset reserves, leases, deferred revenue, state net operating loss carry-forwards and state general business tax credit carry-forwards.
Because of the uncertainty as to the Company’s ability to generate sufficient future taxable income in certain states, the Company has recorded the valuation allowances accordingly in 2017 and 2016.
Supplemental Executive Retirement Plan (SERP) Assumptions
We maintain two non-qualified defined benefit supplemental retirement plans (“SERP” and “SERP II”) for certain executive officers and retired former executive officers. Expense for these plans in 2017 was $1.9 million and in 2016 was $1.9 million. Plan obligations and the related costs are determined using actuarial valuations that involve several assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used. The most critical assumptions include the discount rate, future wage increases, retirement age and life expectancy. The discount rate is used to state expected future cash flows at present value. Using a lower discount rate increases the present value of pension obligations and increases pension expense. For determining the discount rate the Company considers long-term interest rates for high-grade corporate bonds. The discount rate for determining the expense recognized in 2017 was 4.20% compared with 4.45% in 2016. We will use a discount rate of 3.60% in determining our 2018 expense. The assumption for compensation increases takes a long-term view of inflation and performance based salary adjustments based on the Company’s approach to executive compensation. The rate used for future wage increases was 2-3%. It was assumed that each participant retires after fully vesting in the plan at age 62 or 65. A 100 point increase in the discount rate we used would decrease our annual pension expense for 2018 by $0.3 million. If we had assumed annual wage increases of 3-4%, our 2018 pension expense would increase approximately $0.2 million.
Stock-Based Compensation
We have stock-based compensation plans, which include non-qualified stock options as well as incentive stock options. Expense recognized for stock-based compensation was $2.6 million for 2017, $2.3 million for 2016 and $2.3 million for 2015. We determine the fair value of the option awards at the date of grant using a Black-Scholes model. Option pricing models require management to make assumptions and to apply judgment to determine the fair value of the award. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee stock option exercise behaviors and future employee turnover rates. Changes in these assumptions can materially affect the fair value estimate.
Acquisitions
The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations. Acquisition costs are expensed as incurred. Acquisition related expenses were $0.3 million in 2017, insignificant in 2016, and $0.4 million in 2015.
When the Company acquires a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment, as explained previously. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques.
With respect to determining the fair value of the purchase price, the most subjective estimates involve valuations of contingent consideration. Significant judgment is necessary to determine the fair value of the purchase price when the transaction includes an earn-out provision. We engage valuation specialists to assist in the determination of the fair value of contingent consideration. Key assumptions used to value the contingent consideration include future projections and discount rates.
During 2017, acquisitions added approximately $4.0 million in property, plant and equipment and $66.5 million in purchased intangible assets. See Note 18 in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, regarding the acquisitions in 2017.
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
| | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | 2019 (2) | | 2018 | | 2017 (1) |
Sales | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
Gross Margin | 20.2 | % | | 22.5 | % | | 22.0 | % |
SG&A Expenses as a Percentage of Sales | 18.6 | % | | 14.6 | % | | 14.2 | % |
Impairment Loss | $ | 11,083 | | | $ | — | | | $ | 16,237 | |
Net Gain on Sale of Businesses | $ | 78,801 | | | $ | — | | | $ | — | |
Interest Expense | $ | 6,141 | | | $ | 9,710 | | | $ | 5,369 | |
Effective Tax Rate | 23.8 | % | | 10.5 | % | | 21.3 | % |
Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | |
|
| | | | | | | | | | | |
| 2017 (2) | | 2016 | | 2015 (1) |
(Dollars in thousands) | | | |
Sales | $ | 624,464 |
| | $ | 633,123 |
| | $ | 692,279 |
|
Gross Margin | 22.0 | % | | 25.2 | % | | 27.1 | % |
Impairment Loss | $ | 16,237 |
| | $ | — |
| | $ | — |
|
SG&A Expenses as a Percentage of Sales | 14.5 | % | | 13.6 | % | | 12.9 | % |
Interest Expense | $ | 5,369 |
| | $ | 4,354 |
| | $ | 4,751 |
|
Effective Tax Rate | 21.3 | % | | 29.6 | % | | 28.8 | % |
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
|
(1)Our results of operations for 2017 include the operations of CCC, beginning April 3, 2017, and the operations of CSC, beginning December 1, 2017.(2)Our results of operations for 2019 include the operations of Freedom, beginning July 1, 2019, and the operations of Diagnosys, beginning October 4, 2019. 2019 results also reflect the divestiture of the semiconductor business on February 13, 2019.
| |
(1) | Our results of operations for 2015 include the operations of Armstrong, beginning January 14, 2015. |
| |
(2) | Our results of operations for 2017 include the operations of CCC, beginning April 3, 2017, and the operations of CSC, beginning December 1, 2017 ("collectively, the Acquired Businesses"). |
A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.
CONSOLIDATED OVERVIEW OF OPERATIONS
20172019 Compared With 20162018
Consolidated sales for the full year of 2019 decreased $30.6 million to $772.7 million, primarily because of the divested semiconductor business which had sales of $9.7 million in 2019 and $84.3 million in 2018.
Consolidated cost of products sold decreased $6.0 million to $616.6 million in 2019 from $622.6 million in the prior year. The decline was due to lower sales, primarily due to the divestiture of the semiconductor business, partially offset with incremental tariff expense of $5.9 million and $15.4 million of charges associated with the restructuring and impairment charges of our AeroSat antenna business which required classification within cost of products sold.
Selling, general and administrative (“SG&A”) expenses were $143.4 million, or 18.6% or sales, compared with $117.0 million, or 14.6% of sales, for the prior year period. The $26.3 million increase was due to increased legal reserves for the long-term patent dispute of $19.6 million and impairment and restructuring charges related to the antenna business classified within SG&A expense of $2.4 million.
The Company recorded a gain of $80.1 million upon the sale of the semiconductor business on February 13, 2019, offset by a $1.3 million loss on the sale of the airfield lighting product line on July 12, 2019.
Other expense, net in 2019 includes a $5.0 million impairment of an equity investment.
2018 Compared With 2017
Consolidated sales for 2017 decreased by $8.7were $803.3 million, up 28.6%, or $178.8 million, from the same period last year. Organic sales increased $94.0 million, or 1.4%,15.0%. Acquired sales for 2018 were $84.8 million related to $624.5 million.CSC and CCC and all related to the Aerospace segment. Aerospace segment sales of $534.6$675.6 million were consistent with 2016 sales of $534.0up 26.4%, or $141.0 million, whileand Test Systems segment sales were down 9.3%up 42.0% to $89.9$127.6 million. Sales from the Acquired Businesses contributed $15.5 million in 2017.
Consolidated cost of products sold increased $13.7$135.2 million to $487.4$622.6 million in 20172018 from $473.7$487.4 million in the prior year. The increase was due primarily to the incrementalcost associated with the higher organic sales volume, coupled with the cost of products sold associated with the Acquired Businesses of $19.8 million,related to CSC and increased Engineering & Development ("E&D") costs offset by lower organic sales volume. E&D costs increased 6.8% to $95.0 million in 2017 primarily due to the Acquired Businesses, compared with $88.9 million in 2016. The incremental E&D costs of the Acquired Businesses totaled $5.7 million. As a percent of sales, E&D was 15.2% and 14.0% in 2017 and 2016, respectively.CCC.
SG&A expenses increased $4.2were $117.0 million, in 2017or 14.6% or sales, compared with 2016. As a percent$88.8 million, or 14.2% of sales, SG&A expenses were 14.5% and 13.6% for 2017 and 2016, respectively.the prior year period. The $28.3 million increase was due primarily to the incremental SG&A costs of the Acquired BusinessesCSC and CCC, which added $20.9 million. This included $7.4 million of $4.6 million, which included $1.8 million ofincremental intangible asset amortization expense.expense in 2018. Corporate overhead expenses increased $2.6 million due primarily to increased staffing and infrastructure development.
Interest expense increased in 20172018 compared to 20162017 due primarily to increased debt levels.
2016 Compared With 2015
Consolidated sales for 2016 decreased by $59.2 million, or 8.5%, to $633.1 million, from $692.3 million in 2015. Aerospace segment sales were down 2.9% year-over-year to $534.0 million, while Test Systems segment sales were down 30.5% to $99.1 million.
Consolidated cost of products sold decreased $30.6 million to $473.7 million in 2016 from $504.3 million in the prior year. Lower costs of products sold was the result of lower sales volume and lower warranty expenses. E&D costs were $88.9 million in 2016, consistent with $90.3 million in 2015. As a percent of sales, E&D was 14.0% and 13.0% in 2016 and 2015, respectively.
SG&A expenses were $86.3 million, or 13.6% of sales, in 2016 compared with $89.1 million, or 12.9% of sales, in the same period last year. The decline in SG&A expenses was due primarily to reduced commissions resulting from lower sales volumes. SG&A expenses in 2015 benefited from a $1.8 million write-down of a contingent consideration liability related to an acquisition earn-out obligation.
Interest expense decreased in 2016 compared to 2015 due to decreasedaverage debt levels.
Income Taxes
Our effective tax rates for 2019, 2018 and 2017 2016were 23.8%, 10.5% and 2015 were 21.3%, 29.6% and 28.8%, respectively. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year,
but are not consistent from year to year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of(21% in 2019 and 2018 and 35% in 2017) and our effective tax rate:
2019:
1.Recognition of approximately $3.1 million of 2019 U.S. R&D tax credits.
2018:
1.Recognition of approximately $3.2 million of 2018 U.S. R&D tax credits.
2.Benefit of approximately $3.5 million from revised state filing position.
2017:
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1. | Recognition of approximately $2.9 million of 2017 U.S. R&D tax credits. |
| |
2. | Permanent differences, primarily the impact of the Domestic Production Activities Deduction. |
| |
3. | Federal tax expense on deemed repatriation of foreign earnings ($1.3 million), partially offset by revaluation of the deferred tax balances ($0.9 million) as a result of a reduction in the Federal tax rate from tax law changes enacted in 2017. |
2016:1.Recognition of approximately $2.9 million of 2017 U.S. R&D tax credits.
| |
1. | Recognition of approximately $2.6 million of 2016 U.S. R&D tax credits. |
| |
2. | Permanent differences, primarily the impact of the Domestic Production Activities Deduction. |
2015:2.Permanent differences, primarily the impact of the Domestic Production Activities Deduction.
| |
1. | Recognition of approximately $2.6 million of 2015 U.S. R&D tax credits. |
| |
2. | Permanent differences, primarily the impact of the Domestic Production Activities Deduction. |
20183.Provisional amounts related to the Federal tax expense on deemed repatriation of foreign earnings ($1.3 million), partially offset by revaluation of the deferred tax balances ($0.9 million) as a result of a reduction in the Federal tax rate from tax law changes enacted in 2017.
2020 Outlook
The continued grounding of the 737 MAX and the associated production pause has caused us to withdraw revenue guidance temporarily. The MAX situation affects us not only because it is one of our largest production programs, but also because the grounding has reduced capacity for the world’s airlines, challenging our aftermarket business. We look forward to the MAX’s return to service, and issuing sales guidance as soon as practical.
We expect consolidatedfirst quarter sales in 2018 to be between $745.0 million and $815.0 million. Our consolidated backlog at December 31, 2017 was $393.7 million of which approximately $346.7 million is expected to ship in 2018.
We expect our capital equipment spending in 20182020 to be in the range of $24.0$155 million to $28.0$165 million, with Aerospace generating about 90% of the total. We expect the first quarter will be the lightest quarter of 2020, with results strengthening throughout the year. In 2019, we saw strong results at the beginning of the year which weakened towards the end. We expect 2020 will be just the opposite, with a weaker start and a stronger finish.
We have not currently estimated the impact which could result if the COVID-19 coronavirus becomes more significant globally. It is unknown whether and how global airline demand and spending, as well as global supply chains, may be affected if such an epidemic persists for an extended period of time.
At December 31, 2019, our consolidated backlog was $359.6 million. E&DAt December 31, 2018, our backlog was $415.5 million. Excluding backlog related to the divested semiconductor business, our backlog was $403.3 million at December 31, 2018. Backlog in the Aerospace segment was $275.8 million at December 31, 2019, of which $249.6 million is expected to be recognized as revenue in 2020. Backlog in the Test Systems segment was $83.8 million at December 31, 2019. The Test Systems segment expects to recognize as revenue $51.4 million of backlog in 2020.
The effective tax rate for 2020 is expected to be approximately 18% to 22%.
Capital equipment spending in 20182020 is expected to be in the range of $110.0$22 million to $115.0$25 million.
Depreciation and Amortization in 2020 is expected to in the range of $33 million including the Acquired Businesses, which represents approximately 14.4% of sales at the mid-point of the expected sales range.and $35 million.
SEGMENT RESULTS OF OPERATIONS AND OUTLOOK
Operating profit, as presented below, is sales less cost of products sold and other operating expenses excluding interest expense, corporate expenses and other non-operating revenuesales and expenses. Cost of products sold and operating expenses are directly attributable to the respective segment. Operating profit is reconciled to earnings before income taxes in Note 1720 of Item 8, Financial Statements and Supplementary Data, of this report.
AEROSPACE SEGMENT
| | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | 2019 | | 2018 | | 2017 |
Sales | $ | 692,609 | | | $ | 675,625 | | | $ | 534,603 | |
Operating Profit | $ | 16,657 | | | $ | 69,761 | | | $ | 38,888 | |
Operating Margin | 2.4 | % | | 10.3 | % | | 7.3 | % |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | |
Total Assets | $ | 629,371 | | | $ | 647,870 | | | |
Backlog | $ | 275,754 | | | $ | 326,047 | | | |
| | | | | | | | | | | | | | | | | |
Sales by Market | 2019 | | 2018 | | 2017 |
Commercial Transport | $ | 523,921 | | | $ | 536,269 | | | $ | 414,523 | |
Military | 76,542 | | | 68,138 | | | 61,270 | |
Business Jet | 67,541 | | | 43,090 | | | 41,298 | |
Other | 24,605 | | | 28,128 | | | 17,512 | |
Total | $ | 692,609 | | | $ | 675,625 | | | $ | 534,603 | |
|
| | | | | | | | | | | |
(in thousands, except percentages) | 2017 | | 2016 | | 2015 |
Sales | $ | 534,603 |
| | $ | 534,041 |
| | $ | 549,738 |
|
Operating Profit | $ | 38,888 |
| | $ | 77,966 |
| | $ | 85,103 |
|
Operating Margin | 7.3 | % | | 14.6 | % | | 15.5 | % |
| | | | | | | | | | | | | | | | | |
Sales by Product Line | 2019 | | 2018 | | 2017 |
Electrical Power & Motion | $ | 338,237 | | | $ | 303,180 | | | $ | 264,286 | |
Lighting & Safety | 185,462 | | | 174,383 | | | 158,663 | |
Avionics | 106,787 | | | 131,849 | | | 53,960 | |
Systems Certification | 14,401 | | | 13,951 | | | 14,333 | |
Structures | 23,117 | | | 24,134 | | | 25,849 | |
Other | 24,605 | | | 28,128 | | | 17,512 | |
Total | $ | 692,609 | | | $ | 675,625 | | | $ | 534,603 | |
|
| | | | | | | | | |
| 2017 | | 2016 | | |
Total Assets | $ | 621,047 |
| | $ | 500,892 |
| | |
Backlog | $ | 298,604 |
| | $ | 219,146 |
| | |
|
| | | | | | | | | | | |
Sales by Market | 2017 | | 2016 | | 2015 |
Commercial Transport | $ | 414,523 |
| | $ | 435,552 |
| | $ | 455,569 |
|
Military | 61,270 |
| | 54,556 |
| | 43,295 |
|
Business Jet | 41,298 |
| | 25,407 |
| | 32,796 |
|
Other | 17,512 |
| | 18,526 |
| | 18,078 |
|
| $ | 534,603 |
| | $ | 534,041 |
| | $ | 549,738 |
|
|
| | | | | | | | | | | |
Sales by Product Line | 2017 | | 2016 | | 2015 |
Electrical Power & Motion | $ | 264,286 |
| | $ | 288,465 |
| | $ | 279,752 |
|
Lighting & Safety | 158,663 |
| | 156,871 |
| | 157,143 |
|
Avionics | 53,960 |
| | 32,761 |
| | 56,150 |
|
Systems Certification | 14,333 |
| | 16,531 |
| | 21,317 |
|
Structures | 25,849 |
| | 20,887 |
| | 16,372 |
|
Other | 17,512 |
| | 18,526 |
| | 19,004 |
|
| $ | 534,603 |
| | $ | 534,041 |
| | $ | 549,738 |
|
20172019 Compared With 20162018
Aerospace segment sales increased by $0.6$17.0 million, or 0.1%2.5%, to $534.6$692.6 million, when compared with the prior year, primarily due to the addition of the Acquired Businesses which added $15.5 million.
Electrical Power & Motion sales decreased $24.2 million, or 8.4%, due to lower sales of cabin power products due to a combination of lower volume and pricing. Systems Certifications sales decreased $2.2 million and other products decreased $1.0 million from lower project activity. These declines were offset by increased Avionics sales, up $21.2 million of which $15.0 million was from the Acquired Businesses and $5.3 million was from increased sales of databus and in-flight entertainment systems. Structures sales increased by $5.0 million.
Aerospace operating profit for 2017 was $38.9 million, or 7.3% of sales, compared with $78.0 million, or 14.6% of sales, in the same period last year. Aerospace operating profit was negatively impacted by lower sales volume and market pricing pressures primarily related to cabin power products, coupled with the $16.2 million goodwill impairment at Armstrong and an operating loss of $8.4 million from CCC. E&D costs for Aerospace were $85.3 million (inclusive of $5.6 million related to the Acquired Businesses) and $78.5 million in 2017 and 2016, respectively.
2016 Compared With 2015
Aerospace segment sales decreased by $15.7 million, or 2.9%, when compared with the prior year to $534.0 million.prior-year period.
Electrical Power & Motion sales increased $8.7$35.1 million, or 3.1%11.6%, largely driven by higherdue primarily to increased sales of in-seat power and motion products. Lighting & Safety sales increased $11.1 million due to higher sales of products and seat motion products, which were up $7.0to the military market. Avionics sales decreased by $25.1 million and $4.3 million, respectively.for similar reasons in the quarter. Sales of StructuresOther products were up $4.5down $3.5 million. These increases were offset by a $23.4 million decline in Avionics products, which was largely due to lower sales of satellite antenna systems and lower VVIP in-flight entertainment/cabin management systems, and a $4.8 million decrease in System Certification sales.
Aerospace operating profit for 20162019 was $78.0$16.7 million, or 14.6%2.4% of sales, compared with $85.1$69.8 million, or 15.5%10.3% of sales, in the same period last year. The decrease inof 2018. Aerospace operating profit was impacted by the resultlegal reserve for the patent dispute of lower$19.6 million for the full year incremental tariff expense of $5.9 million and antenna business impairment and restructuring charges of $28.8 million.
2018 Compared With 2017
Aerospace segment sales volume, coupledincreased by $141.0 million, or 26.4%, to $675.6 million, when compared with slightlythe prior-year period of $534.6 million. Organic sales increased $56.2 million, or 10.5%, to $590.8 million, while acquired sales from CSC and CCC were $84.8 million.
Avionics sales increased by $77.9 million, driven primarily by the acquisitions, which contributed incremental sales of $72.5 million. Electrical Power & Motion sales increased $38.9 million, or 14.7%, due to higher E&D costssales of in-seat power and seat motion products. Lighting & Safety sales increased $15.7 million due to a general increase in volume. Sales of Other products were up $10.6 million, due to the CSC business. The increases were slightly offset by a decrease in Structures sales of $1.7 million.
Aerospace operating costs. E&D costsprofit for Aerospace were $78.52018 was $69.8 million, and $77.9 million in 2016 and 2015, respectively. Aerospace SG&A expense decreased slightly to $60.0 million in 2016,or 10.3% of sales, compared with $60.1$38.9 million, or 7.3% of sales, in 2015.the same period of 2017. Aerospace operating profit benefited from higher organic sales and profits of CSC, offset partially by increased operating losses of CCC, AeroSat and Armstrong which improved by $3.8 million to $34.7 million compared with the prior year, excluding Armstrong’s 2017 goodwill impairment charge. For the year, intangible asset amortization expense was $9.2 million related to CSC and CCC. Operating profit in the prior year was negatively impacted by the $16.2 million impairment at Armstrong.
20182020 Outlook for Aerospace – We expect 2018 Aerospace segment sales to be in the range of $630.0 million to $680.0 million. The Aerospace segment’s backlog at December 31, 20172019 was $298.6$275.8 million, compared to $219.1$326.0 million at December 31, 2016.2018. Approximately $271.4$249.6 million of the backlog at December 31, 20172019 is expected to be shipped over the next 12 months.
TEST SYSTEMS SEGMENT
| | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | 2019 | | 2018 | | 2017 |
Sales | $ | 80,093 | | | $ | 127,631 | | | $ | 89,861 | |
Operating Profit | $ | 4,494 | | | $ | 10,718 | | | $ | 7,359 | |
Operating Margin | 5.6 | % | | 8.4 | % | | 8.2 | % |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | |
Total Assets | $ | 110,994 | | | $ | 97,056 | | | |
Backlog (1) | $ | 83,837 | | | $ | 89,470 | | | |
(1) Test Systems backlog as of December 31, 2018, includes $12.2 million related to the divested semiconductor business.
|
| | | | | | | | | | | |
(in thousands, except percentages) | 2017 | | 2016 | | 2015 |
Sales | $ | 89,861 |
| | $ | 99,082 |
| | $ | 142,541 |
|
Operating Profit | $ | 7,359 |
| | $ | 8,507 |
| | $ | 25,529 |
|
Operating Margin | 8.2 | % | | 8.6 | % | | 17.9 | % |
| | | | | | | | | | | | | | | | | |
Sales by Market | 2019 | | 2018 | | 2017 |
Semiconductor | $ | 9,692 | | | $ | 84,254 | | | $ | 31,999 | |
Aerospace & Defense | 70,401 | | | 43,377 | | | 57,862 | |
Total | $ | 80,093 | | | $ | 127,631 | | | $ | 89,861 | |
|
| | | | | | | | | |
| 2017 | | 2016 | | |
Total Assets | $ | 90,859 |
| | $ | 76,575 |
| | |
Backlog | $ | 95,086 |
| | $ | 38,887 |
| | |
|
| | | | | | | | | | | |
Sales by Market | 2017 | | 2016 | | 2015 |
Semiconductor | $ | 31,999 |
| | $ | 37,939 |
| | $ | 92,136 |
|
Aerospace & Defense | 57,862 |
| | 61,143 |
| | 50,405 |
|
| $ | 89,861 |
| | $ | 99,082 |
| | $ | 142,541 |
|
20172019 Compared With 20162018
Test Segment sales decreased from $127.6 million to $80.1 million for 2019, primarily due to the divestiture of the semiconductor test business, which contributed sales of $84.3 million in 2018 and $9.7 million in 2019.
Operating profit was $4.5 million, or 5.6% of sales, compared with $10.7 million, or 8.4% of sales, in 2018.
2018 Compared With 2017
Sales in 2017 decreased 9.3%2018 increased 42.0% to $89.9$127.6 million compared with sales of $99.1$89.9 million for 2016, due to lower shipments to both the Semiconductor and Aerospace & Defense markets. Sales2017. The growth was driven by a $52.3 million increase in sales to the Semiconductor market, decreased $5.9 million and sales to theoffset by a decrease in Aerospace & Defense market decreased $3.3 million compared with 2016.sales of $14.5 million.
Operating profit was $10.7 million, or 8.4% of sales, compared with $7.4 million, or 8.2% of sales, compared with $8.5 million, or 8.6% of sales, in 2016.2017. This iswas primarily due to decreasedincreased sales volume. E&D costs were $9.7 million in 2017, compared with $10.4 million in 2016.
2016 Compared With 2015
Sales in 2016 decreased 30.5% to $99.1 million compared with sales of $142.5 million for 2015, due to lower shipments to the Semiconductor market. Sales to the Semiconductor market decreased $54.2 million compared with the same period in 2015, which wasvolume partially offset by increased sales of $10.7 million to the Aerospace & Defense market.
Operating profit was $8.5 million, or 8.6% of sales, compared with $25.5 million, or 17.9% of sales, in 2015. E&D costs were $10.4approximately $2.0 million in 2016 comparedincreased engineering costs and elevated initial costs associated with $12.4 million in the prior year.new products.
20182020 Outlook for Test Systems – We expect 2018 Test System segment sales to be Backlog in the range of $115.0 million to $135.0 million. The Test System segment’s backlog at December 31, 2017Systems segment was $95.1 million, compared with $38.9$83.8 million at December 31, 2016. Approximately $75.32019, compared to Test Systems backlog, exclusive of the divested semiconductor business, of $77.3 million is expectedat December 31, 2018. The Test Systems segment expects to be shipped over the next 12 months.
OFF BALANCE SHEET ARRANGEMENTSrecognize as revenue $51.4 million of backlog in 2020.
We do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
CONTRACTUAL OBLIGATIONS
The following table represents contractual obligations as of December 31, 2017:2019:
| | | Payments Due by Period | | Payments Due by Period | |
(In thousands) | Total | | 2018 | | 2019-2020 | | 2021-2022 | | After 2022 | (In thousands) | Total | | 2020 | | 2021-2022 | | 2023-2024 | | After 2024 |
Long-term Debt | $ | 271,767 |
| | $ | 2,689 |
| | $ | 4,099 |
| | $ | 2,979 |
| | $ | 262,000 |
| Long-term Debt | $ | 188,224 | | | $ | 224 | | | $ | — | | | $ | 188,000 | | | $ | — | |
Interest on Long-term Debt | | Interest on Long-term Debt | 17,078 | | | 5,481 | | | 10,964 | | | 633 | | | — | |
Purchase Obligations | 178,149 |
| | 173,478 |
| | 4,671 |
| | — |
| | — |
| Purchase Obligations | 129,282 | | | 121,034 | | | 8,248 | | | — | | | — | |
Interest on Long-term Debt | 45,170 |
| | 9,244 |
| | 18,153 |
| | 17,440 |
| | 333 |
| |
Supplemental Retirement Plan and Post Retirement Obligations | 26,448 |
| | 419 |
| | 833 |
| | 812 |
| | 24,384 |
| Supplemental Retirement Plan and Post Retirement Obligations | 27,651 | | | 404 | | | 753 | | | 973 | | | 25,521 | |
Operating Leases | 6,980 |
| | 4,141 |
| | 2,724 |
| | 115 |
| | — |
| |
Lease Obligations | | Lease Obligations | 33,197 | | | 7,026 | | | 13,445 | | | 6,749 | | | 5,977 | |
Other Long-term Liabilities | 199 |
| | 83 |
| | 25 |
| | 32 |
| | 59 |
| Other Long-term Liabilities | 8,467 | | | 6,541 | | | 748 | | | 746 | | | 432 | |
Total Contractual Obligations | $ | 528,713 |
| | $ | 190,054 |
| | $ | 30,505 |
| | $ | 21,378 |
| | $ | 286,776 |
| Total Contractual Obligations | $ | 403,899 | | | $ | 140,710 | | | $ | 34,158 | | | $ | 197,101 | | | $ | 31,930 | |
Notes to Contractual Obligations Table
Long-term Debt — See Item 8, Financial Statements and Supplementary Data, Note 6,8, Long-Term Debt and Note Payable in this report. The timing of the payments above consider the amendment to the revolving credit facility as discussed in Note 6.8.
Interest on Long-term Debt — Future interest payments have been calculated using the applicable interest rate of each debt facility based on actual borrowings as of December 31, 2017.2019. Actual future borrowings and rates may differ from these estimates.
Purchase Obligations — Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.
Operating LeasesLease Obligations — Financing and Operating lease obligations are primarily related to the Company's facility leases and interest.
Other Long-termLiabilities — Balance in 2021-2022 includes $4.5 million litigation accrual related to damages awarded to Lufthansa in the patent dispute related to direct sales. See Note 19 of the Consolidated Financial Statements for AES, AeroSat, Armstrong, ATS, Ballard, CCC, CSC,additional information. Table excludes the $16.1 million accrual recorded as management's best estimate of damages related to indirect sales claim, as this will not become a contractual obligation until the appeals process is complete and LSI Canada.amount of damages has been finalized.
LIQUIDITY AND CAPITAL RESOURCES
| | (in thousands) | 2017 | | 2016 | | 2015 | |
Net cash provided (used) by: | | | | | | |
(In thousands) | | (In thousands) | 2019 | | 2018 | | 2017 |
Net cash flows from: | | Net cash flows from: | | | | | |
Operating Activities | $ | 37,783 |
| | $ | 48,854 |
| | $ | 78,501 |
| Operating Activities | $ | 42,689 | | | $ | 54,881 | | | $ | 37,783 | |
Investing Activities | $ | (129,561 | ) | | $ | (14,622 | ) | | $ | (73,586 | ) | Investing Activities | $ | 64,630 | | | $ | (19,667) | | | $ | (129,561) | |
Financing Activities | $ | 91,425 |
| | $ | (34,806 | ) | | $ | (6,725 | ) | Financing Activities | $ | (92,182) | | | $ | (36,134) | | | $ | 91,425 | |
Our cash flow from operations and available borrowing capacity provide us with the financial resources needed to run our operations and reinvest in our business.
Operating Activities
Cash provided by operating activities was $42.7 million in 2019 compared with $54.9 million in 2018. The decrease of $12.2 million in 2019 was primarily due to the net non-cash effect on net income of the net gain from the sale of businesses, the legal reserve and the antenna business impairment and restructuring charges, partially offset by a change in net operating assets.
Cash provided by operating activities was $54.9 million in 2018 compared with $37.8 million in 2017. The increase of $17.1 million in 2018 was primarily a result of increased net income in 2018 when compared with 2017, offset with a change in net operating assets.
Cash provided by operating activities was $37.8 million in 2017 compared with $48.9 million in 2016. The decrease of $11.1 million in 2017 was primarily a result of decreased net income and change in net operating assets in 2017 when compared with 2016, coupled with an increased deferred income tax benefit in 2017.
Cash provided by operating activities was $48.9 million in 2016 compared with $78.5 million in 2015. The decrease of $29.6 million in 2016 was primarily a result of decreased net income and net operating assets in 2016 when compared with 2015, partially offset by an increase deferred income tax benefit in 2016.
Cash provided by operating activities was $78.5 million in 2015 compared with $99.9 million in 2014. The decrease of $21.4 million in 2015 was primarily a result of the impact of increases in net operating assets in 2015 when compared with 2014 net of the effects from acquisitions of businesses.
Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers and employees. Sales and operating results of our Aerospace segment are influenced by the build rates of new aircraft, which are subject to general economic conditions, airline passenger travel and spending for government and military programs. Our Test Systems segment sales depends in part on capital
expenditures of the semiconductoraerospace & defense industry which, in turn, depend on current and future demand for those products. A reduction in demand for our customers’ products would adversely affect our operating results and cash flows. We maintain a revolving credit facility to fund our short and long-term capital requirements including acquisitions and share repurchase efforts.
Investing Activities
Cash provided by investing activities in 2019 was $64.6 million, primarily the result of the $103.8 million in proceeds from the divestiture of the semiconductor business offset by purchases of property, plant and equipment (“PP&E”) of $12.1 million. Cash provided by investing activities in 2019 was also offset by net cash used for the purchases of Freedom and Diagnosys for $21.8 million and $7.0 million, respectively.
Cash used for investing activities in 2018 was $19.7 million, primarily related to purchases of PP&E of $16.3 million.
Cash used for investing activities in 2017 was $129.6 million, primarily related to the acquisitions of CCC and CSC of $114.0 million and purchases of property, plant, and equipment (“PP&E”) of $13.5 million.
Cash used for investing activities in 2016 was $14.6 million, primarily related to purchases of PP&E of $13.0 million.
Cash used for investing activities in 2015 was $73.6 million. The acquisition of Armstrong used approximately $52.3 million of cash in 2015 and purchases of PP&E used $18.6$13.5 million.
Our expectation for 20182020 is that we will invest between $24.0$22 million and $28.0$25 million for PP&E. Future requirements for PP&E depend on numerous factors, including expansion of existing product lines and introduction of new products. Management believes that our cash flow from operations and current borrowing arrangements will provide for these capital expenditures. We expect to continue to evaluate acquisition opportunities in the future.
Financing Activities
Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.
The Company's FourthFifth Amended and Restated Credit Agreement (the “Original Facility”“Agreement”) providedprovides for a $350$500 million revolving credit line with the option to increase the line by up to $150 million. The maturity date of the loans under the Original FacilityAgreement is February 16, 2023. At December 31, 2019, there was September 26, 2019.$188.0 million outstanding on the revolving credit facility and there remains $310.9 million available, net of outstanding letters of credit. The credit facility allocates up to $20 million of the $500 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At December 31, 2017,2019, outstanding letters of credit totaled $1.1 million.
On January 13, 2016, the Company amended the Original Facility to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.53.75 to 1, increasing to 4.04.50 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company paid interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.375% and 2.25% based upon the Company’s leverage ratio. The Company paid a commitment fee to the Lenders in an amount equal to between 0.175% and 0.35% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The Company was required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement.
On February 16, 2018, the Company modified and extended the Original Facility by entering into the Fifth Amended and Restated Credit Agreement (the "Agreement"), which provides for a $500 million revolving credit line with the option to increase the line by up to $150 million. A new lender was added to the facility as well. The outstanding balances in the Original Facility were rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February 16, 2023.
Covenants in the Agreement have been modified to where the maximum permitted leverage ratio is 3.75 to 1 beginning with quarters ended on or after December 31, 2017. However, the Company may elect to exercise its right to increase this ratio to 4.50 to 1 or up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations. The Company is in compliance with its financial covenant at December 31, 2019. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company'sCompany’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between 0.10% and 0.20% ofon the undrawn portion of the credit facility, based upon the Company'sCompany’s leverage ratio. The Company’s leverage ratio was 2.91 to 1 at December 31, 2017. The Company is in compliance with all financial and other covenants at December 31, 2017. The requirement to maintain a minimum interest coverage ratio has been eliminated.
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
The primary financing activities in 20172019 related to the repurchase of approximately 1,851,000 shares at an aggregate cost of $50.8 million under our share purchase program, coupled with net borrowings frompayments on our senior credit facility of $126.0 million and $32.4 million in share repurchases under our original Buyback Program, as further described below, using cash generated from operations.$39.0 million. The primary financing activities in 20162018 related to net repayments on our senior facility of $19.0 million and $17.6 million in share repurchases under our original Buyback Program, using cash generated from operations.The primary financing activities in 2015 relate to borrowings on our senior credit facility to fund the acquisition of Armstrong and voluntary principal payments against our outstanding balance on the senior facility. We borrowed $50.0 million to fund the acquisition of Armstrong. During 2015, we made principal payments of $65.0 million on the senior credit facility, primarily using cash generated by operations.$35.0 million.
The Company’s cash needs for working capital, debt service, and capital equipment, and acquisition opportunities during 20182020 is expected to be met by cash flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the “Buyback Program”). The Buyback Program allowed the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased approximately 1,675,000 shares and has completed that program. On December 12, 2017, the Company’s Board of Directors authorized an additional repurchase of up to $50 million of common stock. No amounts have been repurchased under the new program as of December 31, 2017.
DIVIDENDS
Management believes that it should retain the capital generated from operating activities for investment in advancing technologies, acquisitions and debt retirement. Accordingly, there are no plans to institute a cash dividend program.
BACKLOG
At December 31, 2017, the Company’s2019, our consolidated backlog was approximately $393.7 million compared with approximately $258.0$359.6 million. At December 31, 2018, our backlog was $415.5 million. Excluding backlog related to the divested semiconductor business, our backlog was $403.3 million at December 31, 2016.2018. Backlog in the Aerospace segment was $275.8 million at December 31, 2019, of which $249.6 million is expected to be recognized as revenue in 2020. Backlog in the Test Systems segment was $83.8 million at December 31, 2019, of which $51.4 million is expected to be recognized as revenue of in 2020.
RELATED-PARTY TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated herein by reference to the information included in the Company’s 20182020 Proxy Statement which will be filed with the Commission within 120 days after the end of the Company’s 20172019 fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Financial Statements at Item 8 of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to fluctuation in Canadian and Euroforeign currency exchange rates to the U.S. dollar. Over 90%dollar, primarily in Canadian dollars and Euros currency. The impact of transactions denominated in any other foreign currency is insignificant. Approximately 89% of the Company’s consolidated sales are transacted in U.S. dollars. Net assets held in or measured in Canadian dollars amounted to $14.6$23.6 million at December 31, 2017. Annual disbursements transacted in Canadian dollars were approximately $8.4 million in 2017. A 10% change in the value of the U.S. dollar versus the Canadian dollar would have had a $0.2 million impact to 2017 net income; however it could be significant in the future.2019. Net assets held in or measured in Euros amounted to $32.8$40.8 million at December 31, 2017. Disbursements transacted2019.
Risk due to fluctuation in Eurosforeign exchange rates to net income was insignificant in 2017 were approximately $33.7 million. A 10% change in the value of the U.S. dollar versus the Euros would have had a $0.8 million impact to 2017 net income;2019; however it could be significant in the future. Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $262.0$188.0 million at December 31, 2017.2019. A change of 1% in interest rates of all variable rate debt would impact annual net income by approximately $2.6$1.9 million, before income taxes.
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Astronics Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Astronics Corporation (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively(2)(collectively referred to as the "consolidated“consolidated financial statements"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with USU.S. generally accepted accounting principles.
We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2018March 2, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12, effective January 1, 2018. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as a result of the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective January 1, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Valuation of Goodwill |
Description of the Matter | | As of December 31, 2019, the Company’s goodwill balance was $145 million. As discussed in Notes 1 and 7 of the consolidated financial statements, the Company tests goodwill for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For each reporting unit, the Company performed a quantitative test using the discounted cash flow method to estimate fair value. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates and the weighted-average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill impairment is measured as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
Auditing management’s assumptions was especially subjective due to the estimation required in determining the fair value of the Company’s reporting units. The fair value estimates for these reporting units were sensitive to the significant assumptions of the revenue growth rate and the weighted-average cost of capital, which are affected by expectations about future market or economic conditions, particularly those in the aerospace industry.
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| | | | | | | | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment test process, including the determination of the underlying significant assumptions described above, and the completeness and accuracy of the impairment analysis.
To test the estimated fair value of the Company’s reporting units, we performed audit procedures with the assistance of our valuation professionals that included, among others, assessing the methodology used, testing the significant assumptions discussed above and testing the underlying data used in the impairment analysis. We compared the significant assumptions used by management to current industry and economic trends, historical trends of the Company, and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved our valuation professionals to assist in our evaluation of the weighted average cost of capital used in the fair value estimates. In addition, we tested the reconciliation of the fair value of the Company’s reporting units to the market capitalization of the Company as of the annual impairment testing date.
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| | | | | | | | |
| | Revenue Recognition |
Description of the Matter | | For the year ended December 31, 2019, the Company’s revenues totaled $772.7 million. As discussed in Note 2 to the consolidated financial statements, some of the Company’s contracts with customers contain multiple performance obligations. The majority of the Company’s revenue from contracts with customers is recognized at a point in time when the customer obtains control of the product, which is generally upon delivery and acceptance by the customer. For contracts with customers in which the Company satisfies its promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations.
Auditing management’s evaluation of contracts with customers was especially challenging due to the effort required to analyze the terms and conditions of the Company’s various customer contracts given that such terms and conditions are nonstandard. This included the identification and determination of the performance obligations and the timing of revenue recognition. |
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s revenue recognition process. For example, we tested controls over management’s review of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time. We also tested management’s centralized monitoring control over completeness of the contract reviews and appropriateness of the accounting conclusions.
We performed procedures to test the identification and determination of the performance obligations and the timing of revenue recognition which included reading a sample of executed contracts and purchase orders to understand the contract, performing an independent assessment of the identification of distinct performance obligations and the appropriate timing of revenue recognition, and comparing our assessment to that of management. We tested the completeness and accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1992.
Buffalo, New York
February 28, 2018March 2, 2020
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172019 based upon the framework in Internal Control – Integrated Framework originally issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2017.
2019.
We completed acquisitions in 2017,2019, which were excluded from our management’s report on internal control over financial reporting as of December 31, 2017.2019. We acquired Astronics Custom Control Concepts,Freedom Communication Technologies, Inc. on April 3, 2017July 1, 2019 and Astronics Connectivitythe primary operating subsidiaries from Diagnosys Test Systems and Certification CorporationLimited, on December 1, 2017.October 4, 2019. These acquisitions were included in our 20172019 consolidated financial statements and constituted $127.9$55.8 million and $114.4$33.6 million of total and net assets, respectively, as of December 31, 20172019 and $15.5$12.9 million and ($6.9)2.1) million of sales and net loss,income, respectively, for the year then ended.
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
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By: | | /s/ Peter J. Gundermann | | March 2, 2020 | |
| | Peter J. Gundermann | | | |
| | President & Chief Executive Officer | | | |
| | (Principal Executive Officer) | | | |
| | | | | |
By: | | /s/ Peter J. Gundermann | | February 28, 2018 | |
| | Peter J. Gundermann | | | |
| | President & Chief Executive Officer | | | |
| | (Principal Executive Officer) | | | |
| | | | |
| | /s/ David C. Burney | | February 28, 2018March 2, 2020 | |
| | David C. Burney | | | |
| | Executive Vice President and Chief Financial Officer | | | |
| | (Principal Financial Officer) | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Astronics Corporation
Opinion on Internal Control overOver Financial Reporting
We have audited Astronics Corporation’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Astronics Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control overOver Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Astronics Custom Control ConceptsFreedom Communication Technologies, Inc. (“FCT”) and Astronics Connectivitythe primary operating subsidiaries of Diagnosys Test Systems and Certification Corporation,Limited (“Diagnosys”), which are included in the 20172019 consolidated financial statements of the Company and constituted $127.9 millionapproximately 7% and $114.4 million10% of total and net assets, respectively, as of December 31, 20172019 and $15.5 millionapproximately 2% and ($6.9) million(4)% of revenuessales and net loss,income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Astronics Custom Control Concepts Inc.FCT and Astronics Connectivity Systems and Certification Corporation.Diagnosys.
We also have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated balance sheets of the Company as of December 31, 20172019 and 2016,2018, the related consolidated statementstatements of operations, comprehensive income, shareholders’ equity and cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 28, 2018March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Buffalo, New York
February 28, 2018March 2, 2020
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended December 31, | | Year Ended December 31, | |
(In thousands, except per share data) | 2017 | | 2016 | | 2015 | (In thousands, except per share data) | 2019 | | 2018 | | 2017 |
Sales | $ | 624,464 |
| | $ | 633,123 |
| | $ | 692,279 |
| Sales | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
Cost of Products Sold | 487,351 |
| | 473,656 |
| | 504,337 |
| Cost of Products Sold | 616,560 | | | 622,560 | | | 487,351 | |
Gross Profit | 137,113 |
| | 159,467 |
| | 187,942 |
| Gross Profit | 156,142 | | | 180,696 | | | 137,113 | |
Selling, General and Administrative Expenses | | Selling, General and Administrative Expenses | 143,358 | | | 117,033 | | | 88,775 | |
Impairment Loss | 16,237 |
| | — |
| | — |
| Impairment Loss | 11,083 | | | — | | | 16,237 | |
Selling, General and Administrative Expenses | 90,516 |
| | 86,328 |
| | 89,141 |
| |
Income from Operations | 30,360 |
| | 73,139 |
| | 98,801 |
| Income from Operations | 1,701 | | | 63,663 | | | 32,101 | |
Net Gain on Sale of Businesses | | Net Gain on Sale of Businesses | 78,801 | | | — | | | — | |
Other Expense, Net of Other Income | | Other Expense, Net of Other Income | 6,058 | | | 1,671 | | | 1,741 | |
Interest Expense, Net of Interest Income | 5,369 |
| | 4,354 |
| | 4,751 |
| Interest Expense, Net of Interest Income | 6,141 | | | 9,710 | | | 5,369 | |
Income Before Income Taxes | 24,991 |
| | 68,785 |
| | 94,050 |
| Income Before Income Taxes | 68,303 | | | 52,282 | | | 24,991 | |
Provision for Income Taxes | 5,312 |
| | 20,361 |
| | 27,076 |
| Provision for Income Taxes | 16,286 | | | 5,479 | | | 5,312 | |
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
| Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | |
Basic Earnings Per Share | $ | 0.69 |
| | $ | 1.66 |
| | $ | 2.29 |
| Basic Earnings Per Share | $ | 1.62 | | | $ | 1.45 | | | $ | 0.60 | |
Diluted Earnings Per Share | $ | 0.67 |
| | $ | 1.61 |
| | $ | 2.22 |
| Diluted Earnings Per Share | $ | 1.60 | | | $ | 1.41 | | | $ | 0.58 | |
See notes to consolidated financial statements.
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | Year Ended December 31, | | Year Ended December 31, | |
(In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
| Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | |
Other Comprehensive Income (Loss): | | | | | | Other Comprehensive Income (Loss): | |
Foreign Currency Translation Adjustments | 4,132 |
| | (626 | ) | | (4,617 | ) | Foreign Currency Translation Adjustments | 114 | | | (2,691) | | | 4,132 | |
Retirement Liability Adjustment – Net of Tax | (1,990 | ) | | 196 |
| | 1,502 |
| Retirement Liability Adjustment – Net of Tax | (2,413) | | | 4,087 | | | (1,990) | |
Other Comprehensive Income (Loss) | 2,142 |
| | (430 | ) | | (3,115 | ) | Other Comprehensive Income (Loss) | (2,299) | | | 1,396 | | | 2,142 | |
Comprehensive Income | $ | 21,821 |
| | $ | 47,994 |
| | $ | 63,859 |
| Comprehensive Income | $ | 49,718 | | | $ | 48,199 | | | $ | 21,821 | |
See notes to consolidated financial statements.
ASTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | December 31, | | December 31, | |
(In thousands, except share and per share data) | 2017 | | 2016 | (In thousands, except share and per share data) | 2019 | | 2018 |
ASSETS | | | | ASSETS | | | |
Current Assets: | | | | Current Assets: | |
Cash and Cash Equivalents | $ | 17,914 |
| | $ | 17,901 |
| Cash and Cash Equivalents | $ | 31,906 | | | $ | 16,622 | |
Accounts Receivable, Net of Allowance for Doubtful Accounts | 132,633 |
| | 109,415 |
| Accounts Receivable, Net of Allowance for Doubtful Accounts | 147,998 | | | 182,308 | |
Inventories | 150,196 |
| | 116,597 |
| Inventories | 145,787 | | | 138,685 | |
Prepaid Expenses and Other Current Assets | 14,586 |
| | 11,160 |
| Prepaid Expenses and Other Current Assets | 15,853 | | | 17,198 | |
Assets Held for Sale | | Assets Held for Sale | 1,537 | | | 19,358 | |
Total Current Assets | 315,329 |
| | 255,073 |
| Total Current Assets | 343,081 | | | 374,171 | |
Property, Plant and Equipment, at Cost: | | | | |
Land | 11,237 |
| | 11,112 |
| |
Buildings and Improvements | 81,872 |
| | 79,191 |
| |
Machinery and Equipment | 105,827 |
| | 93,683 |
| |
Construction in Progress | 9,761 |
| | 8,182 |
| |
| 208,697 |
| | 192,168 |
| |
Less Accumulated Depreciation | 82,867 |
| | 69,356 |
| |
Net Property, Plant and Equipment | 125,830 |
| | 122,812 |
| |
Property, Plant and Equipment, Net of Accumulated Depreciation | | Property, Plant and Equipment, Net of Accumulated Depreciation | 112,499 | | | 120,862 | |
Operating Right-of-Use Assets | | Operating Right-of-Use Assets | 23,602 | | | — | |
Other Assets | 15,659 |
| | 13,149 |
| Other Assets | 31,271 | | | 21,272 | |
Intangible Assets, Net of Accumulated Amortization | 153,493 |
| | 98,103 |
| Intangible Assets, Net of Accumulated Amortization | 127,293 | | | 133,383 | |
Goodwill | 125,645 |
| | 115,207 |
| Goodwill | 144,970 | | | 124,952 | |
Total Assets | $ | 735,956 |
| | $ | 604,344 |
| Total Assets | $ | 782,716 | | | $ | 774,640 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities: | | | | Current Liabilities: | |
Current Maturities of Long-term Debt | $ | 2,689 |
| | $ | 2,636 |
| Current Maturities of Long-term Debt | $ | 224 | | | $ | 1,870 | |
Accounts Payable | 41,846 |
| | 25,070 |
| Accounts Payable | 35,842 | | | 50,664 | |
Accrued Payroll and Employee Benefits | 24,890 |
| | 24,743 |
| Accrued Payroll and Employee Benefits | 22,485 | | | 31,732 | |
Accrued Income Taxes | 261 |
| | 62 |
| Accrued Income Taxes | 1,080 | | | 312 | |
Current Operating Lease Liabilities | | Current Operating Lease Liabilities | 4,517 | | | — | |
Other Accrued Expenses | 13,598 |
| | 10,881 |
| Other Accrued Expenses | 25,132 | | | 15,728 | |
Customer Advanced Payments and Deferred Revenue | 19,607 |
| | 23,168 |
| Customer Advanced Payments and Deferred Revenue | 31,360 | | | 26,880 | |
Liabilities Held for Sale | | Liabilities Held for Sale | — | | | 906 | |
Total Current Liabilities | 102,891 |
| | 86,560 |
| Total Current Liabilities | 120,640 | | | 128,092 | |
Long-term Debt | 269,078 |
| | 145,484 |
| Long-term Debt | 188,000 | | | 232,112 | |
Supplemental Retirement Plan and Other Liabilities for Pension Benefits | 26,030 |
| | 22,140 |
| Supplemental Retirement Plan and Other Liabilities for Pension Benefits | 27,247 | | | 22,689 | |
Long-term Operating Lease Liabilities | | Long-term Operating Lease Liabilities | 21,039 | | | — | |
Other Liabilities | 2,909 |
| | 1,414 |
| Other Liabilities | 33,011 | | | 1,923 | |
Deferred Income Taxes | 5,121 |
| | 11,297 |
| Deferred Income Taxes | 3,922 | | | 3,199 | |
Total Liabilities | 406,029 |
| | 266,895 |
| Total Liabilities | 393,859 | | | 388,015 | |
Shareholders’ Equity: | | | | Shareholders’ Equity: | | | |
Common Stock, $.01 par value, Authorized 40,000,000 Shares 22,860,742 Shares Issued and 21,186,028 Outstanding at December 31, 2017 21,955,414 Shares Issued and 21,432,282 Outstanding at December 31, 2016 | 229 |
| | 220 |
| |
Convertible Class B Stock, $.01 par value, Authorized 15,000,000 Shares 6,852,309 Shares Issued and Outstanding at December 31, 2017 7,665,437 Shares Issued and Outstanding at December 31, 2016 | 68 |
| | 77 |
| |
Common Stock, $.01 par value, Authorized 40,000,000 Shares 26,874,223 Shares Issued and 23,348,205 Outstanding at December 31, 2019 25,978,037 Shares Issued and 24,303,323 Outstanding at December 31, 2018 | | Common Stock, $.01 par value, Authorized 40,000,000 Shares 26,874,223 Shares Issued and 23,348,205 Outstanding at December 31, 2019 25,978,037 Shares Issued and 24,303,323 Outstanding at December 31, 2018 | 269 | | | 260 | |
Convertible Class B Stock, $.01 par value, Authorized 15,000,000 Shares 7,650,382 Shares Issued and Outstanding at December 31, 2019 8,289,794 Shares Issued and Outstanding at December 31, 2018 | | Convertible Class B Stock, $.01 par value, Authorized 15,000,000 Shares 7,650,382 Shares Issued and Outstanding at December 31, 2019 8,289,794 Shares Issued and Outstanding at December 31, 2018 | 76 | | | 83 | |
Additional Paid-in Capital | 67,791 |
| | 64,752 |
| Additional Paid-in Capital | 76,340 | | | 73,044 | |
Accumulated Other Comprehensive Loss | (13,352 | ) | | (15,494 | ) | Accumulated Other Comprehensive Loss | (15,628) | | | (13,329) | |
Retained Earnings | 325,191 |
| | 305,512 |
| Retained Earnings | 428,584 | | | 376,567 | |
Treasury Stock; 1,674,714 Shares at December 31, 2017, 532,132 Shares at December 31, 2016 | (50,000 | ) | | (17,618 | ) | |
Treasury Stock; 3,526,018 Shares at December 31, 2019, 1,674,714 Shares at December 31, 2018 | | Treasury Stock; 3,526,018 Shares at December 31, 2019, 1,674,714 Shares at December 31, 2018 | (100,784) | | | (50,000) | |
Total Shareholders’ Equity | 329,927 |
| | 337,449 |
| Total Shareholders’ Equity | 388,857 | | | 386,625 | |
Total Liabilities and Shareholders’ Equity | $ | 735,956 |
| | $ | 604,344 |
| Total Liabilities and Shareholders’ Equity | 782,716 | | | 774,640 | |
See notes to consolidated financial statements.
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended December 31, | | Year Ended December 31, | |
(In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Cash Flows from Operating Activities | | | | | | Cash Flows from Operating Activities | | | | | |
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
| Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | |
Adjustments to Reconcile Net Income to Cash Provided By Operating Activities, Excluding the Effects of Acquisitions: | | | | | | |
Adjustments to Reconcile Net Income to Cash Provided By Operating Activities, Excluding the Effects of Acquisitions and Divestitures: | | Adjustments to Reconcile Net Income to Cash Provided By Operating Activities, Excluding the Effects of Acquisitions and Divestitures: | |
Non-cash Items: | | Non-cash Items: | |
Depreciation and Amortization | | Depreciation and Amortization | 33,049 | | | 35,032 | | | 27,063 | |
Provision for Losses on Inventory and Receivables | | Provision for Losses on Inventory and Receivables | 16,947 | | | 3,271 | | | 2,973 | |
Equity-based Compensation Expense | | Equity-based Compensation Expense | 3,843 | | | 3,098 | | | 2,598 | |
Deferred Tax Benefit | | Deferred Tax Benefit | (14,385) | | | (2,680) | | | (5,494) | |
Operating Lease Expense | | Operating Lease Expense | 4,208 | | | — | | | — | |
Net Gain on Sale of Businesses | | Net Gain on Sale of Businesses | (78,801) | | | — | | | — | |
Impairment Loss | 16,237 |
| | — |
| | — |
| Impairment Loss | 11,083 | | | — | | | 16,237 | |
Depreciation and Amortization | 27,063 |
| | 25,790 |
| | 25,309 |
| |
Provision for Non-Cash Losses on Inventory and Receivables | 2,973 |
| | 2,404 |
| | 3,187 |
| |
Stock Compensation Expense | 2,598 |
| | 2,281 |
| | 2,274 |
| |
Deferred Tax Benefit | (5,494 | ) | | (4,756 | ) | | (252 | ) | |
Non-cash Adjustment to Contingent Consideration | — |
| | — |
| | (1,751 | ) | |
Accrued Litigation Claim | | Accrued Litigation Claim | 19,619 | | | 1,000 | | | — | |
Equity Investment Other Than Temporary Impairment | | Equity Investment Other Than Temporary Impairment | 5,000 | | | — | | | — | |
Restructuring Activities | | Restructuring Activities | 6,539 | | | — | | | — | |
Other | (937 | ) | | 165 |
| | (294 | ) | Other | 1,610 | | | (668) | | | (937) | |
Cash Flows from Changes in Operating Assets and Liabilities, net of the Effects from Acquisitions of Businesses: | | | | | | |
Cash Flows from Changes in Operating Assets and Liabilities, net of the Effects from Acquisitions and Divestitures of Businesses: | | Cash Flows from Changes in Operating Assets and Liabilities, net of the Effects from Acquisitions and Divestitures of Businesses: | |
Accounts Receivable | (9,844 | ) | | (14,622 | ) | | (729 | ) | Accounts Receivable | 34,083 | | | (47,291) | | | (9,844) | |
Inventories | (18,116 | ) | | (2,671 | ) | | (2,537 | ) | Inventories | (12,711) | | | (14,695) | | | (18,116) | |
Prepaid Expenses and Other Current Assets | (2,132 | ) | | 108 |
| | (799 | ) | Prepaid Expenses and Other Current Assets | (1,160) | | | 464 | | | (2,132) | |
Accounts Payable | 10,439 |
| | (2,000 | ) | | (2,168 | ) | Accounts Payable | (16,617) | | | 9,171 | | | 10,439 | |
Accrued Expenses | (702 | ) | | (174 | ) | | 3,738 |
| Accrued Expenses | (10,737) | | | 8,177 | | | (702) | |
Income Taxes Payable | (376 | ) | | 7,926 |
| | (9,266 | ) | Income Taxes Payable | 3,371 | | | (4,460) | | | (376) | |
Customer Advanced Payments and Deferred Revenue | (4,918 | ) | | (15,539 | ) | | (7,485 | ) | Customer Advanced Payments and Deferred Revenue | (11,919) | | | 15,735 | | | (4,918) | |
Operating Lease Liabilities | | Operating Lease Liabilities | (3,840) | | | — | | | — | |
Supplemental Retirement Plan and Other Liabilities | 1,313 |
| | 1,518 |
| | 2,300 |
| Supplemental Retirement Plan and Other Liabilities | 1,490 | | | 1,924 | | | 1,313 | |
Cash Provided By Operating Activities | 37,783 |
| | 48,854 |
| | 78,501 |
| |
Cash Flows from Operating Activities | | Cash Flows from Operating Activities | 42,689 | | | 54,881 | | | 37,783 | |
Cash Flows from Investing Activities | | | | | | Cash Flows from Investing Activities | | | | | |
Acquisitions of Business, Net of Cash Acquired | (114,039 | ) | | — |
| | (52,276 | ) | |
Acquisitions of Businesses, Net of Cash Acquired | | Acquisitions of Businesses, Net of Cash Acquired | (28,907) | | | — | | | (114,039) | |
Proceeds from Sale of Businesses | | Proceeds from Sale of Businesses | 104,877 | | | — | | | — | |
Capital Expenditures | (13,478 | ) | | (13,037 | ) | | (18,641 | ) | Capital Expenditures | (12,083) | | | (16,317) | | | (13,478) | |
Other | (2,044 | ) | | (1,585 | ) | | (2,669 | ) | |
Cash Used For Investing Activities | (129,561 | ) | | (14,622 | ) | | (73,586 | ) | |
Other Investing Activities | | Other Investing Activities | 743 | | | (3,350) | | | (2,044) | |
Cash Flows from Investing Activities | | Cash Flows from Investing Activities | 64,630 | | | (19,667) | | | (129,561) | |
Cash Flows from Financing Activities | | | | | | Cash Flows from Financing Activities | | | | | |
Proceeds From Long-term Debt | 147,086 |
| | 20,000 |
| | 55,000 |
| Proceeds From Long-term Debt | 117,000 | | | 35,015 | | | 147,086 | |
Principal Payments on Long-term Debt | (23,720 | ) | | (41,835 | ) | | (67,694 | ) | Principal Payments on Long-term Debt | (156,107) | | | (72,834) | | | (23,720) | |
Purchase of Outstanding Shares for Treasury | (32,382 | ) | | (17,618 | ) | | — |
| Purchase of Outstanding Shares for Treasury | (50,784) | | | — | | | (32,382) | |
Proceeds from Exercise of Stock Options | 441 |
| | 3,813 |
| | 2,996 |
| |
Excess Tax Benefit from Exercise of Stock Options | — |
| | 834 |
| | 2,973 |
| |
Cash Provided by (Used for) Financing Activities | 91,425 |
| | (34,806 | ) | | (6,725 | ) | |
Debt Acquisition Costs | | Debt Acquisition Costs | — | | | (516) | | | — | |
Stock Options Activity | | Stock Options Activity | (545) | | | 2,201 | | | 441 | |
Finance Lease Principal Payments | | Finance Lease Principal Payments | (1,746) | | | — | | | — | |
Cash Flows From Financing Activities | | Cash Flows From Financing Activities | (92,182) | | | (36,134) | | | 91,425 | |
Effect of Exchange Rates on Cash | 366 |
| | (86 | ) | | (826 | ) | Effect of Exchange Rates on Cash | 147 | | | (372) | | | 366 | |
Increase (Decrease) in Cash and Cash Equivalents | 13 |
| | (660 | ) | | (2,636 | ) | Increase (Decrease) in Cash and Cash Equivalents | 15,284 | | | (1,292) | | | 13 | |
Cash and Cash Equivalents at Beginning of Year | 17,901 |
| | 18,561 |
| | 21,197 |
| Cash and Cash Equivalents at Beginning of Year | 16,622 | | | 17,914 | | | 17,901 | |
Cash and Cash Equivalents at End of Year | $ | 17,914 |
| | $ | 17,901 |
| | $ | 18,561 |
| Cash and Cash Equivalents at End of Year | $ | 31,906 | | | $ | 16,622 | | | $ | 17,914 | |
Supplemental Cash Flow Information: | | | | | | Supplemental Cash Flow Information: | | | | | |
Interest Paid | $ | 4,775 |
| | $ | 4,536 |
| | $ | 4,734 |
| Interest Paid | $ | 5,707 | | | $ | 9,710 | | | $ | 4,775 | |
Income Taxes Paid, Net of Refunds | $ | 10,777 |
| | $ | 15,898 |
| | $ | 32,990 |
| Income Taxes Paid, Net of Refunds | 27,343 | | | 12,218 | | | 10,777 | |
See notes to consolidated financial statements.
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Year Ended December 31, | | Year Ended December 31, | |
(In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Common Stock | | | | | | Common Stock | | | | | |
Beginning of Year | $ | 220 |
| | $ | 194 |
| | $ | 166 |
| Beginning of Year | $ | 260 | | | $ | 229 | | | $ | 220 | |
Exercise of Stock Options and Stock Compensation Expense – Net of Taxes | — |
| | 1 |
| | 2 |
| |
Net Exercise of Stock Options | | Net Exercise of Stock Options | 1 | | | 1 | | | — | |
Class B Stock Converted to Common Stock | 9 |
| | 25 |
| | 26 |
| Class B Stock Converted to Common Stock | 8 | | | 30 | | | 9 | |
End of Year | $ | 229 |
| | $ | 220 |
| | $ | 194 |
| End of Year | $ | 269 | | | $ | 260 | | | $ | 229 | |
Convertible Class B Stock | | | | | | Convertible Class B Stock | | | | | |
Beginning of Year | $ | 77 |
| | $ | 100 |
| | $ | 124 |
| Beginning of Year | $ | 83 | | | $ | 111 | | | $ | 120 | |
Exercise of Stock Options and Stock Compensation Expense – Net of Taxes | — |
| | 2 |
| | 2 |
| |
Net Exercise of Stock Options | | Net Exercise of Stock Options | 1 | | | 2 | | | — | |
Class B Stock Converted to Common Stock | (9 | ) | | (25 | ) | | (26 | ) | Class B Stock Converted to Common Stock | (8) | | | (30) | | | (9) | |
End of Year | $ | 68 |
| | $ | 77 |
| | $ | 100 |
| End of Year | $ | 76 | | | $ | 83 | | | $ | 111 | |
Additional Paid in Capital | | | | | | Additional Paid in Capital | | | | | |
Beginning of Year | $ | 64,752 |
| | $ | 57,827 |
| | $ | 49,588 |
| Beginning of Year | $ | 73,044 | | | $ | 67,748 | | | $ | 64,709 | |
Exercise of Stock Options and Stock Compensation Expense - Net of Taxes | 3,039 |
| | 6,925 |
| | 8,239 |
| |
Net Exercise of Stock Options and Equity-based Compensation Expense | | Net Exercise of Stock Options and Equity-based Compensation Expense | 3,296 | | | 5,296 | | | 3,039 | |
End of Year | $ | 67,791 |
| | $ | 64,752 |
| | $ | 57,827 |
| End of Year | $ | 76,340 | | | $ | 73,044 | | | $ | 67,748 | |
Accumulated Other Comprehensive Loss | | | | | | Accumulated Other Comprehensive Loss | | | | | |
Beginning of Year | $ | (15,494 | ) | | $ | (15,064 | ) | | $ | (11,949 | ) | Beginning of Year | $ | (13,329) | | | $ | (13,352) | | | $ | (15,494) | |
Adoption of ASU 2018-02 | | Adoption of ASU 2018-02 | — | | | (1,373) | | | — | |
Foreign Currency Translation Adjustments | 4,132 |
| | (626 | ) | | (4,617 | ) | Foreign Currency Translation Adjustments | 114 | | | (2,691) | | | 4,132 | |
Retirement Liability Adjustment – Net of Taxes | (1,990 | ) | | 196 |
| | 1,502 |
| Retirement Liability Adjustment – Net of Taxes | (2,413) | | | 4,087 | | | (1,990) | |
End of Year | $ | (13,352 | ) | | $ | (15,494 | ) | | $ | (15,064 | ) | End of Year | $ | (15,628) | | | $ | (13,329) | | | $ | (13,352) | |
Retained Earnings | | | | | | Retained Earnings | | | | | |
Beginning of Year | $ | 305,512 |
| | $ | 257,168 |
| | $ | 190,248 |
| Beginning of Year | $ | 376,567 | | | $ | 325,191 | | | $ | 305,512 | |
Adoption of ASU 2014-09 | | Adoption of ASU 2014-09 | — | | | 3,268 | | | — | |
Adoption of ASU 2018-02 | | Adoption of ASU 2018-02 | — | | | 1,373 | | | — | |
Net income | 19,679 |
| | 48,424 |
| | 66,974 |
| Net income | 52,017 | | | 46,803 | | | 19,679 | |
Cash Paid in Lieu of Fractional Shares from Stock Distribution | — |
| | (80 | ) | | (54 | ) | Cash Paid in Lieu of Fractional Shares from Stock Distribution | — | | | (68) | | | — | |
End of Year | $ | 325,191 |
| | $ | 305,512 |
| | $ | 257,168 |
| End of Year | $ | 428,584 | | | $ | 376,567 | | | $ | 325,191 | |
Treasury Stock | | | | | | Treasury Stock | | | | | |
Beginning of Year | $ | (17,618 | ) | | $ | — |
| | $ | — |
| Beginning of Year | $ | (50,000) | | | $ | (50,000) | | | $ | (17,618) | |
Purchase of Shares | (32,382 | ) | | (17,618 | ) | | — |
| Purchase of Shares | (50,784) | | | — | | | (32,382) | |
End of Year | $ | (50,000 | ) | | $ | (17,618 | ) | | $ | — |
| End of Year | $ | (100,784) | | | $ | (50,000) | | | $ | (50,000) | |
Total Shareholders’ Equity | $ | 329,927 |
| | $ | 337,449 |
| | $ | 300,225 |
| Total Shareholders’ Equity | $ | 388,857 | | | $ | 386,625 | | | $ | 329,927 | |
See notes to consolidated financial statementsstatements.
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, COUNTINUEDCONTINUED | | | Year Ended December 31, | | Year Ended December 31, | |
(Share data, in thousands) | 2017 | | 2016 | | 2015 | (Share data, in thousands) | 2019 | | 2018 | | 2017 |
Common Stock | | | | | | Common Stock | | | | | |
Beginning of Year | 21,955 |
| | 19,349 |
| | 16,608 |
| Beginning of Year | 25,978 | | | 22,861 | | | 21,955 | |
Exercise of Stock Options | 26 |
| | 151 |
| | 168 |
| |
Issuance of Restricted Stock | | Issuance of Restricted Stock | 18 | | | — | | | — | |
Net Issuance from Exercise of Stock Options | | Net Issuance from Exercise of Stock Options | 63 | | | 166 | | | 26 | |
Class B Stock Converted to Common Stock | 880 |
| | 2,455 |
| | 2,573 |
| Class B Stock Converted to Common Stock | 815 | | | 2,951 | | | 880 | |
End of Year | 22,861 |
| | 21,955 |
| | 19,349 |
| End of Year | 26,874 | | | 25,978 | | | 22,861 | |
Convertible Class B Stock | | | | | | Convertible Class B Stock | | | | | |
Beginning of Year | 7,665 |
| | 10,055 |
| | 12,447 |
| Beginning of Year | 8,290 | | | 11,083 | | | 11,896 | |
Exercise of Stock Options | 67 |
| | 65 |
| | 181 |
| |
Net Issuance from Exercise of Stock Options | | Net Issuance from Exercise of Stock Options | 175 | | | 158 | | | 67 | |
Class B Stock Converted to Common Stock | (880 | ) | | (2,455 | ) | | (2,573 | ) | Class B Stock Converted to Common Stock | (815) | | | (2,951) | | | (880) | |
End of Year | 6,852 |
| | 7,665 |
| | 10,055 |
| End of Year | 7,650 | | | 8,290 | | | 11,083 | |
Treasury Stock | | | | | | Treasury Stock | | | | | |
Beginning of Year | 523 |
| | — |
| | — |
| Beginning of Year | 1,675 | | | 1,675 | | | 523 | |
Purchase of Shares | 1,152 |
| | 523 |
| | — |
| Purchase of Shares | 1,851 | | | — | | | 1,152 | |
End of Year | 1,675 |
| | 523 |
| | — |
| End of Year | 3,526 | | | 1,675 | | | 1,675 | |
See notes to consolidated financial statementsstatements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
Description of the Business
Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense electronics and semiconductorelectronics industries. Our products and services include advanced, high-performance electrical power generation, distribution and motion systems, lighting and safety systems, avionics products, systems and certification, aircraft structures and automated test systems.
We have principal operations in the United States (“U.S.”), Canada, France and France.the United Kingdom (“UK”), as well as engineering offices in the Ukraine and India. We design and build our products through our wholly owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Armstrong Aerospace, Inc. (“Armstrong”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”); Astronics Custom Control Concepts Inc. (“CCC”); Astronics Connectivity Systems and Certification Corp. ("CSC"and subsidiaries (“CSC”); Astronics Custom Control ConceptsDiagnosys Inc. ("CCC"and its affiliates (“Diagnosys”); Astronics DME LLC (“DME”); Freedom Communication Technologies, Inc. (“Freedom”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc. (“Max-Viz”); Peco, Inc. (“Peco”); and PGA Electronic s.a. (“PGA”).
At December 31, 2017, theThe Company has two2 reportable segments, Aerospace and Test Systems. The Aerospace segment designs and manufactures products for the global aerospace and defense industry. Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the semiconductor, aerospace and defense, communications and weaponsmass transit test systems as well as training and simulation devices for both commercial and military applications.
On January 14, 2015,February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The business was not core to the future of the Test Systems segment. The total proceeds received for the sale amounted to $103.8 million, plus certain contingent earn-outs as described in Note 22. The Company recorded a pre-tax gain on the sale of approximately $80.1 million in the first quarter of 2019. The Company recorded income tax expense relating to the gain of $19.7 million.
On July 1, 2019, the Company acquired 100%all of the equityissued and outstanding capital stock of Armstrong for approximately $52.3 million in cash. Armstrong,Freedom Communication Technologies, Inc. Freedom, located in Itasca, Illinois,Kilgore, Texas, is a leading provider of engineering, design and certification solutionsleader in wireless communication testing, primarily for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrongthe civil land mobile radio market. Freedom is included in our AerospaceTest Systems segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially all the assets and certain liabilities of Custom Control Concepts LLC, located in Kent, Washington. CCC is a provider of cabin management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was approximately $10.2$21.8 million, net of $0.5$0.6 million in cash acquired. CCC
On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. The Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million.
On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus contingent purchase consideration (“earn-out”) estimated at a fair value of $2.5 million. Diagnosys is included in our AerospaceTest Systems segment.
On December 1, 2017, Astronics acquired substantially all Diagnosys is a developer and manufacturer of the assetscomprehensive automated test equipment providing test, support, and repair of Telefonix Inc.high value electronics, electro-mechanical, pneumatic and a related company Product Development Technologies, LLC and its subsidiaries, to become CSC, located in Waukegan and Lake Zurich, Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design consultancy services forprinted circuit boards focused on the global aerospace industry. Under themass transit and defense markets. The terms of the Agreement,acquisition allow for a potential earn-out of up to an additional $13.0 million over the total considerationnext three years based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India.
For more information regarding these acquisitions and divestitures see Note 21 and Note 22.
In the fourth quarter of 2019, in an effort to reduce the significant operating losses at our AeroSat business, we initiated a restructuring plan to reduce costs and minimize losses of our AeroSat antenna business. The plan narrows the initiatives for the transaction was approximately $103.8 million, net of $0.2 millionAeroSat business to focus primarily on near-term opportunities pertaining to business jet connectivity. The plan has a downsized manufacturing operation remaining in cash acquired. CSC is included in our Aerospace Segment.New Hampshire, with significantly reduced personnel and operating expenses.
For more information regarding the restructuring plan see Note 23.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
Acquisitions are accounted for under the acquisition method and, accordingly, the operating results for the acquired companies are included in the consolidated statements of operations from the respective dates of acquisition.
For additional information on the acquired businesses, see Note 18.
Revenue Recognition
The vast majority of our sales agreements are for standard products and services, with revenue recognized on the accrual basis at the time of shipment of goods, transfer of title and customer acceptance, where required. There are no significant contracts allowing for right of return. To a limited extent at ATS, certain contracts involve multiple elements (such as equipment and service). Service revenues were not material for the years ended December 31, 2017, 2016 and 2015. The Company recognizes revenue for delivered elements when they have stand-alone value to the customer, they have been accepted by the customer, and for which there are only customary refund or return rights. Arrangement consideration is allocated to the deliverables by use of the relative selling price method. The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated selling price if neither
VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used to establish the price to sell the deliverable on a standalone basis.
For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates the costs are incurred on other than a straight-line basis.
Revenue of approximately $21.0 million, $20.7 million and $17.2 million for the years ended December 31, 2017, 2016 and 2015, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. The Company makes significant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods. For contracts with anticipated losses at completion, a charge is taken against income for the amount of the entire loss in the period in which it is estimated.21.
Cost of Products Sold, Engineering and Development and Selling, General and Administrative Expenses
Cost of products sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead as well as all engineering and developmental costs. The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. These costs are expensed when incurred and included in cost of products sold. Research and development, design and related engineering expenses amounted to $108.9 million in 2019, $114.3 million in 2018 and $95.0 million in 2017, $88.9 million in 2016 and $90.3 million in 2015.2017. Selling, general and administrative (“SG&A”) expenses include costs primarily related to our sales, marketing and administrative departments. Interest expense is shown net of interest income. Interest income was insignificant for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
Shipping and Handling
Shipping and handling costs are expensed as incurred and are included in costs of products sold.
Equity-Based Compensation
The Company accounts for its stock options following Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). This Topic requires all equity-based payments to employees, including grants of employee stock options and restricted stock units (“RSU's”), to be recognized in the statement of earnings based on the grant date fair value of the award. For awards with graded vesting, the Company uses a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense, based on vesting. The Company accounts for forfeitures as they occur.
Under ASC Topic 718, stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options and RSU's granted to outside directors vest six months from the date of grant and options granted to officers and key employees vest with graded vesting over a five-yearfive-year period, 20% each year, from the date of grant. In general, RSU's granted to officers and key employees cliff vest in three years. Equity-based compensation expense is included in selling, general and administrative expenses.
Cash and Cash Equivalents
All highly liquid instruments with a maturity of three months or less at the time of purchase are considered cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are composed of trade and contract receivables recorded at either the invoiced amount or costs in excess of billings, are expected to be collected within one year, and do not bear interest. The Company will recordrecords a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on our knowledge of the business, specific customers, review of the receivables’ aging and a specific identification of accounts where collection is at risk. Account balances are charged against the allowance after all means of collections have been exhausted and recovery is considered remote. The Company typically does not require collateral.
Inventories
We record our inventories at the lower of cost or net realizable value. We determine the cost basis of our inventory on a first-in, first-out or weighted average basis using a standard cost methodology that approximates actual cost. The Company records valuation reserves to provide for excess, slow moving or obsolete inventory. In determining the appropriate reserve, the Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that the Company believes is no longer salable.
The Company may, from time to time, incur costs in excess of the amounts required for existing contracts. If it is determined the costs are probable of recovery from future orders, the precontract costs incurred are capitalized, excluding start-up costs which are expensed as incurred. Capitalized precontract costs are included in Inventories in the accompanying Consolidated Balance Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. Included in inventories at December 31, 2017 are capitalized precontract costs of $7.0 million.
Property, Plant and Equipment
Depreciation of property, plant and equipment (“PP&E”) is computed using the straight-line method for financial reporting purposes and using accelerated methods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 25-40 years; machinery and equipment, 4-10 years. Leased buildings and associated leasehold improvements are amortized over the shorter of the terms of the lease or the estimated useful lives of the assets, with the amortization of such assets included within depreciation expense.
Buildings acquired under capital leases amounted to $3.4 million ($8.2 million, net of $4.8 million of accumulated amortization) at December 31, 2018. The weighted-average interest rate on the building capital lease obligation at December 31, 2018 was 5.3%. See Note 10 for additional lease disclosures as required upon adoption of ASC 842.
The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts and the resulting gain or loss, as well as maintenance and repair expenses, is reflected within operating income. Replacements and improvements are capitalized.
Depreciation expense was approximately $14.1$13.7 million, $14.3$15.0 million and $13.3 million in 2017, 2016 and 2015, respectively.
Buildings acquired under capital leases amounted to $10.3 million ($15.5 million, net of $5.2 million of accumulated amortization) and $10.5 million ($14.3 million, net of $3.8 million accumulated amortization) at December 31, 2017 and 2016, respectively. Future minimum lease payments associated with these capital leases are expected to be $2.7 million in 2018, $2.0$14.1 million in 2019, $2.1 million in 2020, $2.2 million in 20212018 and $0.9 million in 2022.2017, respectively.
Long-Lived Assets
Long-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if future undiscounted cash flows from operations are not expected to be sufficient to recover long-lived assets. The carrying amounts are then reduced to fair value, which is typically determined by using a discounted cash flow model.
See Note 23 for further information regarding the long-lived asset impairment charge in 2019 related to AeroSat. The charge was comprised of PP&E, intangible assets and right-of-use assets.
Assets Held for Sale
Assets held for sale are to be reported at lower of its carrying amount or fair value less cost to sell. Judgment is required in estimating the sales price of assets held for sale and the time required to sell the assets. These estimates are based upon available market data and operating cash flows of the assets held for sale.
As of December 31, 2019, the Company has agreed to sell certain facilities within the Aerospace segment. Accordingly, the property, plant and equipment assets associated with these facilities have been classified as held for sale in the consolidated Balance Sheet at December 31, 2019.
As of December 31, 2018, the Company’s Board of Directors had approved a plan to sell the semiconductor test business within the Test Systems segment. Accordingly, the assets and liabilities associated with these operations have been classified as held for sale in the accompanying consolidated Balance Sheet at December 31, 2018. The carrying value of the disposal group was lower than its fair value, less costs to sell, and accordingly, no impairment loss was required at December 31, 2018.
Goodwill
The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has twelveCompany’s 9 reporting units however only nine reporting units havewith goodwill and were subject to the goodwill impairment test as of the first day of our fourth quarter.
We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or selected reporting units. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative test. We may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units.
Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenuesales growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is
considered impaired and any loss must be measured. We adopted ASU No. 2017-04 on January 1, 2017. Accordingly, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
As a result of this assessment,
See Note 7 for further information regarding the Company recorded angoodwill impairment charge of approximately $16.2 million in the December 31, 2017 consolidated statement of operations2019 associated to the ArmstrongAeroSat reporting unit. The 2018 assessment indicated no impairment loss was incurredto the carrying value of goodwill in the Aerospace segment and is reported on the Impairment Loss lineany of the Consolidated StatementsCompany’s reporting units and 0 impairment charge was recognized. An impairment charge associated with the Armstrong reporting unit was recorded as result of Operations. There were no impairment charges in 2016 or 2015. None of this loss related to goodwill is immediately deductible for tax purposes. The majority of goodwill is expensed over 15 years for tax purposes.the 2017 assessment.
Intangible Assets
Acquired intangibles are generally valued based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangible assets are recorded at fair value and are amortized over their estimated useful lives. Acquired intangible assets with an indefinite life are not amortized, but are reviewed for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the carrying amounts of those assets are below their estimated fair values.
Impairment is tested under ASC Topic 350, Intangibles - Goodwill and Other, as amended by Accounting Standards Update (“ASU”) 2012-2, by first performing2012-2. As the undiscounted cash flows of the AeroSat reporting unit were insufficient to recover the carrying value of the long-lived assets, the Company proceeded to determine the fair value of the intangible assets in AeroSat. The Company concluded that the fair value of the intangible assets was de minimis as a qualitative analysisresult of their nominal projected future cash flows and the Company recorded a full impairment charge of approximately $6.2 million in a manner similarthe December 31, 2019 consolidated statement of operations associated to intangible assets of the testing methodology of goodwill discussed previously.AeroSat reporting unit in conjunction with restructuring activities. The qualitative factors applied under this new provision indicated no0 impairment to the Company’s indefinite lived intangible assets in 2017, 20162018 or 2015.2017.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable and long-term debt. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company does not hold or issue financial instruments for trading purposes. Due to their short-term nature, the carrying values of cash and equivalents, accounts receivable, accounts payable, and notes payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair value due to the variable rate feature of these instruments.
From time to time, the Company makes long-term, strategic equity investments in companies to promote business and strategic objectives. These investments as classified within Other Assets in the Consolidated Balance Sheets. For investments requiring equity method accounting, we recognize our share of the investee’s earnings or losses within Other Expense, Net of Other Income in the Consolidated Statement of Operations. Such amounts were immaterial in the year ended December 31, 2019 and not applicable in 2018 or 2017. For investments not requiring equity method accounting, if the investment has no readily determinable fair value, we have elected the practicability exception of ASU 2016-01, under which the investment is measured at cost, less impairment, plus or minus observable price changes from orderly transactions of an identical or similar investment of the same issuer.
The Company determined there were indicators of impairment over one of its investments in 2019 as a result of the investee’s deteriorating operating performance and limited access to capital. There were no observable price changes for this investment during 2019. We determined that the fair value of this investment was de minimis at December 31, 2019 and we recorded an impairment charge of $5.0 million recorded within Other Expense, Net of Other Income in the accompanying Consolidated Statement Operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenuessales and expenses during the reporting periods in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
The Company accounts for its foreign currency translation in accordance with ASC Topic 830, Foreign Currency Translation. The aggregate transaction loss included in operations was insignificant in 2019 and the gain included in operations was insignificant in 20172018 and 2016, and $1.0 million in 2015.2017.
Dividends
The Company has not0t paid any cash dividends in the three-year period ended December 31, 2017.2019.
Loss Contingencies
Loss contingencies may from time to time arise from situations such as claims and other legal actions. Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. In all other instances, legal fees are expensed as incurred. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. In recording liabilities for probable losses, management is required to make estimates and judgments regarding the amount or range of the probable loss. Management continually assesses the adequacy of estimated loss contingencies and, if necessary, adjusts the amounts recorded as better information becomes known.
Acquisitions
The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (" (“ASC Topic 805"805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations. See Note 1821 regarding the acquisitions in 2017 and 2015.2019.
Newly Adopted and Recent Accounting Pronouncements
In May 2014,Recent Accounting Pronouncements Adopted
| | | | | | | | |
Standard | Description | Financial Statement Effect or Other Significant Matters |
ASU No. 2016-02 Leases (Topic 842) | The standard requires lessees to recognize most leases as assets and liabilities on the balance sheet, but record expenses on the statement of operations in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The standard also requires additional disclosures about leasing arrangements and requires a modified retrospective transition approach for existing leases, whereby the standard will be applied to the earliest year presented. The provisions of the standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. | The Company adopted this guidance as of January 1, 2019 using the cumulative-effect method. The standard requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged. Prior year financial statements were not recast under the new method. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. As of January 1, 2019, operating lease ROU assets of approximately $18.4 million and lease liabilities of approximately $18.5 million were recognized on our balance sheet for our leased office and manufacturing facilities and equipment leases. There was a reclassification to ROU assets of $3.5 million from net PP&E for assets under existing finance leases at the transition date and a reclassification of existing lease liabilities of $6.5 million on our balance sheet for a leased facilities and equipment. The standard did not materially impact the Company's consolidated statements of operations or retained earnings. Refer to Note 19 for additional information.
Date of adoption: Q1 2019 |
Recent Accounting Pronouncements Not Yet Adopted
| | | | | | | | |
Standard | Description | Financial Statement Effect or Other Significant Matters |
ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326) | The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires a Company to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The provisions of the standard are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The amendment requires a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. | This ASU does not have a significant impact on our consolidated financial statements.
Planned date of adoption: Q1 2020 |
ASU No. 2018-13 Fair Value Measurement (Topic 820) | The standard removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. | This ASU does not have a significant impact on our consolidated financial statements, as it only includes changes to disclosure requirements. Planned date of adoption: Q1 2020 |
ASU No. 2018-14 Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20) | The standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. | This ASU does not have a significant impact on our consolidated financial statements, as it only includes changes to disclosure requirements. Planned date of adoption: Q1 2021 |
We consider the FASB issued ASUapplicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.
NOTE 2 — REVENUE
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, ("Topic 606"), that, together with several subsequent updates, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Topic 606 is based was adopted on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also provides for enhanced disclosure requirements surrounding revenue recognition beginning with the reporting period ending March 31,January 1, 2018 and we are currently preparing our responsive disclosures.
Revenue on a significant portion of our contracts is currently recognized at the time of shipment of goods, transfer of title and customer acceptance, as required. Our revenue transactions generally consist of a single performance obligation to transfer promised goods and are not accounted for under industry-specific guidance. We have obtained an understanding of the new standard and currently believe that we will retain much of the same accounting treatment used to recognize revenue under current standards. However, the adoption of this guidance will require us to accelerate the recognition of revenue as compared to current standards, for certain customers, in cases where we produce products unique to those customers; and for which we would have an enforceable right of payment for production completed to date.
We have evaluated the impact of ASU No. 2014-09 on our financial results and will adopt this standard using the modified retrospective method, which requiresrequired the recognition of the cumulative effect of the transition as an adjustment to retained earnings, for open contracts as of January 1, 2018. Based on the application of the changes described above, we expect to recognize a transition adjustment of no more than $10 million, net of tax effects, of $3.3 million.
Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or services. Sales shown on the Company's Consolidated Statements of Operations are from contracts with customers.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 90 days after the performance obligation has been satisfied; or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Taxes collected from customers, which will increase our January 1, 2018 retained earnings. Based on our existing operations, ASU No. 2014-09 is notare subsequently remitted to governmental authorities, are excluded from sales.
The Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer. As of December 31, 2019, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year.
The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Condensed Balance
Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. As of December 31, 2019, the Company does not have material impact to net earningscapitalized fulfillment costs. Capitalized fulfillment costs were $9.6 million as of December 31, 2018. These costs were associated with a contract that is included in the divestiture of the semiconductor business and as such, the balance is included in Assets Held for Sale in the accompanying consolidated balance sheet at December 31, 2018. Amortization of fulfillment costs recognized within Cost of Products Sold was approximately $1.0 million for the year ended December 31, 2018.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Thus, the contract's transaction price is the revenue recognized when or as that performance obligation is satisfied. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations.
Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus margin approach, under which expected costs are forecast to satisfy a performance obligation and then an appropriate margin is added for that distinct good or service. Shipping and handling activities that occur after the customer has obtained control of the good are considered fulfillment activities, not performance obligations.
Some of our contracts offer price discounts or free units after a specified volume has been purchased. The Company evaluates these options to determine whether they provide a material right to the customer, representing a separate performance obligation. If the option provides a material right to the customer, revenue is allocated to these rights and recognized when those future goods or services are transferred, or when the option expires.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In February 2016,most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as new contracts. The effect of modifications has been reflected when identifying the FASB issued ASU No. 2016 - 02, Leases. satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.
The new standardmajority of the Company’s revenue from contracts with customers is effectiverecognized at a point in time, when the customer obtains control of the promised product, which is generally upon delivery and acceptance by the customer. These contracts may provide credits or incentives, which may be accounted for reporting periods beginning after December 15, 2018. Early adoptionas variable consideration. Variable consideration is permitted. The standard will require lesseesestimated at the most likely amount to report most leases as assets and liabilities onpredict the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, wherebyconsideration to which the new rulesCompany will be appliedentitled, and only to the earliest year presented. extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal when estimating the amount of revenue to recognize. Variable consideration is treated as a change to the sales transaction price and based on an assessment of all information (i.e., historical, current and forecasted) that is reasonably available to the Company, and estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Most of our contracts do not contain rights to return product; where this right does exist, it is evaluated as possible variable consideration.
For contracts that are subject to the requirement to accrue anticipated losses, the company recognizes the entire anticipated loss in the period that the loss becomes probable.
For contracts with customers in which the Company promises to provide a product to the customer that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead.
The Company also recognizes revenue from service contracts (including service-type warranties) over time. The Company recognizes revenue over time during the term of the agreement as the customer is currently evaluatingsimultaneously receiving and consuming the impactbenefits provided throughout the Company’s performance. The Company typically recognizes revenue on a straight-line basis throughout the contract period.
On December 31, 2019, we had $359.6 million of ASU 2016-02remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $300.9 million of our remaining performance obligations as revenue in 2020.
Costs in excess of billings includes unbilled amounts resulting from revenues under contracts with customers that are satisfied over time and when the cost-to-cost measurement method of revenue recognition is utilized and revenue recognized exceeds the
amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs in excess of billings are classified as current assets, within Accounts Receivable, Net of Allowance for Doubtful Accounts on our financial statements.Consolidated Balance Sheet.
On January 1, 2017,Billings in excess of cost includes billings in excess of revenue recognized as well as other elements of deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are reported in our Consolidated Balance Sheet classified as current liabilities, within Customer Advance Payments and Deferred Revenue, and non-current liabilities, within Other Liabilities. To determine the revenue recognized in the period from the beginning balance of billings in excess of cost, the contract liability as of the beginning of the period is recognized as revenue on a contract-by-contract basis when the Company adopted ASU No. 2016-09, Improvementssatisfies the performance obligation related to Employee Share-Based Payment Accounting. Prospectively,the individual contract. Once the beginning January 1, 2017, excess tax benefits/deficiencies are reflectedcontract liability balance for an individual contract has been fully recognized as income tax benefit/expenserevenue, any additional payments received in the statement of income, resulting in a $0.5period are recognized as revenue once the related costs have been incurred.
We recognized $19.6 million tax benefit forand $8.1 million during the year ended December 31, 2017. The extent of excess tax benefits/deficiencies is subject to variation2019 and 2018, respectively, in revenues that were included in the Company’s stock price and timing/extent of employee stock option exercises. Under previous accounting guidance, when a share-based payment award such as a stock option was granted to an employee,contract liability balance at the fair valuebeginning of the award was generally recognized overperiod.
The Company's contract assets and contract liabilities consist of costs and profits in excess of billings and billings in excess of cost and profits, respectively. Non-current contract liabilities are reported in our Consolidated Balance Sheet within Other Liabilities. The following table presents the vesting period. However,beginning and ending balances of contract assets and contract liabilities:
| | | | | | | | | | | |
(In thousands) | Contract Assets | | Contract Liabilities |
Beginning Balance, January 1, 2019 | $ | 33,030 | | | $ | 27,347 | |
Ending Balance, December 31, 2019 | $ | 19,567 | | | $ | 38,758 | |
The decrease in contract assets reflects the related deduction from taxes payable was based on the award’s intrinsic value at the timenet impact of exercise, which could be either greater (creating an excess tax benefit) or less (creating a tax deficiency) than the compensation costrevenue recognized in excess of additional unbilled revenues recorded during the financial statements. Excess tax benefits wereperiod. The increase in contract liabilities reflects the net impact of additional customer advances or deferred revenues recorded in excess of revenue recognized in additional paid-in capital (“APIC”) within equity, while deficiencies were first recorded to APIC toduring the extent previously recognized excess tax benefits existed, after which time deficiencies were recorded to income tax expense. period and acquired contract liabilities.
The Company’s adoption of this ASU also resulted in associated excess tax benefits being classified as an operating activity in the same manner as other cash flows related to income taxes in the statement of cash flows prospectively beginning January 1, 2017. Based on the adoption methodology applied, the statement of cash flows classification of prior periods has not changed. As permittedfollowing table presents our revenue disaggregated by the ASU, the Company has elected to account for forfeitures as they occur. None of the other provisions in this amended guidance had a significant impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance
claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company early adopted ASU No. 2016-15Market Segments as of January 1, 2017. There were no changes in classification to prior periods presented, and thus no impact was reflected in the Company’s consolidated results of operations and financial condition presented.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. This ASU is effective for fiscal years beginning after December 15, 2017 on a prospective basis with early adoption permitted. The Company would apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective prospectively to annual and interim impairment tests beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 on January 1, 2017. Accordingly, any goodwill impairment losses from that date forward are measured under the provisions of ASU 2017-04.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only the service cost component of net periodic benefit cost would be included in operating expenses. All other net periodic benefit costs components (such as interest cost, prior service cost amortization and actuarial gain/loss amortization) would be reported outside of operating income. This ASU is effective January 1, 2018 on a retrospective basis. The components of the Company’s net periodic defined benefit pension and postretirement benefit costs are presented in Note 10. These include components totaling $1.7 million, $1.7 million and $1.9 million, for the years ended December 31 2017, 2016, and 2015, respectively, that would no longer be included within operating expenses and instead would be reported outsideas follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
Aerospace Segment | | | | | | |
Commercial Transport | | $ | 523,921 | | | $ | 536,269 | | | $ | 414,523 | |
Military | | 76,542 | | 68,138 | | 61,270 |
Business Jet | | 67,541 | | 43,090 | | 41,298 |
Other | | 24,605 | | 28,128 | | 17,512 |
Aerospace Total | | 692,609 | | 675,625 | | 534,603 |
| | | | | | |
Test Systems Segment | | | | | | |
Semiconductor | | 9,692 | | 84,254 | | 31,999 |
Aerospace & Defense | | 70,401 | | 43,377 | | 57,862 |
Test Systems Total | | 80,093 | | 127,631 | | 89,861 |
| | | | | | |
Total | | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
The following table presents our revenue disaggregated by Product Lines as of income from operations under the new standard.December 31 as follows:
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for modifications of share-based payment awards is to record the incremental value arising from the changes as additional compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this modification model. This ASU is effective January 1, 2018, with early adoption permitted. Because the Company does not typically make changes to the terms or conditions of its issued share-based payment awards, this ASU is not expected to have a material impact on its consolidated results of operations and financial condition. | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
Aerospace Segment | | | | | | |
Electrical Power & Motion | | $ | 338,237 | | | $ | 303,180 | | | $ | 264,286 | |
Lighting & Safety | | 185,462 | | 174,383 | | 158,663 |
Avionics | | 106,787 | | 131,849 | | 53,960 |
Systems Certification | | 14,401 | | 13,951 | | 14,333 |
Structures | | 23,117 | | 24,134 | | 25,849 |
Other | | 24,605 | | 28,128 | | 17,512 |
Aerospace Total | | 692,609 | | 675,625 | | 534,603 |
| | | | | | |
Test Systems | | 80,093 | | | 127,631 | | 89,861 |
| | | | | | |
Total | | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
| | | | | | |
NOTE 23 — ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Trade Accounts Receivable | $ | 131,990 | | | $ | 150,764 | |
Unbilled Recoverable Costs and Accrued Profits | 19,567 | | | 33,030 | |
Total Receivables, Gross | 151,557 | | | 183,794 | |
Less Allowance for Doubtful Accounts | (3,559) | | | (1,486) | |
Total Receivables, Net | $ | 147,998 | | | $ | 182,308 | |
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Trade Accounts Receivable | $ | 114,461 |
| | $ | 93,823 |
|
Unbilled Recoverable Costs and Accrued Profits | 19,132 |
| | 16,194 |
|
Total Receivables | 133,593 |
| | 110,017 |
|
Less Allowance for Doubtful Accounts | (960 | ) | | (602 | ) |
| $ | 132,633 |
|
| $ | 109,415 |
|
NOTE 34 — INVENTORIES
Inventories at December 31 are as follows:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Finished Goods | $ | 33,434 | | | $ | 33,100 | |
Work in Progress | 25,594 | | | 27,409 | |
Raw Material | 86,759 | | | 78,176 | |
Total Inventories | $ | 145,787 | | | $ | 138,685 | |
|
| | | | | | | |
(In thousands) | 2017 |
| 2016 |
Finished Goods | $ | 35,193 |
| | $ | 28,792 |
|
Work in Progress | 33,219 |
| | 20,790 |
|
Raw Material | 81,784 |
| | 67,015 |
|
| $ | 150,196 |
| | $ | 116,597 |
|
Additionally, net Inventories of $14.4 million are classified in Assets Held for Sale at December 31, 2018. Refer to Note 22.At December 31, 2017,2019, the Company’s reserve for inventory valuation was $18.0$33.6 million, or 10.7%18.7% of gross inventory.inventory, inclusive of inventory and its associated reserves held for sale. At December 31, 2016,2018, the Company’s reserve for inventory valuation was $15.4$20.8 million, or 11.7%12.0% of gross inventory.
NOTE 45 — PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment at December 31 are as follows:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Land | $ | 9,802 | | | $ | 11,191 | |
Building and Improvements | 74,723 | | | 83,812 | |
Machinery and Equipment | 115,202 | | | 106,327 | |
Construction in Progress | 5,453 | | | 6,404 | |
Total Property, Plant and Equipment, Gross | $ | 205,180 | | | $ | 207,734 | |
Less Accumulated Depreciation | 92,681 | | | 86,872 | |
Total Property, Plant and Equipment, Net | $ | 112,499 | | | $ | 120,862 | |
Net Property, Plant and Equipment of $1.5 million and $3.5 million is classified in Assets Held for Sale at December 31, 2019 and 2018, respectively. Refer to Note 22.
Additionally, there was a $2.3 million impairment of property, plant and equipment in the year ended December 31, 2019, classified within Impairment Loss in the Consolidated Statement of Operations, as more fully disclosed in Note 23.
NOTE 6 — INTANGIBLE ASSETS
The following table summarizes acquired intangible assets at December 31 as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | | | 2018 | | |
(In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Patents | 11 years | | $ | 2,146 | | | $ | 1,804 | | | $ | 2,146 | | | $ | 1,716 | |
Non-compete Agreement | 4 years | | 11,318 | | | 7,696 | | | 10,900 | | | 4,680 | |
Trade Names | 10 years | | 11,438 | | | 6,550 | | | 11,454 | | | 5,182 | |
Completed and Unpatented Technology | 9 years | | 48,201 | | | 21,196 | | | 36,406 | | | 14,964 | |
| | | | | | | | | |
Customer Relationships | 15 years | | 142,212 | | | 50,776 | | | 136,894 | | | 37,875 | |
Total Intangible Assets | 12 years | | $ | 215,315 | | | $ | 88,022 | | | $ | 197,800 | | | $ | 64,417 | |
|
| | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
(In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Patents | 11 Years | | $ | 2,146 |
| | $ | 1,629 |
| | $ | 2,146 |
| | $ | 1,450 |
|
Non-compete Agreement | 4 Years | | 10,900 |
| | 1,687 |
| | 2,500 |
| | 979 |
|
Trade Names | 10 Years | | 11,492 |
| | 4,114 |
| | 10,189 |
| | 3,153 |
|
Completed and Unpatented Technology | 10 Years | | 38,114 |
| | 11,931 |
| | 24,118 |
| | 9,221 |
|
Backlog | 2 Years | | 14,424 |
| | 12,184 |
| | 11,224 |
| | 11,224 |
|
Customer Relationships | 16 Years | | 137,967 |
| | 30,005 |
| | 97,046 |
| | 23,093 |
|
Total Intangible Assets | 13 Years | | $ | 215,043 |
| | $ | 61,550 |
| | $ | 147,223 |
| | $ | 49,120 |
|
Additionally, net Intangible Assets of $0.7 million are classified in Assets Held for Sale at December 31, 2018. Refer to Note 22.Amortization is computed on the straight-linestraight line method for financial reporting purposes, with the exception of backlog, which is amortized based on the expected realization period of the acquired backlog.purposes. Amortization expense for intangibles was $17.6 million, $19.4 million and $12.3 million $10.8for 2019, 2018 and 2017, respectively. Additionally, there was a $6.2 million and $11.3 million for 2017, 2016 and 2015, respectively.impairment of intangible assets as more fully described in Note 23. The amount is classified within Impairment Loss in the Consolidated Statement of Operations.
Based upon acquired intangible assets at December 31, 2017,2019, amortization expense for each of the next five years is estimated to be:
| | | | | |
(In thousands) | |
2020 | $ | 16,620 | |
2021 | $ | 15,394 | |
2022 | $ | 14,963 | |
2023 | $ | 13,927 | |
2024 | $ | 12,908 | |
|
| | | |
(In thousands) | |
2018 | $ | 19,354 |
|
2019 | $ | 16,700 |
|
2020 | $ | 15,975 |
|
2021 | $ | 14,065 |
|
2022 | $ | 13,631 |
|
NOTE 57 — GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for 2017 and 2016:at December 31 as follows:
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Balance at Beginning of the Year | $ | 115,207 |
| | $ | 115,369 |
|
Acquisition | 25,740 |
| | — |
|
Impairment Charge | (16,237 | ) | | — |
|
Foreign Currency Translations and Other | 935 |
| | (162 | ) |
Balance at End of the Year | $ | 125,645 |
| | $ | 115,207 |
|
| | | |
Goodwill - Gross | $ | 158,424 |
| | $ | 131,749 |
|
Accumulated Impairment Losses | (32,779 | ) | | (16,542 | ) |
Goodwill - Net | $ | 125,645 |
| | $ | 115,207 |
|
| | | | | | | | | | | | | | | | | |
(In thousands) | Aerospace | | Test Systems | | Total |
Balance at December 31, 2017 | $ | 125,645 | | | $ | — | | | $ | 125,645 | |
Acquisitions and Divestitures | (241) | | | — | | | (241) | |
| | | | | |
Foreign Currency Translations and Other | (452) | | | — | | | (452) | |
Balance at December 31, 2018 | $ | 124,952 | | | | $ | — | | | $ | 124,952 | |
Acquisitions and Divestitures | (262) | | | $ | 21,932 | | | $ | 21,670 | |
Impairment Charge | (1,610) | | | — | | | (1,610) | |
Foreign Currency Translations and Other | (42) | | | — | | | (42) | |
Balance at December 31, 2019 | $ | 123,038 | | | $ | 21,932 | | | $ | 144,970 | |
| | | | | | |
Goodwill, Gross | $ | 157,427 | | | $ | 21,932 | | | $ | 179,359 | |
Accumulated Impairment Losses | (34,389) | | | — | | | (34,389) | |
Goodwill, Net | $ | 123,038 | | | $ | 21,932 | | | $ | 144,970 | |
As discussed in Note 1, goodwill is not amortized but is periodically tested for impairment. For the nine9 reporting units with goodwill on the first day of our fourth quarter, the Company performed a quantitative assessment of the goodwill’s carrying value. As a result
In the year ending December 31, 2019, we performed quantitative assessments for the reporting units which had goodwill as of thisthe first day of the fourth quarter, prior to the initiation of the antenna business restructuring activities. Based on our quantitative assessment, the Company recorded ana full impairment charge of approximately $16.2$1.6 million in the December 31, 20172019 consolidated statement of operations associated towith the ArmstrongAeroSat reporting unit, which represented all of Armstrong's goodwill.unit. The impairment loss was incurred in the Aerospace segment and is reported onwithin the Impairment Loss line of the Consolidated Statements of Operations. There was
The 2018 assessment indicated no impairment to the carrying value of goodwill in 2016 or 2015. All goodwill relates toany of the Aerospace segment.Company’s reporting units and 0 impairment charge was recognized.
NOTE 68 — LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consistsDebt, including capital leases, at December 31 is as follows:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Revolving Credit Line issued under the Fifth Amended and Restated Credit Agreement. Interest is at LIBOR plus between 1.00% and 1.50% (2.75% at December 31, 2019). | $ | 188,000 | | | $ | 227,000 | |
Other Bank Debt | 224 | | | 338 | |
Capital Lease Obligations | — | | | 6,644 | |
Total Debt | 188,224 | | | 233,982 | |
Less Current Maturities | 224 | | | 1,870 | |
Total Long-term Debt | $ | 188,000 | | | $ | 232,112 | |
In the year ended December 31, 2019, capital lease obligations are included within Other Accrued Expenses and Other Liabilities in the Consolidated Balance Sheets, as appropriate. Refer to Note 10 for additional detail on lease obligations and the implementation of the following:ASC 842.
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Revolving Credit Line issued under the Fourth Amended and Restated Credit Agreement dated September 26, 2014. Interest is at LIBOR plus between 1.375% and 2.25% (3.30% at December 31, 2017). | $ | 262,000 |
| | $ | 136,000 |
|
Other Bank Debt | 807 |
| | 1,270 |
|
Capital Lease Obligations | 8,960 |
| | 10,850 |
|
| 271,767 |
| | 148,120 |
|
Less Current Maturities | 2,689 |
| | 2,636 |
|
| $ | 269,078 |
| | $ | 145,484 |
|
Principal maturities of long-term debt, including capital leases, are approximately:
| | (In thousands) | | (In thousands) | |
2018 | $ | 2,689 |
| |
2019 | 1,957 |
| |
2020 | 2,142 |
| 2020 | $ | 224 | |
2021 | 2,066 |
| 2021 | — | |
2022 | 913 |
| 2022 | — | |
Thereafter | 262,000 |
| |
| $ | 271,767 |
| |
2023 | | 2023 | 188,000 | |
2024 and thereafter | | 2024 and thereafter | — | |
Total Debt | | Total Debt | $ | 188,224 | |
The Company's FourthFifth Amended and Restated Credit Agreement (the “Original Facility”“Agreement”) providedprovides for a $350$500 million revolving credit line with the option to increase the line by up to $150 million. The maturity date of the loans under the Original Facility was September 26, 2019.
On January 13, 2016, the Company amended the Original Facility to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.5 to 1, increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company paid interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.375% and 2.25% based upon the Company’s leverage ratio. The Company paid a commitment fee to the Lenders in an amount equal to between 0.175% and 0.35% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The Company was required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement.
On February 16, 2018, the Company modified and extended the Original Facility by entering into the Fifth Amended and Restated Credit Agreement (the "Agreement"), which provides for a $500 million revolving credit line with the option to increase the line by up to $150 million. A new lender was added to the facility as well. The outstanding balances in the original Facility were rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February 16, 2023. At December 31, 2019, there was $188.0 million outstanding on the revolving credit facility and there remains $310.9 million available, net of outstanding letters of credit. The credit facility allocates up to $20 million of the $500 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At December 31, 2017,2019, outstanding letters of credit totaled $1.1 million. At December 31, 2017, there was $262.0 million outstanding on the revolving credit facility and there remains $236.9 million available, net of outstanding letters of credit.
Covenants in the Agreement have been modified to where theThe maximum permitted leverage ratio isof funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.75 to 1, beginning with quarters ended on or after December 31, 2017. However, the Company may elect to exercise its right to increase this ratioincreasing to 4.50 to 1 orfor up to four4 fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations. The Company is in compliance with its financial covenant at December 31, 2019. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company'sCompany’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between 0.10% and 0.20% ofon the undrawn portion of the credit facility, based upon the Company'sCompany’s leverage ratio. The Company’s leverage ratio was 2.91 to 1 at December 31, 2017. The Company is in compliance with all financial and other covenants at December 31, 2017. The requirement to maintain a minimum interest coverage ratio has been eliminated.
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
NOTE 79 — WARRANTY
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months. The Company determines warranty reserves needed by product line based on experience and current facts and circumstances. Activity in the warranty accrual, which is included in other accrued expenses on the Consolidated Balance Sheets, is summarized as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | 2017 |
Balance at Beginning of the Year | $ | 5,027 | | | $ | 5,136 | | | $ | 4,675 | |
Warranty Liabilities Divested or Acquired | (80) | | | — | | | 511 | |
Warranties Issued | 3,781 | | | 2,806 | | | 1,782 | |
Reassessed Warranty Exposure | 1,451 | | | (370) | | | 540 | |
Warranties Settled | (2,519) | | | (2,545) | | | (2,372) | |
Balance at End of the Year | $ | 7,660 | | | $ | 5,027 | | | $ | 5,136 | |
|
| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Balance at Beginning of the Year | $ | 4,675 |
| | $ | 5,741 |
| | $ | 4,884 |
|
Warranty Liabilities Acquired | 511 |
| | — |
| | 500 |
|
Warranties Issued | 1,782 |
| | 2,281 |
| | 4,039 |
|
Reassessed Warranty Exposure | 540 |
| | (966 | ) | | (485 | ) |
Warranties Settled | (2,372 | ) | | (2,381 | ) | | (3,197 | ) |
Balance at End of the Year | $ | 5,136 |
| | $ | 4,675 |
| | $ | 5,741 |
|
NOTE 810 — LEASES
The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. We have concluded that when an agreement grants us the right to substantially all of the economic benefits associated with an identified asset, and we are able to direct the use of that asset throughout the term of the agreement, we have a lease. We lease certain facilities and office equipment, finance leases, and we lease certain production facilities, office equipment and vehicles under
operating leases. Some of our leases include options to extend or terminate the leases and these options have been included in the relevant lease term to the extent that they are reasonably certain to be exercised.
If the lease arrangement also contains non-lease components, the Company elected the practical expedient not to separate any combined lease and non-lease components for all lease contracts. For our real estate leases, the remaining fixed minimum rental payments used in the calculation of the new lease liability, include fixed payments and variable payments (if the variable payments are based on an index), over the remaining lease term. Variable lease payments based on indices have been included in the related right-of-use assets and lease liabilities on our Consolidated Balance Sheet, while variable lease payments based on usage of the underlying asset have been excluded, as they do not represent present rights or obligations. Variable lease components for leases relate primarily to common area maintenance charges and other separately billed lessor services, sales and real estate taxes. Variable lease costs are expensed in the period they are incurred. We have also elected to adopt the practical expedient under ASC 842 to not separate lease and non-lease components in contracts where the base lease payment contains both. In this situation, these lease agreements are accounted for as a single lease component for all classes of underlying assets. While we do have real estate leases with options to purchase the facility at a market value at the date of exercise, these are not included in the calculation of the lease liability, as these options are not expected to be exercised.
Any new additional operating lease liabilities and corresponding ROU assets are based on the present value of the remaining minimum rental payments. The present value of the Company’s lease liability at transition was calculated using a weighted-average incremental borrowing rate of 3.7%. In determining the incremental borrowing rate, we have considered borrowing data for secured debt obtained from our lending institution. As of December 31, 2019, the Company recognized an operating ROU asset and lease liability of $23.6 million and $25.6 million, respectively. The Company obtained ROU assets of $10.4 million in exchange for operating lease liabilities from new leases entered into or acquired, net of modifications, during the year ended December 31, 2019.
As of December 31, 2019, the Company recognized a financing ROU asset of $2.5 million included in Other Assets. As of December 31, 2019, the Company recognized a financing lease liability of $4.7 million, of which $1.9 million and $2.8 million are within Other Accrued Expenses and Other Liabilities, respectively. No new financing lease liabilities were entered into during the year ended December 31, 2019.
As permitted by ASC 842, leases with expected durations of less than 12 months from inception (i.e. short-term leases) were excluded from the Company’s calculation of its lease liability and right-of-use asset. Furthermore, as permitted by ASC 842, the Company elected to apply the package of practical expedients, which allows companies not to reassess: (a) whether its expired or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases, and (c) initial direct costs for any existing leases.
The following is a summary of the Company's total lease costs as of December 31:
| | | | | | | | |
(In thousands) | | 2019 |
Finance Lease Cost: | | |
Amortization of ROU Assets | | $ | 1,020 | |
Interest on Lease Liabilities | | 314 |
Total Finance Lease Cost | | 1,334 | |
Operating Lease Cost | | 5,050 |
Impairment Charge of Operating Lease ROU Asset | | 1,018 |
Variable Lease Cost | | 1,236 |
Short-term Lease Cost (excluding month-to-month) | | 223 |
Less Sublease and Rental (Income) Expense | | (629) | |
Total Operating Lease Cost | | 6,898 | |
Total Net Lease Cost | | $ | 8,232 | |
The following is a summary of cash paid for amounts included in the measurement of lease liabilities as of December 31:
| | | | | | | | | | |
(In thousands) | | 2019 | | |
Operating Cash Flows Used for Finance Leases | | $ | 314 | | | |
Operating Cash Flows Used for Operating Leases | | $ | 4,718 | | | |
Financing Cash Flows Used for Finance Leases | | $ | 1,746 | | | |
The weighted-average remaining term for the Company's operating and financing leases are approximately 6 years and 2 years, respectively. The weighted-average discount rates for the Company's operating and financing leases are approximately 3.4% and 5.0%, respectively.
The following is a summary of the Company's maturity of lease liabilities:
| | | | | | | | | | | | | | |
(In thousands) | | Operating Leases | | Financing Leases |
2020 | | $ | 4,898 | | | $ | 2,128 | |
2021 | | 5,370 | | | 2,181 | |
2022 | | 5,152 | | | 743 | |
2023 | | 3,911 | | | — | |
2024 | | 2,837 | | | — | |
Thereafter | | 5,977 | | | — | |
Total Lease Payments | | $ | 28,145 | | | $ | 5,052 | |
Less: Interest | | 2,589 | | | 314 | |
Total Lease Liability | | $ | 25,556 | | | $ | 4,738 | |
NOTE 11 — INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a
valuation allowance for the amount of tax benefits which are not expected to be realized. Investment tax credits are recognized on the flow through method.
The provision (benefit) for income taxes at December 31 consists of the following:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | 2017 |
Current | | | | | |
U.S. Federal | $ | 23,798 | | | $ | 7,540 | | | $ | 8,436 | |
State | 4,471 | | | (504) | | | 2,054 | |
Foreign | 2,402 | | | 1,123 | | | 316 | |
Current | 30,671 | | | | 8,159 | | | | 10,806 | |
| | | | | |
Deferred | | | | | |
U.S. Federal | (16,250) | | | (1,799) | | | (3,850) | |
State | 727 | | | (1,584) | | | (326) | |
Foreign | 1,138 | | | 703 | | | (1,318) | |
Deferred | (14,385) | | | | (2,680) | | | | (5,494) | |
Total | $ | 16,286 | | | | $ | 5,479 | | | | $ | 5,312 | |
|
| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Current | | | | | |
U.S. Federal | $ | 8,436 |
| | $ | 21,667 |
| | $ | 24,809 |
|
State | 2,054 |
| | 2,899 |
| | 2,382 |
|
Foreign | 316 |
| | 551 |
| | 137 |
|
Deferred | | | | | |
U.S. Federal | (3,850 | ) | | (2,871 | ) | | 703 |
|
State | (326 | ) | | (1,140 | ) | | (1,019 | ) |
Foreign | (1,318 | ) | | (745 | ) | | 64 |
|
| $ | 5,312 |
| | $ | 20,361 |
| | $ | 27,076 |
|
The effective tax rates differ from the statutory federal income tax rate as follows:
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Statutory Federal Income Tax Rate | 35.0 | % | | 35.0 | % | | 35.0 | % | Statutory Federal Income Tax Rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
Permanent Items | | | | | | Permanent Items | | |
Non-deductible Stock Compensation Expense | 1.1 | % | | 1.1 | % | | 0.6 | % | |
Stock Compensation Expense | | Stock Compensation Expense | (0.5) | % | | (0.9) | % | | 1.1 | % |
Domestic Production Activity Deduction | (4.7 | )% | | (3.3 | )% | | (2.9 | )% | Domestic Production Activity Deduction | — | % | | — | % | | (4.7) | % |
Other | 0.5 | % | | 0.2 | % | | 0.2 | % | Other | 0.5 | % | | 0.4 | % | | 0.5 | % |
Foreign Tax Benefits | (5.6 | )% | | (1.1 | )% | | (1.1 | )% | |
Foreign Tax Rate Differential | | Foreign Tax Rate Differential | 1.4 | % | | 0.5 | % | | (5.6) | % |
State Income Tax, Net of Federal Income Tax Effect | 4.5 | % | | 1.8 | % | | 0.9 | % | State Income Tax, Net of Federal Income Tax Effect | 6.0 | % | | 2.8 | % | | 4.5 | % |
Revised State Filing Tax Benefit, Net of Federal Income Tax Effect, Net of Reserve | | Revised State Filing Tax Benefit, Net of Federal Income Tax Effect, Net of Reserve | — | % | | (6.7) | % | | — | % |
Research and Development Tax Credits | (11.5 | )% | | (3.7 | )% | | (2.7 | )% | Research and Development Tax Credits | (4.6) | % | | (6.2) | % | | (11.5) | % |
Tax Expense on Deemed Repatriation of Foreign Earnings | 5.6 | % | | — | % | | — | % | |
Change in Valuation Allowance | | Change in Valuation Allowance | 1.1 | % | | — | % | | — | % |
Net GILTI and FDII Tax Expense (Benefit) | | Net GILTI and FDII Tax Expense (Benefit) | (1.2) | % | | 0.2 | % | | — | % |
Tax Expense (Benefit) on Deemed Repatriation of Foreign Earnings | | Tax Expense (Benefit) on Deemed Repatriation of Foreign Earnings | — | % | | (0.8) | % | | 5.6 | % |
Revaluation of Deferred Taxes for Federal Tax Rate Change | (3.5 | )% | | — | % | | — | % | Revaluation of Deferred Taxes for Federal Tax Rate Change | — | % | | (0.1) | % | | (3.5) | % |
Other | (0.1 | )% | | (0.4 | )% | | (1.2 | )% | Other | 0.1 | % | | 0.3 | % | | (0.1) | % |
Effective Tax Rate | 21.3 | % | | 29.6 | % | | 28.8 | % | Effective Tax Rate | 23.8 | % | | 10.5 | % | | 21.3 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities as ofat December 31, are as follows:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Deferred Tax Assets: | | | |
Asset Reserves | $ | 17,071 | | | $ | 8,808 | |
Deferred Compensation | 6,427 | | | 5,628 | |
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax | 854 | | | 1,066 | |
Customer Advanced Payments and Deferred Revenue | 3,472 | | | 875 | |
Net Operating Loss Carryforwards and Other | 8,212 | | | 7,407 | |
ASC 606 Revenue Recognition | 2,612 | | | 1,641 | |
Lease Liabilities | 7,466 | | | 1,743 | |
Other | 3,170 | | | — | |
Total Gross Deferred Tax Assets | 49,284 | | | 27,168 | |
Valuation Allowance for Foreign Tax Credit, State Deferred Tax Assets and Tax Credit Carryforwards, Net of Federal Tax | (13,303) | | | (8,098) | |
Deferred Tax Assets | 35,981 | | | 19,070 | |
Deferred Tax Liabilities: | | | |
Depreciation | 10,060 | | | 10,783 | |
Goodwill and Intangible Assets | 4,683 | | | 4,438 | |
ASC 606 Revenue Recognition - Section 481(a) Adjustment | 496 | | | 767 | |
Lease Assets | 6,377 | | | 904 | |
Other | 751 | | | 3,812 | |
Deferred Tax Liabilities | 22,367 | | | 20,704 | |
Net Deferred Tax Assets (Liabilities) | $ | 13,614 | | | $ | (1,634) | |
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Deferred Tax Assets: | | | |
Asset Reserves | $ | 5,615 |
| | $ | 9,208 |
|
Deferred Compensation | 6,091 |
| | 8,378 |
|
Capital Lease Basis Difference | 1,002 |
| | 1,690 |
|
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax | 1,379 |
| | 665 |
|
Customer Advanced Payments and Deferred Revenue | 1,007 |
| | 3,750 |
|
State Net Operating Loss Carryforwards and Other | 8,115 |
| | 4,282 |
|
Total Gross Deferred Tax Assets | 23,209 |
| | 27,973 |
|
Valuation Allowance for Foreign Tax Credit, State Deferred Tax Assets and Tax Credit Carryforwards, Net of Federal Tax | (7,823 | ) | | (3,816 | ) |
Deferred Tax Assets | 15,386 |
| | 24,157 |
|
Deferred Tax Liabilities: | | | |
Depreciation | 9,267 |
| | 12,972 |
|
Goodwill and Intangible Assets | 7,275 |
| | 18,558 |
|
Other | 1,149 |
| | 1,280 |
|
Deferred Tax Liabilities | 17,691 |
| | 32,810 |
|
Net Deferred Tax Liabilities | $ | (2,305 | ) | | $ | (8,653 | ) |
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
| | (In thousands) | 2017 | | 2016 | (In thousands) | 2019 | | 2018 |
Other Assets — Long-term | $ | 2,816 |
| | $ | 2,644 |
| Other Assets — Long-term | $ | 17,536 | | | $ | 3,999 | |
Assets Held for Sale | | Assets Held for Sale | — | | | (1,528) | |
Deferred Tax Liabilities — Long-term | (5,121 | ) | | (11,297 | ) | Deferred Tax Liabilities — Long-term | (3,922) | | | (3,199) | |
Net Deferred Tax Liabilities | $ | (2,305 | ) | | $ | (8,653 | ) | |
Liabilities Held for Sale | | Liabilities Held for Sale | — | | | (906) | |
Net Deferred Tax Assets (Liabilities) | | Net Deferred Tax Assets (Liabilities) | $ | 13,614 | | | $ | (1,634) | |
At December 31, 2017,2019, state tax credit carryforwards amounted to approximately $1.8$0.8 million of which $0.9 million will expire from 20172020 through 2031 and $0.9 million will carryforward until utilized. 2033.
At December 31, 2017,2019, federal net operating loss carryforwards, which the Company expects to utilize, even with annual limitations under IRC Section 382, amounted to approximately $6 million and expire at various dates between 2038 and 2039.
At December 31, 2019, state net operating loss carryforwards which the Company expects to utilize amounted to approximately $13.6$6.9 million and expire at various dates between 20322027 and 2037.
2038. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future and utilize certain of the Company’s state operating loss carryforwards before they expire, the Company has recorded a valuation allowance accordingly. These state net operating loss carryforwards amount to approximately $79.9$108.4 million and expire at various dates from 20212022 through 2037. 2039.
The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting during 2017 and beginning with 2017, the excess tax benefits associated with stock option exercises are no longer recorded directly to shareholders’ equity, but rather, are recorded in the provision for income taxes, when realized. A benefit of approximately $0.6 million, $0.7 million and $0.5 million benefit was recorded in the provision for incomes taxes for the year ended December 31, 2017. Amounts recorded directly to shareholders’ equity amounted to approximately $0.8 million2019, 2018 and $3.0 million for the years ended December 31, 2016, and 20152017, respectively.
At December 31, 2017,2019, estimated foreign tax credit carryforwards, which the Company expects not to utilize, amounted to approximately $0.3$0.2 million. DueThe Company expects to the uncertainty as to the Company’s ability to generate any general limitation foreign source income in the future and will utilize these foreign tax credits,credits. Therefore, during 2019 the Company has removed the valuation allowance that was recorded at December 31, 2018.
During 2019, the Company recorded a valuation allowance accordingly.on a deferred tax asset related to an equity investment impairment, as the Company does not expect to utilize the capital loss in the future.In addition, the Company also removed the state valuation allowance on the deferred tax assets of one of its subsidiaries, which are now expected to be utilized in the future. Finally, the Company added a state valuation allowance on the deferred tax assets of one of its subsidiaries, which are now expected not to be utilized in the future.
During the year ended December 31, 2018, the Company, determined that a revised state filing position could be taken which would reduce the taxable income apportioned for state income tax purposes. Based on the assessment performed, the Company concluded that amended state income tax returns would be filed for the open tax years of 2014 through 2017 to reflect this revised tax position and claim the associated tax benefits. The Company is also claiming the benefit of the revised filing position for 2018 and subsequent tax years. In addition, the revised state tax filing position also resulted in a deferred tax benefit due to the revaluation of deferred tax liabilities. Accordingly, the Company recognized the tax benefits, and related tax reserves, for the revised state filing position during the year ended December 31, 2019 and 2018. Absent a state tax audit notice related to the refund claim, the statute of limitations will expire on various dates in 2020 for the amended returns for tax years 2014 and 2015, at which time approximately $0.8 million of the unrecognized tax benefits is expected to be recognized. Absent a state tax audit notice related to the refund claim, the statute of limitations will expire one year from the date the refund checks are issued for the amended returns for tax years 2016 and 2017 and will expire in 2022 and 2023 for tax years 2018 and 2019, respectively.
The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest associated with that liability would be recorded as interest expense. Penalties, if any, would be recorded as operating expenses. As ofDuring the year ended December 31, 2017, we no longer have any unrecognized tax benefits. Reserves2019, reserves for uncertain tax positions that had beenwere recorded in association with revised state income tax filing positions pursuant to ASC Topic 740-10 as of December 31, 2014 were reversed during the year-ended December 31, 2015.740-10. No additional reserves for uncertain income tax positions
were deemed necessary for the yearsyear ended
December 31, 2017 or 2016.2017. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, which are insignificant, is as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2019 | | 2018 | | 2017 |
Balance at Beginning of the Year | $ | 2,197 | | | $ | — | | | $ | — | |
Decreases as a Result of Tax Positions Taken in Prior Years | — | | | — | | | — | |
Increases as a Result of Tax Positions Taken in the Current Year | 368 | | | 2,197 | | | — | |
Balance at End of the Year | 2,565 | | | $ | 2,197 | | | $ | — | |
|
| | | | | | | | | | | |
(in thousands) | 2017 | | 2016 | | 2015 |
Balance at Beginning of the Year | $ | — |
| | $ | — |
| | $ | 181 |
|
Decreases as a Result of Tax Positions Taken in Prior Years | — |
| | — |
| | (181 | ) |
Increases as a Result of Tax Positions Taken in the Current Year | — |
| | — |
| | — |
|
Balance at End of the Year | $ | — |
| | $ | — |
| | $ | — |
|
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate amounted to $2.6 million and $2.2 million at December 31, 2019 and 2018, respectively. There are no0 material penalties or interest liabilities accrued as of December 31, 20172019 or 2016,2018, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2017, 20162019, 2018 and 2015.2017. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 20142016 through 20172019 for federal purposes and 20132015 through 20172019 for state purposes.
Pretax income from the Company’s foreign subsidiaries amounted to $12.2 million, $7.3 million and $1.1 million $1.6 millionfor 2019, 2018 and $3.6 million for 2017, 2016 and 2015, respectively. The balance of pretax earnings for each of those years were domestic.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act.Act (the “Act”). The legislation significantly changeschanged U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Cuts and Jobs Act permanently reducesreduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a $0.1 million tax benefit and a provisional $0.9 million tax benefit in the Company’s consolidated statement of income for the yearyears ended December 31, 2017.
2018 and 2017 respectively.
The Tax Cuts and Jobs Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $10.3 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $1.4 million of income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. AfterThe Company made an adjustment to its provisional amounts included in its consolidated financial statements for the utilization of existing tax credits, the Company expects to pay additional U.S. federal cash taxesyear ended December 31, 2017 resulting in a benefit of approximately $1.3$0.4 million onrecorded during the deemed mandatory repatriation, payable over eight years. In addition, the Company expects to pay additional State cash taxes of approximately $0.1 million on the deemed mandatory repatriation.year ended December 31, 2018. No additional provision for U.S. federal or foreign taxes has been made as the foreign subsidiaries’ undistributed earnings (approximately $29.7 million at December 31, 2019) are considered to be permanently reinvested. It is not practicable to determine the amount of outside basis differences related to the investment in foreign subsidiaries and other taxes that would be payable if these amounts were repatriated to the U.S.
While the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions andprovisions. The Company elected to account for GILTI tax in the base-erosion and anti-abuse tax (“BEAT”) provisions.
period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings from its Controlled Foreign Corporations (“CFCs”) in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subjectGILTI tax expense resulted from excess net tested income over net deemed tangible income return from the CFCs. The GILTI expense would have been completely offset by a foreign tax credit absent the required allocations of interest expense to incremental U.S. tax onthe GILTI income, beginning in 2018, due to expense allocations required by thewhich created a U.S. foreign tax credit rules.limitation. The FDII provisions allow for a deduction equal to a percentage of the foreign-derived intangible income of a domestic corporation. As a result of these provisions, net, the Company has elected to account for GILTIrecorded a tax in the period in which it is incurred, and therefore has not provided any deferred tax impactsbenefit of GILTI in its consolidated financial statements forapproximately $0.8 million during the year ended December 31, 2017.
2019 and tax expense of approximately $0.2 million during the year ended December 31, 2018.
The BEATBase Erosion and Anti-Abuse Tax (“BEAT”) provisions in the Tax Cuts and Jobs Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017.2019 and 2018.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The
Company hashad recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ fromaccounting for these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a resultincome tax effects of the Tax Cuts and Jobs Act. The accounting is expected to be complete whenAct was completed during the 2017 U.S. corporate incomefourth quarter of 2018 and the provisional tax return is filed inimpacts were adjusted for the year ended December 31, 2018.
NOTE 912 — PROFIT SHARING/401(k) PLAN
The Company offers eligible domestic full-time employees participation in certain profit sharing/401(k) plans. The plans provide for a discretionary annual company contribution. In addition, employees may contribute a portion of their salary to the plans which is partially matched by the Company. The plans may be amended or terminated at any time.
Total charges to income before income taxes for these plans were approximately $10.0 million, $8.3 million and $7.4 million $6.7 millionin 2019, 2018 and $6.3 million in 2017, 2016 and 2015, respectively.
NOTE 1013 — RETIREMENT PLANS AND RELATED POST RETIREMENT BENEFITS
The Company has two2 non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain current and retired executive officers. The accumulated benefit obligation of the plans as of December 31, 20172019 and 20162018 amounts to $22.7$25.2 million and $18.6$21.0 million, respectively.
The Plans provide for benefits based upon average annual compensation and years of service and in the case of SERP, there are offsets for social security and profit sharing benefits. It is the Company’s intent to fund the plans as plan benefits become payable, since no0 assets exist at December 31, 20172019 or 20162018 for either of the plans.
The Company accounts for the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in accordance with the recognition and disclosure provisions of ASC Topic 715, Compensation, Retirement Benefits, which requires the Company to recognize the funded status in its balance sheet, with a corresponding adjustment to AOCI,Accumulated Other Comprehensive Income (“AOCI”), net of tax. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of AOCI. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in AOCI.
Unrecognized prior service costs of $2.3$2.2 million ($3.52.8 million net of $1.2$0.6 million in taxes) and unrecognized actuarial losses of $6.0 million ($8.67.6 million net of $2.6$1.6 million in taxes) are included in AOCI at December 31, 20172019 and have not yet been recognized in net periodic pension cost. The prior service cost included in AOCI that is expected to be recognized in net periodic pension cost during the fiscal year-ended December 31, 20182020 is $0.3 million ($0.4 million net of $0.1 million in taxes). The actuarial loss included in AOCI expected to be recognized in net periodic pension cost during the fiscal year-ended December 31, 20172020 is $0.4$0.5 million ($0.6 million net of $0.2$0.1 million in taxes).
The reconciliation of the beginning and ending balances of the projected benefit obligation of the plans for the years ended December 31 is as follows:
| | | | | | | | | | | |
(In thousands) | 2019 | | 2018 |
Funded Status | | | |
Projected Benefit Obligation | | | |
Beginning of the Year — January 1 | $ | 21,970 | | | $ | 25,141 | |
Service Cost | 181 | | | 200 | |
Interest Cost | 916 | | | 899 | |
Actuarial Loss (Gain) | 3,827 | | | (3,922) | |
Benefits Paid | (347) | | | (348) | |
End of the Year — December 31 | $ | 26,547 | | | $ | 21,970 | |
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Funded Status | | | |
Projected Benefit Obligation | | | |
Beginning of the Year — January 1 | $ | 21,533 |
| | $ | 20,418 |
|
Service Cost | 186 |
| | 173 |
|
Interest Cost | 897 |
| | 901 |
|
Actuarial Loss | 2,873 |
| | 389 |
|
Benefits Paid | (348 | ) | | (348 | ) |
End of the Year — December 31 | $ | 25,141 |
| | $ | 21,533 |
|
The assumptions used to calculate the projected benefit obligation as of December 31 are as follows:
| | | 2017 | | 2016 | | 2019 | | 2018 |
Discount Rate | 3.60% | | 4.20% | Discount Rate | 3.17% | | | 4.20% | |
Future Average Compensation Increases | 2.00% – 3.00% | | 3.00% – 5.00% | Future Average Compensation Increases | 2.00% | | | 2.00% | |
The plans are unfunded at December 31, 20172019 and are recognized in the accompanying Consolidated Balance Sheets as a current accrued pension liability of $0.3 million and a long-term accrued pension liability of $24.8$26.2 million. This also is the expected future contribution to the plan, since the plan is unfunded.
The following table summarizes the components of the net periodic cost for the years ended December 31:
| | (In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Net Periodic Cost | | | | | | Net Periodic Cost | | | | | |
Service Cost — Benefits Earned During Period | $ | 186 |
| | $ | 173 |
| | $ | 194 |
| Service Cost — Benefits Earned During Period | $ | 181 | | | $ | 200 | | | $ | 186 | |
Interest Cost | 897 |
| | 901 |
| | 843 |
| Interest Cost | 916 | | | 899 | | | 897 | |
Amortization of Prior Service Cost | 387 |
| | 413 |
| | 495 |
| Amortization of Prior Service Cost | 386 | | | 386 | | | 387 | |
Amortization of Losses | 369 |
| | 343 |
| | 449 |
| Amortization of Losses | 300 | | | 629 | | | 369 | |
Net Periodic Cost | $ | 1,839 |
| | $ | 1,830 |
| | $ | 1,981 |
| Net Periodic Cost | $ | 1,783 | | | $ | 2,114 | | | $ | 1,839 | |
The assumptions used to determine the net periodic cost are as follows:
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Discount Rate | 4.20% | | 4.45% | | 4.05% | Discount Rate | 4.20% | | | 3.60% | | | 4.20% | |
Future Average Compensation Increases | 3.00% – 5.00% | | 3.00% – 5.00% | | 5.00% | Future Average Compensation Increases | 2.00% | | | 2.00% - 3.00% | | 3.00% - 5.00% |
The Company expects the benefits to be paid in each of the next fivefour years to be $0.3 million, $0.6 million in 2024, and $2.8$5.4 million in the aggregate for the next five years after that. This also is the expected Company contribution to the plans.
Participants in SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The measurement date for determining the plan obligation and cost is December 31.
The reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation for the years ended December 31, is as follows:
| | (In thousands) | 2017 | | 2016 | (In thousands) | 2019 | | 2018 |
Funded Status | | | | Funded Status | | | |
Accumulated Postretirement Benefit Obligation | | | | Accumulated Postretirement Benefit Obligation | |
Beginning of the Year — January 1 | $ | 1,021 |
| | $ | 925 |
| Beginning of the Year — January 1 | $ | 1,136 | | | $ | 1,307 | |
Service Cost | 7 |
| | 5 |
| Service Cost | 13 | | | 16 | |
Interest Cost | 41 |
| | 40 |
| Interest Cost | 46 | | | 46 | |
Actuarial (Gain) Loss | 307 |
| | 112 |
| |
Actuarial Gain | | Actuarial Gain | (28) | | | (162) | |
Benefits Paid | (69 | ) | | (61 | ) | Benefits Paid | (63) | | | (71) | |
End of the Year — December 31 | $ | 1,307 |
| | $ | 1,021 |
| End of the Year — December 31 | $ | 1,104 | | | $ | 1,136 | |
The assumptions used to calculate the accumulated post-retirement benefit obligation as of December 31 are as follows:
| | | | | | | | | | | |
| 2019 | | 2018 |
Discount Rate | 3.17% | | | 4.20% | |
|
| | | |
| 2017 | | 2016 |
Discount Rate | 3.60% | | 4.20% |
The following table summarizes the components of the net periodic cost for the years ended December 31:31 as follows:
| | (In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Net Periodic Cost | | | | | | Net Periodic Cost | | | | | |
Service Cost — Benefits Earned During Period | $ | 7 |
| | $ | 5 |
| | $ | 6 |
| Service Cost — Benefits Earned During Period | $ | 13 | | | $ | 16 | | | $ | 7 | |
Interest Cost | 41 |
| | 40 |
| | 39 |
| Interest Cost | 46 | | | 46 | | | 41 | |
Amortization of Prior Service Cost | 16 |
| | 24 |
| | 26 |
| Amortization of Prior Service Cost | 16 | | | 16 | | | 16 | |
Amortization of Losses | 31 |
| | 22 |
| | 26 |
| Amortization of Losses | 43 | | | 59 | | | 31 | |
Net Periodic Cost | $ | 95 |
| | $ | 91 |
| | $ | 97 |
| Net Periodic Cost | $ | 118 | | | $ | 137 | | | $ | 95 | |
The assumptions used to determine the net periodic cost are as follows:
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Discount Rate | 4.20% | | 4.45% | | 4.05% | Discount Rate | 4.20% | | | 3.60% | | | 4.20% | |
Future Average Healthcare Benefit Increases | 5.50% | | 5.72% | | 5.32% | Future Average Healthcare Benefit Increases | 4.98% | | | 5.38% | | | 5.50% | |
Unrecognized prior service costs of less than $0.1 million and unrecognized actuarial losses of $0.5$0.3 million for medical, dental and long-term care insurance benefits (net of taxes of $0.2$0.1 million) are included in AOCI at December 31, 20172019 and have not been recognized in net periodic cost. The Company estimates that the prior service costs and net losses in AOCI as of December 31, 20172019 that will be recognized as components of net periodic benefit cost during the year ended December 31, 20182020 for the Plan will be insignificant. For measurement purposes, a 6.2%5.2% increase in the cost of health care benefits was assumed for 2018 and 2019, respectively,2020 and a range between 4.2% and 6.2%5.4% from 20192021 through 2070. A one percentage point increase or decrease in this rate would change the post retirement benefit obligation by approximately $0.1 million. The plan is recognized in the accompanying Consolidated Balance SheetsSheet as a current accrued pension liability of less than $0.1 million and a long-term accrued pension liability of $1.2$1.0 million. The Company expects the benefits to be paid in each of the next five years to be less than $0.1 million per year and approximately $0.3 million in the aggregate for the next five years after that. This also is the expected Company contribution to the plan, as it is unfunded.
The Company is a participating employer in a trustee-managed multiemployer defined benefit pension plan for employees who participate in collective bargaining agreements. The plan generally provides retirement benefits to employees based on years of service to the Company. Contributions are based on the hours worked and are expensed on a current basis. The Plan is 91.2%92.7% funded as of January 1, 2017.2019. The Company’s contributions to the plan were $1.1 million in 2017, $1.1 million in 2016each of 2019, 2018 and $1.0 million in 2015.2017. These contributions represent less than 1% of total contributions to the plan.
NOTE 1114 — SHAREHOLDERS’ EQUITY
Share Buyback Program
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the “Buyback Program”). The Buyback Program allowsallowed the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased approximately 1,675,000 shares and has completed that program.program in 2017. On December 12, 2017, the Company’s Board of Directors authorized an additional repurchase of up to $50 million of common stock. No amountsThe Company repurchased approximately 1,823,000 shares and completed that program in the third quarter of 2019. On September 17, 2019, the Company’s Board of Directors authorized an additional repurchase of up to $50 million. An additional 28,000 shares have been repurchased under the new program as of December 31, 2017.2019 at a cost of $0.8 million. Subsequent to December 31, 2019, approximately 282,000 additional shares have been repurchased at a cost of $7.7 million.
Reserved Common Stock
At December 31, 2017,2019, approximately 10.511.8 million shares of common stock were reserved for issuance upon conversion of the Class B stock, exercise of stock options, issuance of restricted stock and purchases under the Employee Stock Purchase Plan. Class B Stock is identical to Common Stock, except Class B Stock has ten10 votes per share, is automatically converted to Common Stock on a one-for-one basis when sold or transferred other than via gift, devise or bequest and cannot receive dividends unless an equal or greater amount of dividends is declared on Common Stock.
Comprehensive Income and Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and the after-tax impact of retirement liability adjustments. NoNaN income tax effect is recorded for currency translation adjustments.
The components of accumulated other comprehensive income (loss) are as follows:
| | (In thousands) | 2017 | | 2016 | (In thousands) | 2019 | | 2018 |
Foreign Currency Translation Adjustments | $ | (4,465 | ) | | $ | (8,597 | ) | Foreign Currency Translation Adjustments | $ | (7,042) | | | $ | (7,156) | |
Retirement Liability Adjustment – Before Tax | (12,988 | ) | | (10,611 | ) | Retirement Liability Adjustment – Before Tax | (10,868) | | | (7,814) | |
Tax Benefit | 4,101 |
| | 3,714 |
| Tax Benefit | 2,282 | | | 1,641 | |
Retirement Liability Adjustment – After Tax | (8,887 | ) | | (6,897 | ) | Retirement Liability Adjustment – After Tax | (8,586) | | | (6,173) | |
Accumulated Other Comprehensive Loss | $ | (13,352 | ) | | $ | (15,494 | ) | Accumulated Other Comprehensive Loss | $ | (15,628) | | | $ | (13,329) | |
The components of other comprehensive (loss) income (loss) are as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | 2017 |
Foreign Currency Translation Adjustments | $ | 114 | | | $ | (2,691) | | | $ | 4,132 | |
Retirement Liability Adjustment | (3,054) | | | 5,174 | | | (2,377) | |
Tax (Expense) Benefit | 641 | | | (1,087) | | | 387 | |
Retirement Liability Adjustment | (2,413) | | | 4,087 | | | (1,990) | |
Other Comprehensive (Loss) Income | $ | (2,299) | | | $ | 1,396 | | | $ | 2,142 | |
|
| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Foreign Currency Translation Adjustments | $ | 4,132 |
| | $ | (626 | ) | | $ | (4,617 | ) |
Retirement Liability Adjustment | (2,377 | ) | | 301 |
| | 2,311 |
|
Tax Benefit (Expense) | 387 |
| | (105 | ) | | (809 | ) |
Retirement Liability Adjustment | (1,990 | ) | | 196 |
| | 1,502 |
|
Other Comprehensive Income (Loss) | $ | 2,142 |
| | $ | (430 | ) | | $ | (3,115 | ) |
NOTE 1215 — EARNINGS PER SHARE
Earnings per share computations are based upon the following table:
| | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | 2019 | | 2018 | | 2017 |
Net Income | $ | 52,017 | | | $ | 46,803 | | | $ | 19,679 | |
Basic Earnings Weighted Average Shares | 32,028 | | | 32,351 | | | 32,874 | |
Net Effect of Dilutive Stock Options | 431 | | | 785 | | | 844 | |
Diluted Earnings Weighted Average Shares | 32,459 | | | 33,136 | | | 33,718 | |
Basic Earnings Per Share | $ | 1.62 | | | $ | 1.45 | | | $ | 0.60 | |
Diluted Earnings Per Share | $ | 1.60 | | | $ | 1.41 | | | $ | 0.58 | |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
(In thousands, except per share data) | | | | | |
Net Income | $ | 19,679 |
| | $ | 48,424 |
| | $ | 66,974 |
|
Basic Earnings Weighted Average Shares | 28,586 |
| | 29,163 |
| | 29,245 |
|
Net Effect of Dilutive Stock Options | 734 |
| | 869 |
| | 934 |
|
Diluted Earnings Weighted Average Shares | 29,320 |
| | 30,032 |
| | 30,179 |
|
Basic Earnings Per Share | $ | 0.69 |
| | $ | 1.66 |
| | $ | 2.29 |
|
Diluted Earnings Per Share | $ | 0.67 |
| | $ | 1.61 |
| | $ | 2.22 |
|
The above information has been adjusted to reflect the impact of the three-for-twenty distribution of Class B Stock for shareholders of record on October 12, 2018.
Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation of diluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares excluded from the computation was approximately 0.10.5 million for the year ended December 31, 2017,2019, 0.2 million for the year ended December 31, 2016,2018, and 0.1 million for the year ended December 31, 2015.2017.
NOTE 1316 — STOCK OPTION AND PURCHASE PLANSEQUITY COMPENSATION
The Company has stock optionequity compensation plans that authorize the issuance of restricted stock units or options for shares of Common Stock to directors, officers and key employees. Stock option grants areEquity-based compensation is designed to reward long-term contributions to the Company and provide incentives for recipients to join and to remain with the Company. The exercise price of stock options, determined by a committee of the Board of Directors, may not be less than the fair market value of the Common Stock on the grant date. Options become exercisable over periods not exceeding ten years. The Company’s practice has been to issue new shares upon the exercise of the options.
The Company established Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key employees, and to align management’s interest with those of the shareholders. Generally, the options must be exercised within 10 years from the grant date and vest ratably over a five-year period. The exercise price for the options is equal to the share price at the date of grant. At December 31, 2019, the Company had options outstanding for 603,184 shares under the plans.
The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with those of the shareholders. The options must be exercised within ten years from the grant date. The exercise price for the option is equal to the share price at the date of grant and vests six months from the grant date. At December 31, 2019, the Company had options outstanding for 177,080 shares under the plans.
During 2017, the Company established the Long Term Incentive Plan for the purpose of attracting and retaining directors, executive officers and key employees, and to align management's interest with those of the shareholders. The Plan contemplates the use of a mix of equity award types, and contains, with certain exceptions, a three-year pro-rata vesting schedule for time-based awards. The Long Term Incentive Plan was amended on December 14, 2018 to provide a six-month pro-rata vesting schedule for directors. For stock options, the exercise price is equal to the share price on the date of grant. Upon inception, the remaining options available for future grant under the 2011 Incentive Stock Option Plan and the Directors Stock Option Plans were rolled in the Long Term Incentive Plan, and no further grants may be made out of those plans. At December 31, 2019, the Company had stock options and RSU's outstanding of 453,733 shares under the Long Term Incentive Plan, and there were 1,305,613 shares available for future grant under this plan.
Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outside directors vest six months from the date of grant and options granted to officers and key employees straight line vest over a five-yearfive-year period from the date of grant. RSUs granted to officers and key employees cliff vest three years from the date of grant.
The following table provides compensation expense information based on the fair value of stock options and RSU's for the years ended December 31 as follows: |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Weighted Average Fair Value of the Options Granted | $ | 17.60 |
| | $ | 16.85 |
| | $ | 18.00 |
|
| | | | | | | | | | | | | | | | | |
(In thousands) | 2019 | | 2018 | | 2017 |
Equity-based Compensation Expense | $ | 3,843 | | | $ | 3,098 | | | $ | 2,598 | |
Tax Benefit | (452) | | | (179) | | | (140) | |
Equity-based Compensation Expense, Net of Tax | $ | 3,391 | | | $ | 2,919 | | | $ | 2,458 | |
Stock Options
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Weighted Average Fair Value of the Options Granted | $ | 11.93 | | | $ | 14.64 | | | $ | 15.30 | |
The weighted average fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Risk-free Interest Rate | 2.05% – 2.36% | | 1.08% – 2.34% | | 1.36% – 2.10% | Risk-free Interest Rate | 1.67% – 1.78% | | 2.63% – 2.87% | | 2.05% – 2.36% |
Dividend Yield | —% | | —% | | —% | Dividend Yield | —% | | | —% | | | —% | |
Volatility Factor | 0.40 – 0.41 | | 0.40 – 0.45 | | 0.40 – 0.51 | Volatility Factor | 0.39 | | 0.39 | | 0.40 – 0.41 |
Expected Life in Years | 5.0 – 8.0 | | 4.0 – 8.0 | | 4.0 – 8.0 | Expected Life in Years | 5.0 – 7.0 | | 5.0 – 8.0 | | 5.0 – 8.0 |
To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock and considers currently available information to determine if future volatility is expected to differ over the expected terms of the options granted. The risk-free rate is based on the U.S. Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.
The following table provides compensation expense information based on the fair value of stock options for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Stock Compensation Expense | $ | 2,598 |
| | $ | 2,281 |
| | $ | 2,274 |
|
Tax Benefit | (140 | ) | | (145 | ) | | (177 | ) |
Stock Compensation Expense, Net of Tax | $ | 2,458 |
| | $ | 2,136 |
| | $ | 2,097 |
|
A summary of the Company’s stock option activity and related information for the years ended December 31 is as follows:
| | | 2017 | | 2016 | | 2015 | | 2019 | | | 2018 | | | 2017 | |
(Aggregate intrinsic value in thousands) | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | (Aggregate intrinsic value in thousands) | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
Outstanding at January 1 | 1,338,273 |
| | $ | 14.85 |
| | $ | 35,630 |
| | 1,444,954 |
| | $ | 12.61 |
| | $ | 30,675 |
| | 1,686,178 |
| | $ | 9.43 |
| | $ | 43,778 |
| Outstanding at January 1 | 1,327,919 | | | $ | 18.13 | | | $ | 13,042 | | | 1,506,604 | | | $ | 14.65 | | | $ | 23,801 | | | 1,539,017 | | | $ | 12.91 | | | $ | 35,630 | |
Options Granted | 103,140 |
| | $ | 38.41 |
| | $ | 315 |
| | 104,900 |
| | $ | 34.29 |
| | $ | (48 | ) | | 105,742 |
| | $ | 35.80 |
| | $ | (42 | ) | Options Granted | 138,300 | | | $ | 30.04 | | | $ | (289) | | | 120,270 | | | $ | 32.33 | | | $ | (226) | | | 118,612 | | | $ | 33.40 | | | $ | 315 | |
Options Exercised | (114,699 | ) | | $ | 11.24 |
| | $ | (3,467 | ) | | (188,768 | ) | | $ | 7.20 |
| | $ | (5,029 | ) | | (346,966 | ) | | $ | 4.25 |
| | $ | (10,808 | ) | Options Exercised | (313,326) | | | $ | 5.38 | | | $ | (7,072) | | | (274,941) | | | $ | 3.89 | | | $ | (7,303) | | | (131,904) | | | $ | 9.77 | | | $ | (3,467) | |
Options Forfeited | (16,624 | ) | | $ | 27.91 |
| | $ | (225 | ) | | (22,813 | ) | | $ | 25.96 |
| | $ | (180 | ) | | — |
| | $ | — |
| | $ | — |
| Options Forfeited | (36,848) | | | $ | 21.56 | | | $ | (235) | | | (24,014) | | | $ | 34.13 | | | $ | 88 | | | (19,121) | | | $ | 24.27 | | | $ | (225) | |
Outstanding at December 31 | 1,310,090 |
| | $ | 16.85 |
| | $ | 32,253 |
| | 1,338,273 |
| | $ | 14.85 |
| | $ | 25,418 |
| | 1,444,954 |
| | $ | 12.61 |
| | $ | 32,928 |
| Outstanding at December 31 | 1,116,045 | | | $ | 23.07 | | | $ | 5,446 | | | 1,327,919 | | | $ | 18.13 | | | $ | 16,360 | | | 1,506,604 | | | $ | 14.65 | | | $ | 32,253 | |
Exercisable at December 31 | 1,088,970 |
| | $ | 12.84 |
| | $ | 31,177 |
| | 1,091,561 |
| | $ | 11.03 |
| | $ | 24,898 |
| | 1,167,040 |
| | $ | 9.20 |
| | $ | 30,576 |
| Exercisable at December 31 | 802,873 | | | $ | 19.79 | | | $ | 6,551 | | | 1,043,596 | | | $ | 14.27 | | | $ | 16,885 | | | 1,252,315 | | | $ | 11.17 | | | $ | 31,177 | |
The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stock price of Common Stock which would have been received by the option holders had all option holders exercised their options as of that date. The Company’s closing stock price of Common Stock was $41.47, $33.84$27.95, $30.45 and $35.40$36.06 as of December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
The weighted average fair value of options vested during 2019, 2018 and 2017 2016was $15.91, $16.54 and 2015 was $14.25, $12.05 and $10.85,$12.39, respectively. The total fair value of options that vested during the year amounted to $1.6 million, $1.4 million and $1.5$1.6 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. At December 31, 2017,2019, total compensation costs related to non-vested awards not yet recognized amounts to $4.8$5.2 million and will be recognized over a weighted average period of 2.32.34 years.
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding | | | | | | Exercisable | | | | |
Exercise Price Range | Shares | | Weighted Average Remaining Life in Years | | Weighted Average Exercise Price | | Shares | | Weighted Average Remaining Life in Years | | Weighted Average Exercise Price |
$ 3.19 – $ 13.63 | 419,944 | | | 1.9 | | $ | 9.58 | | | 419,944 | | | 1.9 | | $ | 9.58 | |
$ 22.69 – $ 35.82 | 677,848 | | | 7.3 | | $ | 30.82 | | | 364,676 | | | 6.0 | | $ | 30.25 | |
$ 45.89 – $ 45.89 | 18,253 | | | 5.2 | | $ | 45.89 | | | 18,253 | | | 5.2 | | $ | 45.89 | |
| 1,116,045 | | | 5.2 | | $ | 23.07 | | | 802,873 | | | 3.8 | | $ | 19.79 | |
|
| | | | | | | | | | | | | | | | | |
| Outstanding | | Exercisable |
Exercise Price Range | Shares | | Weighted Average Remaining Life in Years | | Weighted Average Exercise Price | | Shares | | Weighted Average Remaining Life in Years | | Weighted Average Exercise Price |
$ 3.07 - $ 3.67 | 470,757 |
| | 1.5 | | $ | 3.29 |
| | 470,757 |
| | 1.5 | | $ | 3.29 |
|
$ 6.35 - $ 6.35 | 15,055 |
| | 0.2 | | $ | 6.35 |
| | 15,055 |
| | 0.2 | | $ | 6.35 |
|
$ 8.83 - $15.68 | 374,619 |
| | 4.0 | | $ | 11.52 |
| | 374,619 |
| | 4.0 | | $ | 11.52 |
|
$ 26.09 - $41.19 | 429,819 |
| | 8.0 | | $ | 35.06 |
| | 208,699 |
| | 7.4 | | $ | 33.41 |
|
$ 52.77 - $52.77 | 19,840 |
| | 7.2 | | $ | 52.77 |
| | 19,840 |
| | 7.2 | | $ | 52.77 |
|
| 1,310,090 |
| | 4.4 | | $ | 16.85 |
| | 1,088,970 |
| | 3.6 | | $ | 12.84 |
|
Restricted Stock UnitsThe Company established Incentive Stock Option Plans for the purposefair value of attracting and retaining executive officers and key employees, and to align management’s interest with those of the shareholders. Generally, the options must be exercised within ten years from the grant date and vest ratably over a five-year period. The exercise price for the optionseach RSU granted is equal to the share price at the date of grant. At December 31, 2017, the Company had options outstanding for 1,034,898 shares under the plans.
The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with thosefair market value of the shareholders. The options must be exercised within ten years from the grant date. The exercise price for the option is equal to the share price at the date of grant and vests six months from the grant date. At December 31, 2017, the Company had options outstanding for 204,052 shares under the plans.
During 2017, the Company established the Long Term Incentive Plan for the purpose of attracting and retaining executive officers and key employees, and to align management's interest with those of the shareholders. The Plan contemplates the use of a mix of equity award types, and contains, with certain exceptions, a minimum three-year pro-rata vesting schedule for time-based awards. For stock options, the exercise price is equal to the share priceCompany’s Common Stock on the date of grant. Upon inception,The RSU’s cliff vest three years from the remaining options availabledate of grant. There were 87,634 RSU’s granted in 2019 at a weighted-average price of $36.01, of which 17,776 awards were vested during 2019. Forfeitures during the year were insignificant. Included in total equity-based compensation expense for future grant under the 2011 Incentive Stock Option Plan and the Directors Stock Option Plans were rolled in the Long Term Incentive Plan, and no further grants may be made out of those plans.year ended December 31, 2019 was $1.6 million related to RSU's. At December 31, 2017, the Company had stock options outstanding2019, total compensation costs related to non-vested awards not yet recognized amounts to $2.2 million and will be recognized over a weighted average period of 71,140 shares under the Long Term Incentiveapproximately 2 years.
Employee Stock Purchase Plan and there were 1,685,899 shares available for future grant under this plan.
In addition to the stock options and RSU's discussed above, the Company has established the Employee Stock Purchase Plan to encourage employees to invest in Astronics Corporation. The plan provides employees the opportunity to invest up to the IRS annual maximum of approximately $21,250$25,000 in Astronics common stock at a price equal to 85% of the fair market value of the Astronics common stock, determined each October 1. Employees are allowed to enroll annually. Employees indicate the number of shares they wish to obtain through the program and their intention to pay for the shares through payroll deductions over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annual cycle, and all money withheld from the employees pay is returned with interest. If an employee remains enrolled in the program, enough money will have been withheld from the employees’ pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2017,2019, employees had subscribed to purchase 129,798133,979 shares at $25.63$24.75 per share. The weighted average fair value of the options was approximately $5.92, $9.88$8.26, $8.48 and $6.93$5.15 for options granted during the year ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
The fair value for the options granted under the Employee Stock Purchase Plan was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | | 2018 | | | 2017 | |
Risk-free Interest Rate | 1.73 | % | | | 2.60 | % | | | 1.31 | % | |
Dividend Yield | — | % | | | — | % | | | — | % | |
Volatility Factor | 0.53 | | | | 0.33 | | | | 0.26 | | |
Expected Life in Years | 1.0 | | | 1.0 | | | 1.0 | |
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Risk-free Interest Rate | 1.31 | % | | | 0.63 | % | | | 0.31 | % | |
Dividend Yield | — | % | | | — | % | | | — | % | |
Volatility Factor | 0.26 | | | 0.45 | | | 0.40 | |
Expected Life in Years | 1.0 |
| | | 1.0 |
| | | 1.0 |
| |
NOTE 1417 — FAIR VALUE
ASC Topic 820, Fair valueValue Measurements and Disclosures, (“ASC Topic 820”) defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC Topic 820 defines fair value based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or liability.
ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
On a Recurring Basis:
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. TheThere were 0 financial liabilities carried at fair value measured on a recurring basis consisted of contingent consideration related to certain prior acquisitions, valued at zero at December 31, 2016. The values were determined using Level 3 inputs. There are no financialassets or liabilities carried at fair value measured on a recurring basis at December 31, 2017.2019 or 2018.
There were no financial assets carried atThe terms of the Diagnosys acquisition allow for a potential earn-out of up to an additional $13.0 million over the next three years based on achievement of new order levels of over $72.0 million during that period. The fair value measured on a recurring basisof this contingent consideration is estimated at $2.5 million as of December 31, 2017 or 2016.2019. The amounts recorded forfair value assigned to the contingent considerations were calculatedearn-out is determined using an estimate ofthe real options method, which requires inputs such as new order forecasts, discount rate, volatility factors, and other market variables to assess the probability of Diagnosys achieving certain order levels over the future cash outflows. The varying contingent payments were then discounted to the present value utilizing a discounted cash flow methodology. The contingent consideration liabilities had no observable Level 1 or Level 2 inputs. The change in the balance of contingent consideration during fiscal 2015 was primarily due to fair value adjustments of $1.8 million resulting from the re-evaluation of the probability of the achievement of the contingent consideration targets. This adjustment was recorded within SG&A expenses in the Consolidated Statements of Operations.period.
On a Non-recurring Basis:
In accordance with the provisions of ASC Topic 350, Intangibles – Goodwill and Other, the Company estimates the fair value of reporting units, utilizing unobservable Level 3 inputs. Level 3 inputs require significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. The Company utilizes a discounted cash flow method to estimate the fair value of reporting units utilizing unobservable inputs. The fair value measurement of the reporting unit under the step-one and step-two analysis of the quantitative goodwill impairment test are classified as Level 3 inputs. In 2019, we performed quantitative assessments for the reporting units which had goodwill as of the first day of the fourth quarter, prior to the initiation of the AeroSat restructuring activities. Based on our quantitative assessment, the Company recorded a full impairment charge of approximately $1.6 million in the December 31, 2019 consolidated statement of operations associated with the AeroSat reporting unit.
There were 0 impairment charges to goodwill in any of the Company’s reporting units in 2018.
As a result of the annual goodwill impairment test for 2017, the Company recorded an impairment charge of $16.2 million related to the Armstrong reporting unit. Due to the adoption of ASU No. 2017-04 on January 1, 2017, theThe goodwill impairment was calculated as the amount by which the reporting unit's carrying value exceeded its fair value, not to exceed the carrying value of goodwill. There were no impairment charges to goodwill in any of the Company’s reporting units in 2016 or 2015.
Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value. In conjunction with the restructuring of AeroSat in 2019, the Company recorded impairment charges to long-lived assets including intangible assets, property, plant and equipment and ROU assets of approximately $9.5 million in the Consolidated Statement of Operations associated to the AeroSat reporting unit in conjunction with restructuring activities.
There were no0 impairment charges to any of the Company’s long-lived assets in either of the Company’s segments in 2017, 20162018 or 2015.2017.
From time to time, the Company makes long-term, strategic equity investments in companies to promote business and strategic objectives. These investments are included in Other Assets on the Consolidated Balance Sheets. One of the investments incurred a full impairment charge which accounts for $5.0 million recorded within the Other Expense, Net of Other Income line in the accompanying Consolidated Statement of Operations for the year ended December 31, 2019. This is a Level 3 measurement as there were no observable price changes during the year.
The Armstrong, CCC,Freedom and CSCDiagnosys intangible assets were valued using a discounted cash flow methodology, as of their respective acquisitions dates, and are classified as Level 3 inputs.
Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair value due to the variable rate feature of these instruments.
NOTE 1518 — SELECTED QUARTERLY FINANCIAL INFORMATION
The following table summarizes selected quarterly financial information for 20172019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | | | | | | | | | | | |
(Unaudited) | Dec. 31, | | Sep. 28, | | June 29, | | March 30, | | Dec. 31, | | Sep. 29, | | June 30, | | March 31, |
(In thousands, except for per share data) | 2019 | | 2019 | | 2019 | | 2019 | | 2018 | | 2018 | | 2018 | | 2018 |
Sales | $ | 198,412 | | | $ | 177,018 | | | $ | 189,098 | | | | $ | 208,174 | | | | $ | 202,917 | | | | $ | 212,674 | | | | $ | 208,606 | | | | $ | 179,059 | |
Gross Profit (sales less cost of products sold) | $ | 26,908 | | | $ | 36,794 | | | $ | 40,363 | | | | $ | 52,077 | | | | $ | 47,672 | | | | $ | 46,320 | | | | $ | 49,572 | | | | $ | 37,132 | |
Impairment Loss | $ | 11,083 | | | $ | — | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
Income Before Income Taxes | $ | (43,282) | | | $ | 1,760 | | | $ | 8,830 | | | | $ | 100,995 | | | | $ | 15,594 | | | | $ | 15,580 | | | | $ | 17,182 | | | | $ | 3,926 | |
Net Income | $ | (34,065) | | | $ | 1,210 | | | $ | 6,726 | | | | $ | 78,146 | | | | $ | 12,485 | | | | $ | 16,999 | | | | $ | 14,025 | | | | $ | 3,294 | |
Basic Earnings Per Share | $ | (1.10) | | | $ | 0.04 | | | $ | 0.21 | | | | $ | 2.40 | | | | $ | 0.38 | | | | $ | 0.53 | | | | $ | 0.43 | | | | $ | 0.10 | |
Diluted Earnings Per Share | $ | (1.10) | | | $ | 0.04 | | | $ | 0.20 | | | | $ | 2.35 | | | | $ | 0.37 | | | | $ | 0.52 | | | | $ | 0.42 | | | | $ | 0.10 | |
Information for 2019 includes the results of Freedom, acquired on July 1, 2019, and Diagnosys, acquired on October 4, 2019, each from the acquisition date forward. Information for 2019 reflects the divestiture of the semiconductor business on February 13, 2019.
Additionally, several events occurred in the fourth quarter of 2019 which impacted the results as presented. Information included in 2019 is impacted by a significant increase to a legal reserve as well as restructuring, impairment and other charges as discussed in Note 19 and Note 23 in our consolidated financial statements, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended |
(Unaudited) | Dec. 31, | Sep. 30, | July 1, | April 1, | Dec. 31, | Oct. 1, | July 2, | April 2, |
(In thousands, except for per share data) | 2017 | 2017 | 2017 | 2017 | 2016 | 2016 | 2016 | 2016 |
Sales | $ | 171,318 |
| $ | 149,636 |
| $ | 151,114 |
| $ | 152,396 |
| $ | 154,068 |
| $ | 155,099 |
| $ | 164,426 |
| $ | 159,530 |
|
Gross Profit (sales less cost of products sold) | $ | 32,153 |
| $ | 32,493 |
| $ | 34,150 |
| $ | 38,317 |
| $ | 36,486 |
| $ | 38,663 |
| $ | 44,835 |
| $ | 39,483 |
|
Impairment Loss | $ | 16,237 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
(Loss) Income Before Income Taxes | $ | (9,715 | ) | $ | 8,646 |
| $ | 10,569 |
| $ | 15,491 |
| $ | 14,296 |
| $ | 16,422 |
| $ | 21,555 |
| $ | 16,512 |
|
Net (Loss) Income | $ | (5,653 | ) | $ | 6,060 |
| $ | 7,685 |
| $ | 11,587 |
| $ | 9,885 |
| $ | 12,074 |
| $ | 14,980 |
| $ | 11,485 |
|
Basic Earnings (Loss) Per Share | $ | (0.20 | ) | $ | 0.21 |
| $ | 0.27 |
| $ | 0.40 |
| $ | 0.34 |
| $ | 0.42 |
| $ | 0.51 |
| $ | 0.39 |
|
Diluted Earnings (Loss) Per Share | $ | (0.20 | ) | $ | 0.21 |
| $ | 0.26 |
| $ | 0.38 |
| $ | 0.33 |
| $ | 0.41 |
| $ | 0.50 |
| $ | 0.38 |
|
NOTE 1619 — COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under various lease contracts with terms that meet the accounting definition of operating leases, as well as finance leases. These arrangements may include fair value renewal or purchase options. Rental expenseRefer to Note 10 for the years ended December 31, 2017, 2016 and 2015 was $3.5 million, $3.9 million and $2.9 million, respectively. The following table represents future minimum lease payment commitments as of December 31, 2017:
|
| | | |
(In thousands) | |
2018 | $ | 4,141 |
|
2019 | 2,194 |
|
2020 | 530 |
|
2021 | 115 |
|
2022 | — |
|
| $ | 6,980 |
|
From time to time the Company may enter into purchase agreements with suppliers under which there is a commitment to buy a minimum amount of product. Purchase commitments outstanding at December 31, 2017 were $178.1 million. These commitments are not reflected as liabilities in the Company’s Consolidated Balance Sheets.additional information.
Legal Proceedings
On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim assertsasserted that oura subsidiary of the Company, AES, sold, marketed, and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa. The reliefLufthansa sought by Lufthansa includesan order requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers in Germany since November 26, 2003, and compensation for damages.damages related to direct sales of the allegedly infringing power supply system in Germany (referred to as “direct sales”). The claim doesdid not specify an estimate of damages and a related damages claim will be madeis being pursued by Lufthansa only if it receives a favorable ruling on the determination of infringement.in separate court proceedings in an action filed in July 2017, as further discussed below.
OnIn February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment doesdid not require AES to recall products that are already installed in aircraft or havehad been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required AES to provide certain financial information regarding direct sales of the infringing product in Germany to enable Lufthansa to make an estimate of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been issued to date. As of December 31, 2017 , there are no products in the distribution channels in Germany.
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Higher Regional Court of Karlsruhe issued its ruling and upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the German Federal Supreme Court. The Company believes it has valid defenses to refuteOn April 18, 2018, the decision. Should theGerman Federal Supreme Court decidegranted Astronics’ petition in part, namely with respect to hear the case,part concerning the amount of damages. On January 8, 2019, the German Federal Supreme Court held the hearing on the appeal. By judgment of March 26, 2019, the German Federal Supreme Court dismissed AES's appeal. With this decision, the above-mentioned proceedings are complete.
In July 2017, Lufthansa filed an action in the Regional State Court of Mannheim for payment of damages caused by the court’s decision that AES infringed the patent, specifically related to direct sales of the product into Germany (associated with the original December 2010 action discussed above). In this action, which was served to AES on April 11, 2018, Lufthansa claimed payment of approximately $6.2 million plus interest. An oral hearing was held on September 13, 2019. A first instance decision is in this matter was handed down on December 6, 2019. According to this ruling, Lufthansa was awarded damages in the amount of approximately $3.2 million plus interest. Inclusive of interest, this equates to approximately $4.5 million through December 31, 2019. Interest will continue to accrue at a statutory rate until final payment to Lufthansa. In February 2020 we received notice that Lufthansa’s intention is to provide a security and to enforce payment on the first instance judgment. If Lufthansa provides a security deposit in a sufficient amount, as they have stated is their intention, the Company will be required to remit the payment. Based on this information, we believe payment for damages and interest on the direct sales claim will be required in 2020. AES has appealed this decision and the appeal process is estimatedcurrently pending before the Higher Regional Court of Karlsruhe. If the first instance judgment is later reversed on appeal, the Company could reclaim any amounts that the court determines to extend upbe “excessive”, but there can be no assurances that we will be successful on such appeal. Prior to two years. We estimate AES’s potential exposure2019, the Company had accrued $1.0 million related to this matter. As a result of the judgment on direct sales into Germany, the Company has reflected an incremental reserve of $3.5 million in its December 31, 2019 financial statements related to this matter, tofor a total reserve of $4.5 million.
On December 29, 2017, Lufthansa filed another infringement action against AES in the Regional State Court of Mannheim claiming that sales by AES to its international customers have infringed Lufthansa's patent if AES's customers later shipped the products to Germany (referred to as “indirect sales”). This action, therefore, addresses sales other than those covered by the action filed on December 29, 2010, discussed above. In this action, served on April 11, 2018, Lufthansa sought an order obliging AES to provide information and accounting and a finding that AES owes damages for the attacked indirect sales. Moreover, Lufthansa sought accounting and a finding that the sale of individual components of the EmPower system – either directly to Germany or to international customers if these customers later shipped products to Germany – constitutes an indirect patent infringement of Lufthansa's patent in Germany. In addition, Lufthansa sought an order obliging AES to confirm by an affidavit that the accounting provided in September 2015 was accurate and a finding that AES is also liable for damages for the sale of modified products if the modification of the products was not communicated to all subsequent buyers of the products. No amount of claimed damages has been specified by Lufthansa.
An oral hearing in this matter was held on September 13, 2019, as part of the oral hearing for the direct sales damages claim discussed above. A first instance decision in this matter was handed down on December 6, 2019. According to this judgment, Lufthansa's claims were granted in part. The court granted Lufthansa's claims for a finding that indirect sales (as defined above)
by AES to international customers constitute a patent infringement under the conditions specified in the judgment and that the sale of components of the EmPower system to Germany constitutes an indirect patent infringement. Moreover, the Court granted Lufthansa's request for an affidavit confirming that the accounting provided in September 2015 was accurate. The Court rejected Lufthansa's request for a finding that AES is also liable for damages for the sale of modified products as inadmissible. This is relevant, as it provides that once AES modified the system to remove the infringing feature, any subsequent outlets are deemed not to be infringing outlets for purposes of calculating damages. AES and Lufthansa both appealed this decision and the appeal is currently pending before the Higher Regional Court of Karlsruhe. The appeal is not likely to be settled in 2020.
If the decision is confirmed on appeal, this would mean that AES would be responsible for payment of damages for indirect sales of patent-infringing EmPower in-seat power supply systems in the period from December 29, 2007 to May 22, 2018. AES modified the outlet units at the end of 2014 and the modified outlet units sold from 2015 do not infringe the patent of Lufthansa. Since only sales of systems comprising patent-infringing outlet units trigger damages claims, the period for which AES is liable for damages in connection with indirect sales finished at the end of 2014.
After the accounting, Lufthansa is expected to enforce its claim for damages in separate court proceedings. These proceedings would probably be tried before the Mannheim Court again, which makes it probable that the Mannheim court will determine the damages for the indirect sales on the basis of the same principles as in the direct sales proceedings. Based on the information available currently, we estimate that the resulting damages would be approximately $1$11.6 million plus approximately $4.5 million of accrued interest at the end of 2019, for a total of approximately $16.1 million. Similar to $3 million.the direct sales claim, interest will accrue at a rate of 5% above the European Central Bank rate until final payment to Lufthansa.
Based upon the determination of the damages in the direct sales claim discussed above, in the December 31, 2019 consolidated financial statements, we have reflected a total accrual (inclusive of interest through December 31, 2019) of $4.5 million related to the direct sales claim, and $16.1 million related to the indirect sales claim as management’s best estimate of the total exposure related to these matters that is probable and that can be reasonably estimated at this time. Expenses recorded in 2019 related to these claims ($3.5 million related to the direct sales claim and $16.1 million related to the indirect sales claim) have been recorded within Selling, General and Administrative Expense in the Company’s Consolidated Statement of Operations. We estimate that payment for the damages and related interest of the direct sales claim will be paid before December 31, 2020, therefore the liability related to this matter, totaling $4.5 million, is classified within Other Accrued Expenses (current) in the Consolidated Balance Sheet at December 31, 2019. In connection with the indirect sales claims, we currently believe it is unlikely that the appeals process will be completed and the damages and related interest will be paid before December 31, 2020. Therefore the liability related to this matter, totaling $16.1 million, is classified within Other Liabilities (non-current) in the Consolidated Balance Sheet at December 31, 2019.
In December 2017, Lufthansa filed patent infringement cases in the UK and in France against AES. The Lufthansa patent expired in May 2018. In those cases, Lufthansa accuses AES of having manufactured, used, sold and offered for sale a power supply system, and offered and supplied parts for a power supply system that infringed upon a Lufthansa patent in those respective countries. In the UK matter, a trial has been scheduled for June 2020 to address the issues of infringement and validity.
The France and UK claims are separate and apart from the claims in Germany and validity and infringement of the Lufthansa patent will first need to be determined by the courts in these countries, whose laws differ from those in Germany. Also the principles of calculating damages in German patent infringement proceedings differ substantially from the calculation methods in the UK and France. Therefore the Company has assessed this separate from the German claims. However, it reasonably possible that additional damages and interest could be incurred if the courts in France and the UK were to rule in favor of Lufthansa, but at this time we cannot reasonably estimate the range of loss. As loss exposure is notneither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigationthese matters as of December 31, 2017.
2019.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in thisthat action alleges that AES manufactures, uses, sells and offers for sale a power supply system that infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that involved in the German action. On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and unenforceable. On July 20, 2016, the U.S. District Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice.
Lufthansa appealed the District Court's decision to the United States Court of Appeals for the Federal Circuit. On October 19, 2017, the Federal Circuit affirmed the District Court'sdistrict court’s decision, holding that the sole independent claim of the patent is
indefinite, renderingrending all claims on the patent indefinite. Lufthansa did not file a petition for en banc rehearing or petition the U.S. Supreme Court for a writ of certiorari. Therefore, there is no longer a risk of exposure from that lawsuit.
Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our financial condition or results of operations.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2017.
NOTE 1720 — SEGMENTS
Segment information and reconciliations to consolidated amounts for the years ended December 31 are as follows:
| | (In thousands) | 2017 | | 2016 | | 2015 | (In thousands) | 2019 | | 2018 | | 2017 |
Sales: | | | | | | Sales: | | | | | |
Aerospace | $ | 534,724 |
| | $ | 534,408 |
| | $ | 549,738 |
| Aerospace | $ | 692,614 | | | $ | 675,744 | | | $ | 534,724 | |
Less Inter-segment Sales | (121 | ) | | (367 | ) | | — |
| Less Inter-segment Sales | (5) | | | (119) | | | (121) | |
Total Aerospace Sales | 534,603 |
| | 534,041 |
| | 549,738 |
| Total Aerospace Sales | 692,609 | | | 675,625 | | | 534,603 | |
| | | | | | |
Test Systems | 89,861 |
| | 99,082 |
| | 142,596 |
| Test Systems | 80,495 | | | 127,679 | | | 89,861 | |
Less Inter-segment Sales | — |
| | — |
| | (55 | ) | Less Inter-segment Sales | (402) | | | (48) | | | — | |
Test Systems | 89,861 |
| | 99,082 |
| | 142,541 |
| Test Systems | 80,093 | | | 127,631 | | | 89,861 | |
Total Consolidated Sales | $ | 624,464 |
| | $ | 633,123 |
| | $ | 692,279 |
| Total Consolidated Sales | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
Operating Profit and Margins: | | | | | | Operating Profit and Margins: | | | | | |
Aerospace | $ | 38,888 |
| | $ | 77,966 |
| | $ | 85,103 |
| Aerospace | $ | 16,657 | | | $ | 69,761 | | | $ | 38,888 | |
| 7.3 | % | | 14.6 | % | | 15.5 | % | | 2.4 | % | | 10.3 | % | | 7.3 | % |
Test Systems | 7,359 |
| | 8,507 |
| | 25,529 |
| Test Systems | 4,494 | | | 10,718 | | | 7,359 | |
| 8.2 | % | | 8.6 | % | | 17.9 | % | | 5.6 | % | | 8.4 | % | | 8.2 | % |
Total Operating Profit | $ | 46,247 |
| | $ | 86,473 |
| | $ | 110,632 |
| Total Operating Profit | $ | 21,151 | | | $ | 80,479 | | | $ | 46,247 | |
| 7.4 | % | | 13.7 | % | | 16.0 | % | | 2.7 | % | | 10.0 | % | | 7.4 | % |
Deductions from Operating Profit: | | | | | | |
Additions to (Deductions from) Operating Profit: | | Additions to (Deductions from) Operating Profit: | |
Net Gain on Sale of Businesses | | Net Gain on Sale of Businesses | $ | 78,801 | | | $ | — | | | $ | — | |
Interest Expense, Net of Interest Income | $ | (5,369 | ) | | $ | (4,354 | ) | | $ | (4,751 | ) | Interest Expense, Net of Interest Income | (6,141) | | | (9,710) | | | (5,369) | |
Corporate and Other Expenses, Net | (15,887 | ) | | (13,334 | ) | | (11,831 | ) | Corporate and Other Expenses, Net | (25,508) | | | (18,487) | | | (15,887) | |
Income before Income Taxes | $ | 24,991 |
| | $ | 68,785 |
| | $ | 94,050 |
| Income before Income Taxes | $ | 68,303 | | | $ | 52,282 | | | $ | 24,991 | |
Depreciation and Amortization: | | | | | | Depreciation and Amortization: | | | |
Aerospace | $ | 22,111 |
| | $ | 19,873 |
| | $ | 19,377 |
| Aerospace | $ | 27,879 | | | $ | 29,947 | | | $ | 22,111 | |
Test Systems | 4,302 |
| | 5,273 |
| | 5,209 |
| Test Systems | 4,534 | | | 4,500 | | | 4,302 | |
Corporate | 650 |
| | 644 |
| | 723 |
| Corporate | 636 | | | 585 | | | 650 | |
Total Depreciation and Amortization | $ | 27,063 |
| | $ | 25,790 |
| | $ | 25,309 |
| Total Depreciation and Amortization | $ | 33,049 | | | $ | 35,032 | | | $ | 27,063 | |
Assets: | | | | | | Assets: | | | |
Aerospace | $ | 621,047 |
| | $ | 500,892 |
| | $ | 510,884 |
| Aerospace | $ | 629,371 | | | $ | 647,870 | | | $ | 621,047 | |
Test Systems | 90,859 |
| | 76,575 |
| | 64,934 |
| Test Systems | 110,994 | | | 97,056 | | | 90,859 | |
Corporate | 24,050 |
| | 26,877 |
| | 33,425 |
| Corporate | 42,351 | | | 29,714 | | | 24,050 | |
Total Assets | $ | 735,956 |
| | $ | 604,344 |
| | $ | 609,243 |
| Total Assets | $ | 782,716 | | | $ | 774,640 | | | $ | 735,956 | |
Capital Expenditures: | | | | | | Capital Expenditures: | | | | | |
Aerospace | $ | 10,656 |
| | $ | 9,511 |
| | $ | 16,503 |
| Aerospace | $ | 11,552 | | | $ | 14,680 | | | $ | 10,656 | |
Test Systems | 2,721 |
| | 3,345 |
| | 2,103 |
| Test Systems | 380 | | | 1,370 | | | 2,721 | |
Corporate | 101 |
| | 181 |
| | 35 |
| Corporate | 151 | | | 267 | | | 101 | |
Total Capital Expenditures | $ | 13,478 |
| | $ | 13,037 |
| | $ | 18,641 |
| Total Capital Expenditures | $ | 12,083 | | | $ | 16,317 | | | $ | 13,478 | |
Operating profit is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment.
For the yearsyear ended December, 31 2019, there was a goodwill impairment loss of $1.6 million and intangible asset impairment of $6.2 million recorded in the Aerospace segment. In 2018, there were 0 goodwill or purchased intangible asset impairment losses in either the Aerospace or Test System segment. In 2017, there was a goodwill impairment loss of $16.2 million recorded in the Aerospace segment. In 2016 and 2015, there was no goodwill or purchased intangible asset impairment losses in either the Aerospace or Test System segment. In the Aerospace segment, goodwill amounted to $125.6$123.0 million and $115.2$125.0 million at December 31, 20172019 and 2016,2018, respectively. In the Test Systems segment, there was no goodwill amounted to $21.9 million as of December 31, 2017 and 2016.
2019. There was 0 goodwill in the Test Systems segment as of December 31, 2018.
The following table summarizes the Company’s sales into the following geographic regions for the years ended December 31:
| | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | | | | |
(In thousands) | | | | | | (In thousands) | 2019 | | 2018 | | 2017 |
United States | $ | 482,219 |
| | $ | 504,270 |
| | $ | 508,724 |
| United States | $ | 583,589 | | | $ | 575,830 | | | $ | 482,219 | |
North America (excluding United States) | 6,198 |
| | 12,331 |
| | 13,044 |
| North America (excluding United States) | 12,585 | | | 10,834 | | | 6,198 | |
Asia | 58,732 |
| | 52,171 |
| | 108,967 |
| Asia | 40,764 | | | 112,135 | | | 58,732 | |
Europe | 73,677 |
| | 61,200 |
| | 57,936 |
| Europe | 130,227 | | | 98,193 | | | 73,677 | |
South America | 1,280 |
| | 577 |
| | 1,112 |
| South America | 862 | | | 1,973 | | | 1,280 | |
Other | 2,358 |
| | 2,574 |
| | 2,496 |
| Other | 4,675 | | | 4,291 | | | 2,358 | |
| $ | 624,464 |
| | $ | 633,123 |
| | $ | 692,279 |
| |
Total | | Total | $ | 772,702 | | | $ | 803,256 | | | $ | 624,464 | |
The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31:
| | | 2017 | | 2016 | | 2015 | | | | | | | | | | |
(In thousands) | | | | | | (In thousands) | 2019 | | 2018 |
United States | $ | 116,026 |
| | $ | 114,048 |
| | $ | 115,117 |
| United States | $ | 101,169 | | | $ | 110,738 | |
France | 9,094 |
| | 8,216 |
| | 9,092 |
| France | 8,740 | | | 9,241 | |
India | | India | 1,509 | | | — | |
Canada | 710 |
| | 548 |
| | 533 |
| Canada | 1,081 | | | 883 | |
| $ | 125,830 |
| | $ | 122,812 |
| | $ | 124,742 |
| |
Total | | Total | $ | 112,499 | | | $ | 120,862 | |
Sales recorded by the Company’s foreign operations were $85.9 million, $70.6 million and $53.9 million $50.1 millionin 2019, 2018 and $50.8 million in 2017, 2016 and 2015, respectively. Net income from these locations was $8.6 million, $5.5 million and $2.2 million $1.8 millionin 2019, 2018 and $3.4 million in 2017, 2016 and 2015, respectively. Net assets held outside of the U.S. total $47.4$66.4 million and $36.8$45.0 million at December 31, 20172019 and 2016,2018, respectively. The exchange gainloss included in determining net income was insignificant in 20172019 and 2016.2018. Cumulative translation adjustments amounted to $(4.5)$(7.0) million and $(8.6)$(7.2) million at December 31, 20172019 and 2016,2018, respectively.
The Company has a significant concentration of business with two2 major customers; The Boeing Company (“Boeing”) and Panasonic Aviation Corporation (“Panasonic”) and The Boeing Company (“Boeing”). The following is information relating to the activity with those customers:
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Percent of Consolidated Sales | | | | | |
Boeing | 13.6% | | | 14.3% | | | 16.8% | |
Panasonic | 13.0% | | | 14.4% | | | 19.1% | |
|
| | | | | |
| 2017 |
| 2016 | | 2015 |
Percent of Consolidated Revenue | | | | | |
Panasonic | 19.1% | | 21.6% | | 21.0% |
Boeing | 16.8% | | 15.2% | | 13.0% |
| | (In thousands) | 2017 | | 2016 | (In thousands) | 2019 | | 2018 |
Accounts Receivable at December 31, | | | | Accounts Receivable at December 31, | | | |
Boeing | | Boeing | $ | 21,806 | | | $ | 24,649 | |
Panasonic | $ | 10,200 |
| | $ | 17,126 |
| Panasonic | $ | 15,831 | | | $ | 14,994 | |
Boeing | $ | 12,969 |
| | $ | 11,737 |
| |
Sales to Boeing and Panasonic are primarily in the Aerospace segment. Sales to Boeing occur in both segments.
NOTE 1821 — ACQUISITIONS
Diagnosys Inc. and its affiliates
On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited for $7.0 million in cash, plus an earn-out estimated at a fair value of $2.5 million. The terms of the acquisition allow for a potential earn-out of up to an additional
$13.0 million over the next three years based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India. Diagnosys is included in our Test Systems segment. Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets.
The purchase price allocation for this acquisition has not yet been finalized. Purchased intangible assets and goodwill are not expected to be deductible for tax purposes. This transaction was not considered material to the Company’s financial position or results of operations.
Freedom Communication Technologies, Inc.
On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom Communication Technologies, Inc. Freedom, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market. Freedom is included in our Test Systems segment. The total consideration for the transaction was $21.8 million, net of $0.6 million in cash acquired. The purchase price allocation for this acquisition has not yet been finalized. Purchased intangible assets and goodwill are not expected to be deductible for tax purposes. This transaction was not considered material to the Company’s financial position or results of operations.
Astronics Connectivity Systems and Certification Corp.
On December 1, 2017, Astronics completed the acquisition of substantially all of the assets and liabilities of Telefonix Inc., including 100% of the stock of a related company, Product Development Technologies, LLC and its subsidiaries. The combined group designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design consultancy services for the global aerospace industry. The company’s products include wireless access points, file servers, content loaders, passenger control units and cord reels, as well as engineering services for its customers. We purchased the assets of these companies for approximately $103.8 million, net of $0.2 million in cash acquired. The acquired companies are included in our Aerospace reporting segment.
The allocation of the purchase price paid for CSC is based on fair values of the acquired assets and liabilities assumed of CSC as of December 1, 2017.
The preliminary allocation of purchase price based on appraised fair values was as follows (in thousands):
|
| | | | |
Cash | | $ | 213 |
|
Accounts Receivable | | 9,300 |
|
Inventory | | 12,558 |
|
Other Current Assets | | 274 |
|
Fixed Assets | | 1,434 |
|
Other Long Term Assets | | 50 |
|
Purchased Intangible Assets | | 62,200 |
|
Goodwill | | 23,397 |
|
Accounts Payable, Accrued Expenses, and Other Current Liabilities | | (5,372 | ) |
Total Purchase Price | | $ | 104,054 |
|
The preliminary amounts allocated to the purchased intangible assets consist of the following:
|
| | | | | | |
(In thousands) | | Weighted Average Life | | Acquisition Fair Value |
Trademark | | 9 Years | | $ | 1,000 |
|
Technology | | 9 Years | | 12,000 |
|
Backlog | | 0.4 Years | | 2,800 |
|
Non-compete Agreements | | 3 - 5 years | | 8,400 |
|
Customer Relationships/Backlog | | 15 Years | | 38,000 |
|
| | | | $ | 62,200 |
|
Goodwill and other intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed. The goodwill is primarily attributable to expected synergies and the assembled workforce. All of the goodwill and purchased intangible assets are expected to be deductible for tax purposes over 15 years.
The acquired companies are included in our Aerospace reporting segment. Adjustments made to the preliminary purchase price valuation during the measurement period were not significant. The purchase price allocation for this acquisition has been finalized.
The following is a summary of the sales and amounts included in income from operations for CSC included in the consolidated financial statements of the Company from the date of acquisition to December 31, 2017 (in thousands):
|
| | | | |
Sales | | $ | 6,174 |
|
Operating Loss | | $ | (499 | ) |
| | | | | | | | |
Sales | | $ | 6,174 | |
Operating Loss | | $ | (499) | |
The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of CSC as if the acquisition took place on January 1, 2017. The pro forma consolidated results include the impact of certain adjustments, including increased interest expense on acquisition debt, amortization of purchased intangible assets and income taxes.
|
| | | | | | | | |
| | UNAUDITED |
(in thousands, except earnings per share) | | 2017 | | 2016 |
Sales | | $ | 683,541 |
| | $ | 686,143 |
|
Net income | | $ | 18,302 |
| | $ | 41,672 |
|
Basic earnings per share | | $ | 0.64 |
| | $ | 1.43 |
|
Diluted earnings per share | | $ | 0.62 |
| | $ | 1.39 |
|
| | | | | | | | | | |
| | Unaudited | | |
(In thousands, except earnings per share) | | 2017 | | |
Sales | | $ | 683,541 | | | |
Net income | | $ | 18,302 | | | |
Basic earnings per share | | $ | 0.56 | | | |
Diluted earnings per share | | $ | 0.54 | | | |
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the year ended December 31, 2017 and 2016.2017. In addition, they are not intended to be a projection of future results.
Astronics Custom Control Concepts, Inc.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company, acquired substantially all the assets and certain liabilities of Custom Control Concepts LLC (“CCC”), located in Kent, Washington. CCC is a provider of cabin management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was approximately $10.2 million, net of $0.5 million in cash acquired. All of the goodwill and purchased intangible assets are expected to be deductible for tax purposes over 15 years. CCC is included in our Aerospace segment. The purchase price allocation for this acquisition has been finalized.
Armstrong Aerospace, Inc.NOTE 22 — DIVESTITURE ACTIVITIES
Semiconductor Test Business
As of December 31, 2018, the Company’s Board of Directors approved a plan to sell the semiconductor test business within the Test Systems segment. Accordingly, the assets and liabilities associated with these operations have been classified as held for sale in the accompanying consolidated Balance Sheet at December 31, 2018. The carrying value of the disposal group was lower than its fair value, less costs to sell, and accordingly, 0 impairment loss was required at December 31, 2018.
The following is a summary of the assets and liabilities held for sale as of December 31:
| | | | | |
(In thousands) | 2018 |
Assets Held for Sale | |
Inventories | $ | 14,385 | |
Prepaid Expenses and Other Current Assets | 87 | |
Net Property, Plant and Equipment | 3,521 | |
Other Assets | 714 | |
Intangible Assets, Net of Accumulated Amortization | 651 | |
Total Assets Held for Sale | $ | 19,358 | |
| |
Liabilities Held for Sale | |
Deferred Income Taxes | $ | 906 | |
On January 14, 2015,February 13, 2019, the Company purchased 100%completed the divestiture. The business was not core to the future of the equityTest Systems segment. The total proceeds received for the sale amounted to $103.8 million. The Company recorded a pre-tax gain on the sale of Armstrongapproximately $80.1 million in the first quarter of 2019. The income tax expense relating to the gain was $19.7 million.
The transaction also includes two elements of contingent earnouts. The First Earnout is calculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in each annual period from 2019 through 2022. The First Earnout may not exceed $35.0 million in total. The Second Earnout is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for $52.3each annual period from 2019 through 2022. The Second Earnout is not capped. For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, 0 amounts will be paid relative to such annual period; the sales in such annual period do not carry over to the next annual period. Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company will recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. No amounts were payable to the Company under the First Earnout.
Airfield Lighting Product Line
On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. Armstrong, locatedThe Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million. This amount is reported in Itasca, Illinois, isthe Consolidated Condensed Statement of Operations in Net Gain on Sales of Businesses in the year ended December 31, 2019.
As of December 31, 2019, the Company has agreed to sell certain facilities within the Aerospace segment. Accordingly, the property, plant and equipment assets associated with these facilities of $1.5 million have been classified as held for sale in the consolidated Balance Sheet at December 31, 2019.
NOTE 23 — RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES
Antenna Business Impairment and Restructuring
In 2019, we performed quantitative assessments for the reporting units which had goodwill as of the first day of the fourth quarter, prior to the initiation of the antenna business restructuring activities. Based on our quantitative assessment, the Company recorded a leading providerfull goodwill impairment charge of engineering, designapproximately $1.6 million in the December 31, 2019 Consolidated Statement of Operations associated with the AeroSat reporting unit.
In the fourth quarter of 2019, in an effort to reduce the significant operating losses at our AeroSat business, we initiated a restructuring plan to reduce costs and certification solutionsminimize losses of our AeroSat antenna business. The plan narrows the initiatives for commercial aircraft, specializingthe AeroSat business to focus primarily on near-term opportunities pertaining to business jet connectivity. The plan has a downsized manufacturing operation remaining in connectivity, in-flight entertainment,New Hampshire, with significantly reduced personnel and electrical power systems. Armstrongoperating expenses.
As a result of the restructuring plan, the Company's total impairments and restructuring charges recorded in the fourth quarter of 2019 (including the goodwill impairment described above) amounted to $28.8 million, all of which is included in ourthe Aerospace segment. This transaction was not considered material to the Company’s financial position or results of operations. AllAny future restructuring actions will depend upon market conditions, customer actions and other factors.
A summary of the goodwillrestructuring, impairment and purchased intangible assetsother charges, and their location on the Consolidated Statement of Operations, are presented as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring Charges | | | | | | |
(In thousands) | Cost of Products Sold | | Selling, General and Administrative | | Impairment Loss | | Amounts |
Accounts Receivable, Net | $ | — | | | $ | 1,785 | | | $ | — | | | $ | 1,785 | |
Inventories | 9,429 | | | — | | | — | | | 9,429 | |
Prepaid Expenses and Other Current Assets | 1,227 | | | — | | | — | | | 1,227 | |
Property, Plant and Equipment, Net | — | | | — | | | 2,268 | | | 2,268 | |
Other Assets | — | | | 122 | | | 1,019 | | | 1,141 | |
Intangible Assets, Net | — | | | — | | | 6,186 | | | 6,186 | |
Goodwill | — | | | — | | | 1,610 | | | 1,610 | |
Accrued Payroll and Employee Benefits | — | | | 449 | | | — | | | | 449 | |
Other Accrued Expenses | 164 | | | — | | | — | | | | 164 | |
Other Liabilities | 4,577 | | | — | | | — | | | 4,577 | |
| $ | 15,397 | | | $ | 2,356 | | | $ | 11,083 | | | | $ | 28,836 | |
The charge to Prepaid Expenses and Other Current Assets is comprised of prepaid installation fees associated with programs that were either cancelled or are no longer being pursued as a result of the restructuring. The charge to Other Assets is comprised of the right-of-use asset values for the AeroSat facility lease. The charge to Accrued Payroll and Employee Benefits is comprised of employee termination benefits expected to be deductiblepaid in 2020.The charge to Other Accrued Expenses and Other Liabilities represents the estimated current and non-current portions of payments to be made under non-cancelable inventory purchase commitments in the future for tax purposes over 15 years. The purchase price allocationinventory which is not expected to be purchased prior to the expiration date of such agreements as a result of the restructuring plan. None of the restructuring or impairment charges resulted in the utilization of cash during 2019.
Financial Instrument Impairment
From time to time, the Company makes long-term, strategic equity investments in companies to promote business and strategic objectives. These investments are included in Other Assets on the Consolidated Balance Sheets. One of the investments incurred a full impairment charge which accounts for this acquisition has been finalized.$5.0 million recorded within the Other Expense, Net of Other Income line in the accompanying Consolidated Statement of Operations for the year ended December 31, 2019.
Acquisition costs are expensed as incurred. Acquisition related expenses were approximately $0.3 million in 2017, insignificant in 2016, and $0.4 million in 2015.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of Company Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report, to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are effective to ensure such information is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
See the report appearing under Item 8, Financial Statements and Supplemental Data, Managements Report on Internal Control Over Financial Reporting.
Remediation of Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we previously reported was identified as of December 31, 2016 related to the design of information technology change controls over a report writing application. Additionally, management identified deficiencies in certain review controls over the financial statement consolidation process, which when aggregated along with the information technology change controls matter described above, aggregated to a material weakness over the financial statement close process as of December 31, 2016.
The Company has implemented changes to the design and application of new controls and has made significant changes to the design of existing controls over information technology as well as controls related to the financial statement consolidation process. During the fourth quarter of fiscal 2017, we successfully completed the testing necessary to conclude that the material weaknesses have been remediated.
Changes in Internal Control over Financial Reporting
We have taken actions to remediate the material weaknesses related to our internal control over financial reporting, as described in Remediation of Material Weaknesses above. Other than remediation of the material weaknesses referenced above, thereThere have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding directors is contained under the captions “Election of Directors” and “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference to the 20182020 Proxy to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.
The executive officers of the Company, their ages, their positions and offices with the Company, and the date each assumed their office with the Company as of December 31, 2019, are as follows:
|
| | | | | | | | | | |
Name and Age of Executive Officer | Positions and Offices with Astronics | | Year First Elected Officer |
Peter J. Gundermann Age 5557 | President, Chief Executive Officer and Director of the Company | | 2001 |
David C. Burney Age 5557 | Executive Vice President, Secretary and Chief Financial Officer of the Company | | 2003 |
Mark A. Peabody Age 5860 | Astronics Advanced Electronic Systems President and Executive Vice President of Astronics Corporation | | 2010 |
James S. Kramer Age 5456 | Luminescent Systems Inc. President and Executive Vice President of Astronics Corporation | | 2010 |
James F. Mulato Age 59 | President of Astronics Test Systems, Inc. and Executive Vice President of Astronics Corporation | | 2019 |
Michael C. Kuehn Age 59 | Astronics Connectivity Systems & Certification Corp. and Armstrong Aerospace, Inc. President and Executive Vice President of Astronics Corporation | | 2019 |
The principal occupation and employment for all executives listed aboveMessrs. Gundermann, Burney, Kramer, Mulato and Peabody for the past five years has been with the Company.Company in their respective current roles.
Mr. Kuehn and Mr. Mulato became Executive Vice Presidents of the Company on January 1, 2019.
Mr. Kuehn has been the President of Astronics Connectivity Systems & Certification Corp. (“ACSC”) since its acquisition by the Company in 2017, and the President of Armstrong Aerospace, Inc. since 2018. Prior to acquisition, Mr. Kuehn ran the ACSC business as President of Telefonix, Incorporated for eight years.
The Company has adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, Chief Financial Officer as well as other directors, officers and employees of the Company. This Code of Business Conduct and Ethics is available upon request without charge by contacting Astronics Corporation Investor Relations at (716) 805-1599. The Code of Business Conduct and Ethics is also available on the Investors section of the Company’s website at www.astronics.com.
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ITEM 11.ITEM 11.EXECUTIVE COMPENSATION | EXECUTIVE COMPENSATION |
The information contained under the caption “Executive Compensation” and “Summary Compensation Table” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Executive Compensation” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information contained under the captions “Certain Relationships and Related Transactions and Director Independence” and “Proposal One: Election of Directors” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.
| |
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the caption “Audit and Non-Audit Fees” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.
PART IV
| |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | The documents filed as a part of this report are as follows: |
a.The documents filed as a part of this report are as follows:
| |
1. | The following financial statements are included: |
1.The following financial statements are included:
| |
(i) | Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015i.Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 ii.Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 iii.Consolidated Balance Sheets as of December 31, 2019 and 2018 iv.Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 v.Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017 vi.Notes to Consolidated Financial Statements vii.Reports of Independent Registered Public Accounting Firm viii.Management’s Report on Internal Control Over Financial Reporting 2. Financial Statement Schedule |
| |
(ii) | Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 |
| |
(iii) | Consolidated Balance Sheets as of December 31, 2017 and 2016 |
| |
(iv) | Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
|
| |
(v) | Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
|
| |
(vi) | Notes to Consolidated Financial Statements |
| |
(vii) | Reports of Independent Registered Public Accounting Firm |
| |
(viii) | Management’s Report on Internal Control Over Financial Reporting |
| |
2. | Financial Statement Schedule |
Schedule II. Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or the notes thereto.
3. Exhibits
|
| | | | | | | |
Exhibit No. | | Description |
| | |
| | Restated Certificate of Incorporation, incorporated by reference to the registrant’s 2013 Annual Report on Form 10-K, Exhibit 3(a), filed March 7, 2014 (File No. 000-07087). |
| | |
| | By-Laws, as amended, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 3(b), filed March 11, 2009 (File No. 000-07087). |
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| | Certificate of Amendment of the Certificate of Incorporation of Astronics Corporation, incorporated by reference to the registrant’s Form 8-K, Exhibit 3.1, filed July 1, 2016 (File No. 000-07087). |
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| | Restated Thrift and Profit Sharing Retirement Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.1, filed March 3, 2011 (File No. 000-07087). |
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| | 2001 Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.4, filed March 3, 2011 (File No. 000-07087). |
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| | Non-Qualified Supplemental Retirement Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.5, filed March 3, 2011 (File No. 000-07087). |
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| | Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation and Peter J. Gundermann, President and Chief Executive Officer of Astronics Corporation, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.6, filed March 3, 2011 (File No. 000-07087). |
| | |
| | Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation and David C. Burney, Vice President and Chief Financial Officer of Astronics Corporation, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.7, filed March 3, 2011 (File No. 000-07087). |
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| | 2005 Director Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.8, filed March 3, 2011 (File No. 000-07087). |
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| | Supplemental Retirement Plan, Amended and Restated, March 6, 2012, incorporated by reference to the registrant’s 2012 Annual Report on Form 10-K, Exhibit 10.10, filed February 22, 2013 (File No. 000-07087). |
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| | First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between Astronics Corporation and Peter J. Gundermann, President and Chief Executive Officer of Astronics, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 10.11, filed March 11, 2009 (File No. 000-07087). |
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| | First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between Astronics Corporation and David C. Burney, Vice President and Chief Financial Officer of Astronics Corporation, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 10.12, filed March 11, 2009 (File No. 000-07087). |
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| | Employment Termination Benefits Agreement Dated February 18, 2005 between Astronics Corporation and Mark A. Peabody, Executive Vice President of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.13, filed March 3, 2011 (File No. 000-07087). |
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| | First Amendment of the Employment Termination Benefits Agreement dated December 31, 2008 between Astronics Corporation and Mark A. Peabody, Executive Vice President of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.14, filed March 3, 2011 (File No. 000-07087). |
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| | Form of Indemnification Agreement as executed by each of Astronics Corporation’s Directors and Executive Officers, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.15, filed March 3, 2011 (File No. 000-07087). |
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| | 2011 Employee Stock Option Plan, incorporated by reference to the registrant’s Form S-8, Exhibit 4.1 filed on August 4, 2011 (File No. 000-07087). |
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| | Supplemental Retirement Plan II, incorporated by reference to the registrant’s 2012 Annual Report on Form 10-K, Exhibit 10.18, filed February 22, 2013 (File No. 000-07087). |
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| | Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Company, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed May 29, 2013 (File No. 000-07087). |
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| | Amendment to the Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Company, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed July 19, 2013 (File No. 000-07087). |
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| | Asset Purchase Agreement by and among Astronics AS Corporation, AeroSat Corporation, AeroSat Airborne Internet LLC, AeroSat Avionics, LLC and AeroSat Tech Licensing, LLC, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed October 1, 2013 (File No. 000-07087). |
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| | Sale Agreement relating to PGA Electronic, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed November 5, 2013 (File No. 000-07087). |
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| | Guarantee Agreement relating to PGA Electronic, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.2, filed November 5, 2013 (File No. 000-07087).
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| | Purchase Agreement between EADS North America Inc. and Astronics Corporation dated as of January 20, 2014, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1 filed January 21, 2014 (File No. 000-07087). |
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| | Fourth Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC Bank USA, National Association, Bank of America, N.A. and Manufacturers and Traders Trust Company, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed September 26, 2014 (File No. 000-07087). |
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| | Stock Purchase Agreement between Planesite Holdings Inc., the shareholders of Planesite, Robert Abbinante and Astronics Corporation dated as of December 23, 2014, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1 filed December 24, 2014 (File No. 000-07087). |
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| | Amendment No.1 to the Fourth Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC Bank USA, National Association, Bank of America, N.A., Manufacturers and Traders Trust Company and Wells Fargo Bank, incorporated by reference to the registrant's Form 8-K, Exhibit 10.1, filed January 15, 2016 (File No. 000-07087). |
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| | Astronics Corporation 2017 Long Term Incentive Plan (incorporated by reference as Exhibit A to the Registrant’s Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 17, 2017).
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| | Asset Purchase Agreement dated as of March 16, 2017 by and between UJB Acquisition Corp. and Custom Control Concepts LLC filed as Exhibit 10.1 on Form 8-K filed on April 6, 2017 (File No. 000-07087). |
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| | Asset Purchase Agreement entered as of October 26, 2017, by and among Talon Acquisition Corp., Telefonix, Incorporated, Product Development Technologies, LLC, and Paul Burke filed as Exhibit 10.1 on Form 8-K filed on October 27, 2017 (File No. 000-07087). |
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| | Fifth Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC Bank USA, National Association, HSBC Securities (USA) Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc., and Suntrust Bank, filed as Exhibit 10.1 on Form 8-K filed on February 21, 2018 (File No. 000-07087). |
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| | Amended and Restated Asset Purchase Agreement dated as of February 13, 2019 by and Among Astronics Test Systems, Inc., Astronics Corporation and Advantest Test Solutions, Inc., filed as Exhibit 10.1 on Form 8-K filed on February 19, 2019 (File No. 000-07087). |
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| | Stock Purchase Agreement dated as of July 1, 2019, among Astronics Corporation, Freedom Communication Technologies, the Sellers and Hanover Partners, filed as Exhibit 10.1 on Form 8-K Filed on July 1, 2019 (File No. 000-07087) |
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| | Amendment to the Astronics Corporation 2017 Long Term Incentive Plan, dated December 14, 2018. |
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| | Subsidiaries of the Registrant; filed herewith. |
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| | Consent of Independent Registered Public Accounting Firm; filed herewith. |
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| | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; filed herewith. |
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| | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; filed herewith. |
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| | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002; filed herewith. |
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101.INS** | | XBRL Instance Document |
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101.INS** | | XBRL Instance Document |
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101.SCH** | | XBRL Taxonomy Extension Schema Document |
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101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Identifies a management contract or compensatory plan or arrangement as required by Item 15(a) (3) of Form 10-K. |
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** | Submitted electronically herewith |
SCHEDULE II
Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year | | Description | | Balance at the Beginning of Period | | Additions Charged to Cost and Expense | | Write-Offs/Other | | Balance at End of Period |
(In thousands) | | | | | | | | | | |
2019 | | Allowance for Doubtful Accounts | | $ | 1,486 | | | $ | 2,144 | | | $ | (71) | | | $ | 3,559 | |
| | Reserve for Inventory Valuation | | 20,826 | | | 14,803 | | | (2,023) | | | 33,606 | |
| | Deferred Tax Valuation Allowance | | 8,098 | | | 5,205 | | | — | | | 13,303 | |
2018 | | Allowance for Doubtful Accounts | | $ | 960 | | | $ | 589 | | | $ | (63) | | | $ | 1,486 | |
| | Reserve for Inventory Valuation | | 18,013 | | | 2,682 | | | 131 | | | 20,826 | |
| | Deferred Tax Valuation Allowance | | 7,823 | | | 275 | | | — | | | 8,098 | |
2017 | | Allowance for Doubtful Accounts | | $ | 602 | | | $ | 87 | | | $ | 271 | | | $ | 960 | |
| | Reserve for Inventory Valuation | | 15,410 | | | 2,885 | | | (282) | | | 18,013 | |
| | Deferred Tax Valuation Allowance | | 3,816 | | | 4,007 | | | — | | | 7,823 | |
|
| | | | | | | | | | | | | | | | | | |
Year | | Description | | Balance at the Beginning of Period | | Additions Charged to Cost and Expense | | Write-Offs/Other | | Balance at End of Period |
(In thousands) | | | | | | | | | | |
2017 | | Allowance for Doubtful Accounts | | $ | 602 |
| | $ | 87 |
| | $ | 271 |
| | $ | 960 |
|
| | Reserve for Inventory Valuation | | 15,410 |
| | 2,885 |
| | (282 | ) | | 18,013 |
|
| | Deferred Tax Valuation Allowance | | 3,816 |
| | 4,007 |
| | — |
| | 7,823 |
|
2016 | | Allowance for Doubtful Accounts | | $ | 312 |
| | $ | 388 |
| | $ | (98 | ) | | $ | 602 |
|
| | Reserve for Inventory Valuation | | 14,594 |
| | 2,015 |
| | (1,199 | ) | | 15,410 |
|
| | Deferred Tax Valuation Allowance | | 2,640 |
| | 1,176 |
| | — |
| | 3,816 |
|
2015 | | Allowance for Doubtful Accounts | | $ | 293 |
| | $ | 68 |
| | $ | (49 | ) | | $ | 312 |
|
| | Reserve for Inventory Valuation | | 12,276 |
| | 3,120 |
| | (802 | ) | | 14,594 |
|
| | Deferred Tax Valuation Allowance | | 3,134 |
| | — |
| | (494 | ) | | 2,640 |
|
| |
ITEM 16. | FORM 10-K SUMMARY |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on February 28, 2018.
| | | | | | | | | | | | | | | | | | | | |
Astronics Corporation | | | | | | |
| | | | | | |
Astronics CorporationBy | | |
| | | |
By | | /s/ Peter J. Gundermann | | By | | /s/ David C. Burney |
Peter J. Gundermann President and Chief Executive Officer | | | | David C. Burney, Executive Vice President, Chief Financial Officer | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
Signature | | Title | | Date |
| | |
/s/ Peter J. Gundermann | | President and Chief Executive Officer (Principal Executive Officer) | | February 28, 2018March 2, 2020 |
Peter J. Gundermann | | | | |
| | | | |
/s/ David C. Burney | | Executive Vice President, Chief Financial Officer (Principal Financial Officer) | | February 28, 2018March 2, 2020 |
David C. Burney | | | | |
| | | | |
/s/ Nancy L. Hedges | | Corporate Controller and Principal Accounting Officer | | February 28, 2018March 2, 2020 |
Nancy L. Hedges | | | | |
| | | | |
/s/ Raymond W. Boushie | | Director | | February 28, 2018March 2, 2020 |
Raymond W. Boushie | | | | |
| | | | |
/s/ Robert T. Brady | | Director | | February 28, 2018March 2, 2020 |
Robert T. Brady | | | | |
| | | | |
/s/ John B. DrenningTonit Calaway | | Director | | February 28, 2018March 2, 2020 |
John B. DrenningTonit Calaway | | | | |
| | | | |
/s/ Peter J. GundermannJeffry D. Frisby | | Director | | February 28, 2018March 2, 2020 |
Jeffry D. Frisby | | | | |
| | | | |
/s/ Peter J. Gundermann | | |
| | |
/s/ Kevin T. Keane | | Director | | February 28, 2018March 2, 2020 |
Kevin T. KeanePeter J. Gundermann | | | | |
| | | | |
/s/ Robert J. McKennaWarren C. Johnson | | Director | | February 28, 2018March 2, 2020 |
Robert J. McKenna | | |
| | | | |
/s/ Jeffry D. Frisby | |
Director
| | February 28, 2018 |
Jeffry D. Frisby | | |
| | | | |
/s/ Warren C. Johnson | |
Director
| | February 28, 2018 |
Warren C. Johnson | | | | |
/s/ Robert S. Keane | | Director | | March 2, 2020 |
Robert S. Keane | | | | |
| | | | |
/s/ Neil Kim | |
Director | | February 28, 2018March 2, 2020 |
Neil Kim | | | | |
| | | | |
/s/ Mark J. Moran | | Director | | March 2, 2020 |
Mark J. Moran | | | | |