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 and electronics 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 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. 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”).
The Company has two 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 aerospace and defense, communications and mass transit test systems as well as training and simulation devices for both commercial and military applications.
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 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 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.
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 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 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.
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 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 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 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. 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, 2019, 2018 and 2017.
Shipping and Handling
Shipping and handling costs 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-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 records 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.
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 $13.7 million, $15.0 million and $14.1 million in 2019, 2018 and 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’s nine reporting units with goodwill 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 sales 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. 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.
See Note 7 for further information regarding the goodwill impairment charge in 2019 associated to the AeroSat reporting unit. The 2018 assessment indicated no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charge was recognized. An impairment charge associated with the Armstrong reporting unit was recorded as result of 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. 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 result of their nominal projected future cash flows and the Company recorded a full impairment charge of approximately $6.2 million in the December 31, 2019 consolidated statement of operations associated to intangible assets of the AeroSat reporting unit in conjunction with restructuring activities. The qualitative factors applied under this new provision indicated no impairment to the Company’s indefinite lived intangible assets in 2018 or 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 sales 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 2018 and 2017.
Dividends
The Company has not paid any cash dividends in the three-year period ended December 31, 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”). 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 21 regarding the acquisitions in 2019.
Newly Adopted and Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted
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Standard
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Description
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Financial Statement Effect or Other Significant Matters
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ASU No. 2016-02
Leases (Topic 842)
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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.
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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
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Recent Accounting Pronouncements Not Yet Adopted
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Standard
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Description
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Financial Statement Effect or Other Significant Matters
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ASU No. 2016-13
Financial Instruments - Credit Losses (Topic 326)
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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.
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This ASU does not have a significant impact on our consolidated financial statements.
Planned date of adoption: Q1 2020
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ASU No. 2018-13
Fair Value Measurement (Topic 820)
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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.
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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
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ASU No. 2018-14
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)
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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.
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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
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We consider the applicability 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, was adopted on January 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings, 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 are 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 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 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 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 satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.
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 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, 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 simultaneously receiving and consuming the benefits 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 remaining 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 Consolidated Balance Sheet.
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 satisfies the performance obligation related to the individual contract. Once the beginning contract liability balance for an individual contract has been fully recognized as revenue, any additional payments received in the period are recognized as revenue once the related costs have been incurred.
We recognized $19.6 million and $8.1 million during the year ended December 31, 2019 and 2018, respectively, in revenues that were included in the contract liability balance at the beginning of the period.
The Company's contract assets and contract liabilities consist of costs and profits in excess of billings and billings in excess of cost and profits, respectively. Non-current contract liabilities are reported in our Consolidated Balance Sheet within Other Liabilities. The following table presents the beginning and ending balances of contract assets and contract liabilities:
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(In thousands)
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Contract Assets
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Contract Liabilities
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Beginning Balance, January 1, 2019
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$
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33,030
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$
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27,347
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Ending Balance, December 31, 2019
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$
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19,567
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$
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38,758
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The decrease in contract assets reflects the net impact of revenue recognized in excess of additional unbilled revenues recorded during the period. The increase in contract liabilities reflects the net impact of additional customer advances or deferred revenues recorded in excess of revenue recognized during the period and acquired contract liabilities.
The following table presents our revenue disaggregated by Market Segments as of December 31 as follows:
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(In thousands)
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2019
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2018
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2017
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Aerospace Segment
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Commercial Transport
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$
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523,921
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$
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536,269
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$
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414,523
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Military
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76,542
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68,138
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61,270
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Business Jet
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67,541
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43,090
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41,298
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Other
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24,605
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28,128
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17,512
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Aerospace Total
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692,609
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675,625
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534,603
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Test Systems Segment
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Semiconductor
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9,692
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84,254
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31,999
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Aerospace & Defense
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70,401
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43,377
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57,862
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Test Systems Total
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80,093
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127,631
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89,861
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Total
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$
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772,702
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$
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803,256
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$
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624,464
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The following table presents our revenue disaggregated by Product Lines as of December 31 as follows:
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(In thousands)
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2019
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2018
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2017
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Aerospace Segment
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Electrical Power & Motion
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$
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338,237
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$
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303,180
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$
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264,286
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Lighting & Safety
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185,462
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174,383
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158,663
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Avionics
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106,787
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131,849
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53,960
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Systems Certification
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14,401
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13,951
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14,333
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Structures
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23,117
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24,134
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25,849
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Other
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24,605
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28,128
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17,512
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Aerospace Total
|
|
692,609
|
|
675,625
|
|
534,603
|
|
|
|
|
|
|
|
Test Systems
|
|
80,093
|
|
|
127,631
|
|
89,861
|
|
|
|
|
|
|
|
Total
|
|
$
|
772,702
|
|
|
$
|
803,256
|
|
|
$
|
624,464
|
|
|
|
|
|
|
|
|
NOTE 3 — 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
|
|
NOTE 4 — 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
|
|
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, 2019, the Company’s reserve for inventory valuation was $33.6 million, or 18.7% of gross inventory, inclusive of inventory and its associated reserves held for sale. At December 31, 2018, the Company’s reserve for inventory valuation was $20.8 million, or 12.0% of gross inventory.
NOTE 5 — 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
|
|
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 line method for financial reporting purposes. Amortization expense for intangibles was $17.6 million, $19.4 million and $12.3 million for 2019, 2018 and 2017, respectively. Additionally, there was a $6.2 million 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, 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
|
|
NOTE 7 — GOODWILL
The following table summarizes the changes in the carrying amount of goodwill at December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 nine reporting units with goodwill on the first day of our fourth quarter, the Company performed a quantitative assessment of the goodwill’s carrying value.
In the year ending December 31, 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 full impairment charge of approximately $1.6 million in the December 31, 2019 consolidated statement of operations associated with the AeroSat reporting unit. The impairment loss was incurred in the Aerospace segment and is reported within the Impairment Loss line of the Consolidated Statements of Operations.
The 2018 assessment indicated no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charge was recognized.
NOTE 8 — LONG-TERM DEBT AND NOTES PAYABLE
Long-term Debt, 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 ASC 842.
Principal maturities of long-term debt, including capital leases, are approximately:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
224
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
188,000
|
|
2024 and thereafter
|
—
|
|
Total Debt
|
$
|
188,224
|
|
The Company's Fifth Amended and Restated Credit Agreement (the “Agreement”) provides for a $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 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, 2019, outstanding letters of credit totaled $1.1 million.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.75 to 1, increasing to 4.50 to 1 for 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’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% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio.
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 9 — 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
|
|
NOTE 10 — 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
|
|
The effective tax rates differ from the statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory Federal Income Tax Rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
Permanent Items
|
|
|
|
|
|
Stock Compensation Expense
|
(0.5)
|
%
|
|
(0.9)
|
%
|
|
1.1
|
%
|
Domestic Production Activity Deduction
|
—
|
%
|
|
—
|
%
|
|
(4.7)
|
%
|
Other
|
0.5
|
%
|
|
0.4
|
%
|
|
0.5
|
%
|
Foreign Tax Rate Differential
|
1.4
|
%
|
|
0.5
|
%
|
|
(5.6)
|
%
|
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
|
—
|
%
|
|
(6.7)
|
%
|
|
—
|
%
|
Research and Development Tax Credits
|
(4.6)
|
%
|
|
(6.2)
|
%
|
|
(11.5)
|
%
|
Change in Valuation Allowance
|
1.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Net GILTI and FDII Tax Expense (Benefit)
|
(1.2)
|
%
|
|
0.2
|
%
|
|
—
|
%
|
Tax Expense (Benefit) on Deemed Repatriation of Foreign Earnings
|
—
|
%
|
|
(0.8)
|
%
|
|
5.6
|
%
|
Revaluation of Deferred Taxes for Federal Tax Rate Change
|
—
|
%
|
|
(0.1)
|
%
|
|
(3.5)
|
%
|
Other
|
0.1
|
%
|
|
0.3
|
%
|
|
(0.1)
|
%
|
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 at 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)
|
|
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
Other Assets — Long-term
|
$
|
17,536
|
|
|
$
|
3,999
|
|
Assets Held for Sale
|
—
|
|
|
(1,528)
|
|
Deferred Tax Liabilities — Long-term
|
(3,922)
|
|
|
(3,199)
|
|
Liabilities Held for Sale
|
—
|
|
|
(906)
|
|
Net Deferred Tax Assets (Liabilities)
|
$
|
13,614
|
|
|
$
|
(1,634)
|
|
At December 31, 2019, state tax credit carryforwards amounted to approximately $0.8 million which will expire from 2020 through 2033.
At December 31, 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 $6.9 million and expire at various dates between 2027 and 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 $108.4 million and expire at various dates from 2022 through 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 was recorded in the provision for incomes taxes for the year ended December 31, 2019, 2018 and 2017, respectively.
At December 31, 2019, estimated foreign tax credit carryforwards, which the Company expects to utilize, amounted to approximately $0.2 million. The Company expects to generate general limitation foreign source income in the future and will utilize these foreign tax 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 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. During the year ended December 31, 2019, reserves for uncertain tax positions were recorded in association with revised state income tax filing positions pursuant to ASC Topic 740-10. No reserves for uncertain income tax positions
were deemed necessary for the year ended December 31, 2017. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, 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
|
|
|
$
|
—
|
|
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 no material penalties or interest liabilities accrued as of December 31, 2019 or 2018, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2019, 2018 and 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 2016 through 2019 for federal purposes and 2015 through 2019 for state purposes.
Pretax income from the Company’s foreign subsidiaries amounted to $12.2 million, $7.3 million and $1.1 million for 2019, 2018 and 2017, 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 (the “Act”). The legislation significantly changed 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 Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 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 years ended December 31, 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. The Company made an adjustment to its provisional amounts included in its consolidated financial statements for the year ended December 31, 2017 resulting in a benefit of approximately $0.4 million recorded during the 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 the foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions. The Company elected to account for GILTI tax in the 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 GILTI 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 the GILTI income, which created a U.S. foreign tax credit 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 recorded a tax benefit of approximately $0.8 million during the year ended December 31, 2019 and tax expense of approximately $0.2 million during the year ended December 31, 2018.
The Base 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, 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 had 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 accounting for these income tax effects of the Tax Cuts and Jobs Act was completed during the fourth quarter of 2018 and the provisional tax impacts were adjusted for the year ended December 31, 2018.
NOTE 12 — 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 in 2019, 2018 and 2017, respectively.
NOTE 13 — RETIREMENT PLANS AND RELATED POST RETIREMENT BENEFITS
The Company has two 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, 2019 and 2018 amounts to $25.2 million and $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 no assets exist at December 31, 2019 or 2018 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 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 $2.2 million ($2.8 million net of $0.6 million in taxes) and unrecognized actuarial losses of $6.0 million ($7.6 million net of $1.6 million in taxes) are included in AOCI at December 31, 2019 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, 2020 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, 2020 is $0.5 million ($0.6 million net of $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
|
|
The assumptions used to calculate the projected benefit obligation as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Discount Rate
|
3.17%
|
|
|
4.20%
|
|
Future Average Compensation Increases
|
2.00%
|
|
|
2.00%
|
|
The plans are unfunded at December 31, 2019 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 $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)
|
2019
|
|
2018
|
|
2017
|
Net Periodic Cost
|
|
|
|
|
|
Service Cost — Benefits Earned During Period
|
$
|
181
|
|
|
$
|
200
|
|
|
$
|
186
|
|
Interest Cost
|
916
|
|
|
899
|
|
|
897
|
|
Amortization of Prior Service Cost
|
386
|
|
|
386
|
|
|
387
|
|
Amortization of Losses
|
300
|
|
|
629
|
|
|
369
|
|
Net Periodic Cost
|
$
|
1,783
|
|
|
$
|
2,114
|
|
|
$
|
1,839
|
|
The assumptions used to determine the net periodic cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Discount Rate
|
4.20%
|
|
|
3.60%
|
|
|
4.20%
|
|
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 four years to be $0.3 million, $0.6 million in 2024, and $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)
|
2019
|
|
2018
|
Funded Status
|
|
|
|
Accumulated Postretirement Benefit Obligation
|
|
|
|
Beginning of the Year — January 1
|
$
|
1,136
|
|
|
$
|
1,307
|
|
Service Cost
|
13
|
|
|
16
|
|
Interest Cost
|
46
|
|
|
46
|
|
Actuarial Gain
|
(28)
|
|
|
(162)
|
|
Benefits Paid
|
(63)
|
|
|
(71)
|
|
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%
|
|
The following table summarizes the components of the net periodic cost for the years ended December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Net Periodic Cost
|
|
|
|
|
|
Service Cost — Benefits Earned During Period
|
$
|
13
|
|
|
$
|
16
|
|
|
$
|
7
|
|
Interest Cost
|
46
|
|
|
46
|
|
|
41
|
|
Amortization of Prior Service Cost
|
16
|
|
|
16
|
|
|
16
|
|
Amortization of Losses
|
43
|
|
|
59
|
|
|
31
|
|
Net Periodic Cost
|
$
|
118
|
|
|
$
|
137
|
|
|
$
|
95
|
|
The assumptions used to determine the net periodic cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Discount Rate
|
4.20%
|
|
|
3.60%
|
|
|
4.20%
|
|
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 $0.3 million for medical, dental and long-term care insurance benefits (net of taxes of $0.1 million) are included in AOCI at December 31, 2019 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, 2019 that will be recognized as components of net periodic benefit cost during the year ended December 31, 2020 for the Plan will be insignificant. For measurement purposes, a 5.2% increase in the cost of health care benefits was assumed for 2020 and a range between 4.2% and 5.4% from 2021 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 Sheet as a current accrued pension liability of $0.1 million and a long-term accrued pension liability of $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 92.7% funded as of January 1, 2019. The Company’s contributions to the plan were $1.1 million in each of 2019, 2018 and 2017. These contributions represent less than 1% of total contributions to the plan.
NOTE 14 — 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 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 repurchased approximately 1,675,000 shares and completed that 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. The 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, 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, 2019, approximately 11.8 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 ten 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. No income tax effect is recorded for currency translation adjustments.
The components of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
Foreign Currency Translation Adjustments
|
$
|
(7,042)
|
|
|
$
|
(7,156)
|
|
Retirement Liability Adjustment – Before Tax
|
(10,868)
|
|
|
(7,814)
|
|
Tax Benefit
|
2,282
|
|
|
1,641
|
|
Retirement Liability Adjustment – After Tax
|
(8,586)
|
|
|
(6,173)
|
|
Accumulated Other Comprehensive Loss
|
$
|
(15,628)
|
|
|
$
|
(13,329)
|
|
The components of other comprehensive (loss) income 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
|
|
NOTE 15 — 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
|
|
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 0.5 million for the year ended December 31, 2019, 0.2 million for the year ended December 31, 2018, and 0.1 million for the year ended December 31, 2017.
NOTE 16 — EQUITY COMPENSATION
The Company has equity compensation plans that authorize the issuance of restricted stock units or options for shares of Common Stock to directors, officers and key employees. Equity-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-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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free Interest Rate
|
1.67% – 1.78%
|
|
2.63% – 2.87%
|
|
2.05% – 2.36%
|
Dividend Yield
|
—%
|
|
|
—%
|
|
|
—%
|
|
Volatility Factor
|
0.39
|
|
0.39
|
|
0.40 – 0.41
|
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.
A summary of the Company’s stock option activity and related information for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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
|
138,300
|
|
|
$
|
30.04
|
|
|
$
|
(289)
|
|
|
120,270
|
|
|
$
|
32.33
|
|
|
$
|
(226)
|
|
|
118,612
|
|
|
$
|
33.40
|
|
|
$
|
315
|
|
Options Exercised
|
(313,326)
|
|
|
$
|
5.38
|
|
|
$
|
(7,072)
|
|
|
(274,941)
|
|
|
$
|
3.89
|
|
|
$
|
(7,303)
|
|
|
(131,904)
|
|
|
$
|
9.77
|
|
|
$
|
(3,467)
|
|
Options Forfeited
|
(36,848)
|
|
|
$
|
21.56
|
|
|
$
|
(235)
|
|
|
(24,014)
|
|
|
$
|
34.13
|
|
|
$
|
88
|
|
|
(19,121)
|
|
|
$
|
24.27
|
|
|
$
|
(225)
|
|
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
|
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 $27.95, $30.45 and $36.06 as of December 31, 2019, 2018 and 2017, respectively.
The weighted average fair value of options vested during 2019, 2018 and 2017 was $15.91, $16.54 and $12.39, respectively. The total fair value of options that vested during the year amounted to $1.6 million, $1.4 million and $1.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, total compensation costs related to non-vested awards not yet recognized amounts to $5.2 million and will be recognized over a weighted average period of 2.34 years.
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 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
|
|
Restricted Stock Units
The fair value of each RSU granted is equal to the fair market value of the Company’s Common Stock on the date of grant. The RSU’s cliff vest three years from the date 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 the year ended December 31, 2019 was $1.6 million related to RSU's. At December 31, 2019, 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 approximately 2 years.
Employee Stock Purchase 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 $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, 2019, employees had subscribed to purchase 133,979 shares at $24.75 per share. The weighted average fair value of the options was approximately $8.26, $8.48 and $5.15 for options granted during the year ended December 31, 2019, 2018 and 2017, 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
|
|
NOTE 17 — FAIR VALUE
ASC Topic 820, Fair Value 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. There were no financial assets or liabilities carried at fair value measured on a recurring basis at December 31, 2019 or 2018.
The 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 of this contingent consideration is estimated at $2.5 million as of December 31, 2019. The fair value assigned to the earn-out is determined using the 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 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 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 no 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. The 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.
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 no impairment charges to any of the Company’s long-lived assets in either of the Company’s segments in 2018 or 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 Freedom and Diagnosys 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 18 — SELECTED QUARTERLY FINANCIAL INFORMATION
The following table summarizes selected quarterly financial information for 2019 and 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.
NOTE 19 — 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. Refer to Note 10 for 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 asserted that a 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. Lufthansa sought an 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 related to direct sales of the allegedly infringing power supply system in Germany (referred to as “direct sales”). The claim did not specify an estimate of damages and a related damages claim is being pursued by Lufthansa in separate court proceedings in an action filed in July 2017, as further discussed below.
In February 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment did not require AES to recall products that are already installed in aircraft or had 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.
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 submitted a petition to grant AES leave for appeal to the German Federal Supreme Court. On April 18, 2018, the German Federal Supreme Court granted Astronics’ petition in part, namely with respect to the 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 is currently 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 be “excessive”, but there can be no assurances that we will be successful on such appeal. Prior to 2019, 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, for 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 $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 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 neither probable nor estimable at this time, the Company has not recorded any liability with respect to these matters as of December 31, 2019.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in that 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, rending 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.
NOTE 20 — SEGMENTS
Segment information and reconciliations to consolidated amounts for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
Sales:
|
|
|
|
|
|
Aerospace
|
$
|
692,614
|
|
|
$
|
675,744
|
|
|
$
|
534,724
|
|
Less Inter-segment Sales
|
(5)
|
|
|
(119)
|
|
|
(121)
|
|
Total Aerospace Sales
|
692,609
|
|
|
675,625
|
|
|
534,603
|
|
|
|
|
|
|
|
Test Systems
|
80,495
|
|
|
127,679
|
|
|
89,861
|
|
Less Inter-segment Sales
|
(402)
|
|
|
(48)
|
|
|
—
|
|
Test Systems
|
80,093
|
|
|
127,631
|
|
|
89,861
|
|
Total Consolidated Sales
|
$
|
772,702
|
|
|
$
|
803,256
|
|
|
$
|
624,464
|
|
Operating Profit and Margins:
|
|
|
|
|
|
Aerospace
|
$
|
16,657
|
|
|
$
|
69,761
|
|
|
$
|
38,888
|
|
|
2.4
|
%
|
|
10.3
|
%
|
|
7.3
|
%
|
Test Systems
|
4,494
|
|
|
10,718
|
|
|
7,359
|
|
|
5.6
|
%
|
|
8.4
|
%
|
|
8.2
|
%
|
Total Operating Profit
|
$
|
21,151
|
|
|
$
|
80,479
|
|
|
$
|
46,247
|
|
|
2.7
|
%
|
|
10.0
|
%
|
|
7.4
|
%
|
Additions to (Deductions from) Operating Profit:
|
|
|
|
|
|
Net Gain on Sale of Businesses
|
$
|
78,801
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest Expense, Net of Interest Income
|
(6,141)
|
|
|
(9,710)
|
|
|
(5,369)
|
|
Corporate and Other Expenses, Net
|
(25,508)
|
|
|
(18,487)
|
|
|
(15,887)
|
|
Income before Income Taxes
|
$
|
68,303
|
|
|
$
|
52,282
|
|
|
$
|
24,991
|
|
Depreciation and Amortization:
|
|
|
|
|
|
Aerospace
|
$
|
27,879
|
|
|
$
|
29,947
|
|
|
$
|
22,111
|
|
Test Systems
|
4,534
|
|
|
4,500
|
|
|
4,302
|
|
Corporate
|
636
|
|
|
585
|
|
|
650
|
|
Total Depreciation and Amortization
|
$
|
33,049
|
|
|
$
|
35,032
|
|
|
$
|
27,063
|
|
Assets:
|
|
|
|
|
|
Aerospace
|
$
|
629,371
|
|
|
$
|
647,870
|
|
|
$
|
621,047
|
|
Test Systems
|
110,994
|
|
|
97,056
|
|
|
90,859
|
|
Corporate
|
42,351
|
|
|
29,714
|
|
|
24,050
|
|
Total Assets
|
$
|
782,716
|
|
|
$
|
774,640
|
|
|
$
|
735,956
|
|
Capital Expenditures:
|
|
|
|
|
|
Aerospace
|
$
|
11,552
|
|
|
$
|
14,680
|
|
|
$
|
10,656
|
|
Test Systems
|
380
|
|
|
1,370
|
|
|
2,721
|
|
Corporate
|
151
|
|
|
267
|
|
|
101
|
|
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 year 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 no 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 the Aerospace segment, goodwill amounted to $123.0 million and $125.0 million at December 31, 2019 and 2018, respectively. In the Test Systems segment, goodwill amounted to $21.9 million as of December 31, 2019. There was no 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
583,589
|
|
|
$
|
575,830
|
|
|
$
|
482,219
|
|
North America (excluding United States)
|
12,585
|
|
|
10,834
|
|
|
6,198
|
|
Asia
|
40,764
|
|
|
112,135
|
|
|
58,732
|
|
Europe
|
130,227
|
|
|
98,193
|
|
|
73,677
|
|
South America
|
862
|
|
|
1,973
|
|
|
1,280
|
|
Other
|
4,675
|
|
|
4,291
|
|
|
2,358
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
United States
|
$
|
101,169
|
|
|
$
|
110,738
|
|
France
|
8,740
|
|
|
9,241
|
|
India
|
1,509
|
|
|
—
|
|
Canada
|
1,081
|
|
|
883
|
|
Total
|
$
|
112,499
|
|
|
$
|
120,862
|
|
Sales recorded by the Company’s foreign operations were $85.9 million, $70.6 million and $53.9 million in 2019, 2018 and 2017, respectively. Net income from these locations was $8.6 million, $5.5 million and $2.2 million in 2019, 2018 and 2017, respectively. Net assets held outside of the U.S. total $66.4 million and $45.0 million at December 31, 2019 and 2018, respectively. The exchange loss included in determining net income was insignificant in 2019 and 2018. Cumulative translation adjustments amounted to $(7.0) million and $(7.2) million at December 31, 2019 and 2018, respectively.
The Company has a significant concentration of business with two major customers; The Boeing Company (“Boeing”) and Panasonic Aviation Corporation (“Panasonic”). 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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
2018
|
Accounts Receivable at December 31,
|
|
|
|
Boeing
|
$
|
21,806
|
|
|
$
|
24,649
|
|
Panasonic
|
$
|
15,831
|
|
|
$
|
14,994
|
|
Sales to Boeing and Panasonic are primarily in the Aerospace segment.
NOTE 21 — 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 $103.8 million, net of $0.2 million in cash acquired. 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)
|
|
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
|
|
|
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. 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 $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.
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, no 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 February 13, 2019, the Company completed the divestiture. 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. The Company recorded a pre-tax gain on the sale of approximately $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 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 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. 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. This amount is reported in the 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 full goodwill impairment charge of approximately $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 minimize losses of our 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 operating 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 $28.8 million, all of which is included in the Aerospace segment. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
A summary of the restructuring, impairment and other charges, and their location on the Consolidated Statement of Operations, are presented as of December 31, 2019:
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Restructuring Charges
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(In thousands)
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Cost of Products Sold
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Selling, General and Administrative
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Impairment Loss
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Amounts
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Accounts Receivable, Net
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$
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—
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$
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1,785
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$
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—
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$
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1,785
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Inventories
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9,429
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—
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—
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9,429
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Prepaid Expenses and Other Current Assets
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1,227
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|
|
—
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|
|
—
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|
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1,227
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Property, Plant and Equipment, Net
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—
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|
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—
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|
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2,268
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|
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2,268
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Other Assets
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—
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|
|
122
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|
|
1,019
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|
|
1,141
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Intangible Assets, Net
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—
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|
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—
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|
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6,186
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|
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6,186
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Goodwill
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—
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|
|
—
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|
|
1,610
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|
|
1,610
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Accrued Payroll and Employee Benefits
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—
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|
|
449
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|
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—
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|
|
449
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Other Accrued Expenses
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164
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|
|
—
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|
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—
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164
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Other Liabilities
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4,577
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|
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—
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|
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—
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|
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4,577
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$
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15,397
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|
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$
|
2,356
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|
|
$
|
11,083
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|
|
|
$
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28,836
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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 paid 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 inventory 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 $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.