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 seat 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 England, as well as engineering offices in the Ukraine and India.
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 industries as well as training and simulation devices for both commercial and military applications.
See Notes 21 and 22 for details of our acquisition and divestiture activities in 2022, 2021 and 2020.
Impact of the COVID-19 Pandemic
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The spread of the COVID-19 pandemic disrupted businesses on a global scale, led to significant volatility in financial markets and affected the aviation and industrial industries. The impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by customer demand variability. Although we saw stable and growing backlog during 2022 in our aerospace business, COVID-19 related disruptions are ongoing and continue to adversely challenge our commercial transport market. While we remain bullish about the aerospace business, we believe the recovery to pre-pandemic activity, particularly in the widebody market, will take longer than originally anticipated at the outset of the pandemic. As economic activity continues to recover, we will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders.
In September 2021 the Company was awarded a grant of up to $14.7 million from the U.S. Department of Transportation under the Aviation Manufacturing Jobs Protection Program (“AMJP”). The Company received $7.4 million under the grant in 2021, $5.2 million in the first quarter of 2022 and $2.1 million in the third quarter of 2022. The grant benefit was recognized ratably over the six-month performance period as a reduction to cost of products sold in proportion to the compensation expense that the award is intended to defray. During the years ended December 31, 2022 and 2021, the Company recognized $6.0 million and $8.7 million of the award, respectively.
Additionally, the Company qualified for government subsidies from the Canadian and French governments as a result of the COVID-19 pandemic’s impact on our foreign operations. The Canadian and French subsidies are income-based grants intended to reimburse the Company for certain employee wages. The grants are recognized as income over the periods in which the Company recognizes as expenses the costs the grants are intended to defray. The amount recognized during 2022 was immaterial.
The following table presents the COVID-19 related government assistance, including AMJP, recorded during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Reduction in Cost of Products Sold | $ | 6,062 | | | $ | 10,682 | | | $ | 2,383 | |
| Reduction in Selling, General and Administrative Expenses | 11 | | | 228 | | | 278 | |
| Total | $ | 6,073 | | | $ | 10,910 | | | $ | 2,661 | |
Restructuring Activities
The COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s anticipated future operating results. As a result, the Company executed restructuring activities in the form of workforce reduction, primarily in the second quarter of 2020, to align capacity with expected demand.
Additional restructuring activities occurred during 2021 to align the workforce to expected activities and to consolidate certain facilities.
For more information regarding these restructuring plans see Note 22.
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.
Cost of Products Sold, Research 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 research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation. Research and development expenses amounted to $48.3 million in 2022, $43.3 million in 2021 and $40.2 million in 2020. These costs are included in Cost of products sold. 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, 2022, 2021 and 2020.
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”). ASC Topic 718 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. Equity-based compensation expense is included in SG&A 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 Estimated Credit Losses
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 estimated credit losses. The estimate for credit losses is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as the age of the receivable balances, historical experience, credit quality, current economic conditions, and reasonable and supportable forecasts of future economic conditions that may affect a customer’s ability to pay. Balances are written off when determined to be uncollectible.
The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the current COVID-19 pandemic, industry conditions, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables and contract assets as airlines and other aerospace companies’ cash flows are impacted by the COVID-19 pandemic.
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 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 or whose value has diminished.
Cloud Computing Arrangements
The Company incurs costs to implement cloud computing arrangements that are hosted by third party vendors. Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase. Amortization is calculated on a straight-line basis over the contractual term of the cloud computing arrangement. Capitalized amounts related to such arrangements are recorded within other current assets and other non-current assets in the consolidated balance sheets and were insignificant as of December 31, 2022 and December 31, 2021.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. 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; and 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.
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 $12.0 million, $12.7 million and $13.3 million in 2022, 2021 and 2020, respectively.
Deferred Financing Costs
The Company incurs debt issuance costs in connection with amending or entering into new credit facilities. These costs are amortized as an adjustment to interest expense over term of the credit facility on a straight-line basis, which approximates the effective interest method. The unamortized balance of deferred financing costs was $3.2 million at December 31, 2022 and $0.4 million at December 31, 2021, recorded within Other Assets on the Consolidated Balance Sheets.
On January 19, 2023, the Company completed a financing transaction, which refinanced its previous revolving credit facility which was scheduled to mature in November 2023. The new financing consists of a $90 million asset-based term loan (the “Term Loan Facility”) and a $115 million asset-based revolving credit facility (the “ABL Revolving Credit Facility”). In 2022, the Company incurred $3.6 million in debt issuance costs associated with amending its existing credit facility and entering into a new credit facility. These costs are classified within Other Assets on the Consolidated Balance Sheets. The Company incurred an additional $6.1 million in debt issuance costs upon execution of the Restated Agreement and the Term Loan Facility on January 19, 2023. Deferred debt issuance costs associated with revolving credit facilities will be recorded within other assets and those associated with term loan facilities will be recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets.
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.
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. During the fourth quarter of 2021, we sold a facility resulting in a gain of $5.0 million. Refer to Note 21.
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.
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, the shortfall up to the carrying value of the goodwill represents the amount of goodwill impairment.
The 2022 and 2021 assessments indicated no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charges were recognized. See Note 7 for further information regarding the goodwill impairment charge in 2020.
Intangible Assets
The estimated fair values of acquired intangibles are generally determined 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.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts 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 and accounts 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 Statements of Operations. Such amounts were immaterial in 2022, 2021 and 2020. 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.
In 2020, the Company determined there were indicators of impairment over one of its investments as a result of the investee’s deteriorating operating performance and limited access to capital. We determined that the fair value of this investment was de minimis and a full impairment charge of $3.5 million was recorded within Other Expense, Net of Other Income in the accompanying Consolidated Statement Operations for the year ended December 31, 2020.
Deferred Tax Asset Valuation Allowance
As a result of the on-going COVID-19 pandemic, the Company generated a significant tax loss for the year ended December 31, 2020, which was carried back under the CARES Act to recover previously paid income taxes. The Company records a valuation allowance against the deferred tax assets if and to the extent it is more likely than not that the Company will not recover the deferred tax assets. In evaluating the need for a valuation allowance, the Company weights all relevant positive and negative evidence, and considers among other factors, historical financial performance, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, and tax planning strategies. Losses in recent periods and cumulative pre-tax losses in the three years period ending with the current year, combined with the significant uncertainty brought about by the COVID-19 pandemic, is collectively considered significant negative evidence under ASC 740 when assessing whether an entity can use projected income as a basis for concluding that deferred tax assets are realizable on a
more-likely than not basis. For purposes of assessing the recoverability of deferred tax assets, the Company determined that it could not include future projected earnings in the analysis due to recent history of losses and therefore had insufficient objective positive evidence that the Company will generate sufficient future taxable income to overcome the negative evidence of cumulative losses. Accordingly, during the years ended December 31, 2022, 2021, and 2020 the Company determined that a portion of its deferred tax assets are not expected to be realizable in the future. As a result, the Company recorded a provision for valuation allowances against its U.S. federal deferred tax assets of approximately $11.9 million, $6.0 million, and $23.3 million during the years ended December 31, 2022, 2021 and 2020 respectively. In addition, during the year ended December 31, 2022 and 2021, the Company recorded a valuation allowance against certain foreign deferred tax assets of approximately $0.4 million and $1.3 million, respectively.
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 gains and losses included in operations were insignificant in 2022, 2021, and 2020.
Dividends
The Company has not paid any cash dividends in the three-year period ended December 31, 2022.
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.
Newly Adopted and Recent Accounting Pronouncements
We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had and are expected to have minimal impact on our financial statements and related disclosures.
NOTE 2 — REVENUE
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, 2022 and 2021, the Company did 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 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, 2022, the Company has capitalized $2.5 million of costs. As of December 31, 2021, the Company did not have material capitalized fulfillment costs.
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, 2022, we had $571.4 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $451.4 million of our remaining performance obligations as revenue in 2023.
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 Estimated Credit Losses on our Consolidated Balance Sheets.
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 Sheets 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 $14.8 million and $18.2 million during the year ended December 31, 2022 and 2021, 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. The following table presents the beginning and ending balances of contract assets and contract liabilities:
| | | | | | | | | | | |
| (In thousands) | Contract Assets | | Contract Liabilities |
Beginning Balance, January 1, 2022 | $ | 25,941 | | | $ | 28,495 | |
Ending Balance, December 31, 2022 | $ | 27,349 | | | $ | 33,209 | |
The increase in contract assets reflects the net impact of new revenue recognized in excess of billings exceeding billing of previously unbilled revenue 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.
The following table presents our revenue disaggregated by Market Segments as of December 31 as follows: | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Aerospace Segment | | | | | | |
Commercial Transport | | $ | 314,564 | | | $ | 201,990 | | | $ | 262,636 | |
Military | | 54,534 | | | 70,312 | | | 67,944 | |
General Aviation | | 63,395 | | | 56,673 | | | 60,437 | |
Other | | 28,703 | | | 36,263 | | | 26,971 | |
| Aerospace Total | | 461,196 | | | 365,238 | | | 417,988 | |
| | | | | | |
| Test Systems Segment | | | | | | |
Semiconductor | | — | | | — | | | 3,483 | |
Aerospace & Defense | | 73,698 | | | 79,670 | | | 81,116 | |
| Test Systems Total | | 73,698 | | | 79,670 | | | 84,599 | |
| | | | | | |
| Total | | $ | 534,894 | | | $ | 444,908 | | | $ | 502,587 | |
The following table presents our revenue disaggregated by Product Lines as of December 31 as follows: | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Aerospace Segment | | | | | | |
Electrical Power & Motion | | $ | 187,446 | | | $ | 141,746 | | | $ | 179,245 | |
Lighting & Safety | | 124,347 | | | 103,749 | | | 118,928 | |
Avionics | | 97,234 | | | 64,901 | | | 76,113 | |
Systems Certification | | 17,222 | | | 13,050 | | | 6,899 | |
Structures | | 6,244 | | | 5,529 | | | 9,832 | |
Other | | 28,703 | | | 36,263 | | | 26,971 | |
| Aerospace Total | | 461,196 | | | 365,238 | | | 417,988 | |
| | | | | | |
| Test Systems | | 73,698 | | | 79,670 | | | 84,599 | |
| | | | | | |
| Total | | $ | 534,894 | | | $ | 444,908 | | | $ | 502,587 | |
| | | | | | |
NOTE 3 — ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Trade Accounts Receivable | $ | 123,071 | | | $ | 84,681 | |
| Unbilled Recoverable Costs and Accrued Profits | 27,349 | | | 25,941 | |
| Total Receivables, Gross | 150,420 | | | 110,622 | |
| Less Allowance for Estimated Credit Losses | (2,630) | | | (3,183) | |
| Total Receivables, Net | $ | 147,790 | | | $ | 107,439 | |
The following table provides a rollforward of the allowance for estimated credit losses that is deducted from accounts receivable to present the net amount expected to be collected at December 31: | | | | | |
| (In thousands) | |
Balance at December 31, 2020 | $ | 3,218 | |
| Bad Debt Expense, Net of Recoveries | 90 | |
| Write-off Charges Against the Allowance and Other Adjustments | (125) | |
Balance at December 31, 2021 | 3,183 | |
| Bad Debt Expense, Net of Recoveries | 565 | |
| Write-off Charges Against the Allowance and Other Adjustments | (1,118) | |
Balance at December 31, 2022 | $ | 2,630 | |
NOTE 4 — INVENTORIES
Inventories at December 31 are as follows: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Finished Goods | $ | 30,703 | | | $ | 28,579 | |
| Work in Progress | 29,895 | | | 22,954 | |
| Raw Material | 127,385 | | | 106,043 | |
| Total Inventories | $ | 187,983 | | | $ | 157,576 | |
At December 31, 2022, the Company’s reserve for inventory valuation was $36.8 million, or 16.4% of gross inventory. At December 31, 2021, the Company’s reserve for inventory valuation was $33.8 million, or 17.7% of gross inventory.
NOTE 5 — PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment at December 31 are as follows: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Land | $ | 8,578 | | | $ | 8,632 | |
| Building and Improvements | 73,744 | | | 70,566 | |
| Machinery and Equipment | 123,071 | | | 121,960 | |
| Construction in Progress | 6,415 | | | 5,680 | |
| Total Property, Plant and Equipment, Gross | 211,808 | | | 206,838 | |
| Less Accumulated Depreciation | 121,150 | | | 111,602 | |
| Total Property, Plant and Equipment, Net | $ | 90,658 | | | $ | 95,236 | |
NOTE 6 — INTANGIBLE ASSETS
The following table summarizes acquired intangible assets at December 31 as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2022 | | 2021 |
| (In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents | 11 years | | $ | 2,146 | | | $ | 2,066 | | | $ | 2,146 | | | $ | 1,979 | |
| Non-compete Agreement | 4 years | | 11,082 | | | 11,052 | | | 11,082 | | | 10,592 | |
| Trade Names | 10 years | | 11,402 | | | 9,350 | | | 11,447 | | | 8,518 | |
| Completed and Unpatented Technology | 9 years | | 47,855 | | | 34,877 | | | 47,932 | | | 30,441 | |
| | | | | | | | | |
| Customer Relationships | 15 years | | 142,133 | | | 77,996 | | | 142,276 | | | 69,033 | |
| Total Intangible Assets | 12 years | | $ | 214,618 | | | $ | 135,341 | | | $ | 214,883 | | | $ | 120,563 | |
Amortization is computed on the straight line method for financial reporting purposes. Amortization expense for intangibles was $14.9 million, $15.4 million and $17.1 million for 2022, 2021 and 2020, respectively.
Based upon acquired intangible assets at December 31, 2022, amortization expense for each of the next five years is estimated to be:
| | | | | |
| (In thousands) | |
| 2023 | $ | 13,878 | |
| 2024 | $ | 12,856 | |
| 2025 | $ | 10,935 | |
| 2026 | $ | 9,533 | |
| 2027 | $ | 7,825 | |
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, 2020 | $ | 36,648 | | | $ | 21,634 | | | $ | 58,282 | |
| | | | | |
| | | | | |
| Foreign Currency Translations and Other | — | | | — | | | — | |
Balance at December 31, 2021 | 36,648 | | | 21,634 | | | 58,282 | |
| | | | | |
| | | | | |
| Foreign Currency Translations and Other | (114) | | | 1 | | | (113) | |
Balance at December 31, 2022 | $ | 36,534 | | | $ | 21,635 | | | $ | 58,169 | |
| | | | | |
| Goodwill, Gross | $ | 157,235 | | | $ | 21,635 | | | $ | 178,870 | |
| Accumulated Impairment Losses | (120,701) | | | — | | | (120,701) | |
| Goodwill, Net | $ | 36,534 | | | $ | 21,635 | | | $ | 58,169 | |
The Company’s four reporting units with goodwill as of the first day of our fourth quarters of 2022 and 2021 were subject to the annual goodwill impairment test. Based on our quantitative assessments of our reporting units performed during our annual goodwill impairment tests, the Company concluded that no impairment to the carrying value of goodwill in any of the Company’s reporting units was indicated and no impairment charges were recognized in 2022 and 2021.
Beginning in the first quarter of 2020, the COVID-19 pandemic negatively impacted the global economy and aerospace industry. Management considered these qualitative factors and the impact to each reporting unit’s revenue and earnings, and determined that it was more likely than not that the fair value of several reporting units was less than its carrying value. Therefore, we performed a quantitative test for all eight reporting units with goodwill as of March 28, 2020.
We determined that the estimated fair value of four of the eight reporting units with goodwill significantly exceeded their respective carrying values and did not result in a goodwill impairment for these four reporting units as of March 28, 2020.
For the remaining four reporting units with goodwill, we determined that the estimated fair value was less than their respective carrying values. We recognized full impairments of the goodwill of our Astronics Connectivity Systems and Certification (“ACSC”), PGA and Custom Control Concepts (“CCC”) reporting units, and a partial impairment of the goodwill of our PECO reporting unit as of March 28, 2020.
During the second quarter of 2020, further commercial aircraft order reductions, delays and cancellations at a major customer of our PECO reporting unit resulted in revisions to PECO’s forecast. We therefore performed a quantitative test for the PECO reporting unit as of June 27, 2020. As a result of this quantitative test, we determined that the estimated fair value was less than the respective carrying value as of June 27, 2020.
As a result of our interim goodwill impairment tests, we recorded non-cash goodwill impairment charges in the Aerospace segment of approximately $86.3 million within the Impairment Loss line of the December 31, 2020 Consolidated Statement of Operations.
NOTE 8 — LONG-TERM DEBT
The Company's long-term debt at December 31, 2022 and 2021 consisted of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”). On March 1, 2022, the Company executed an amendment to the Agreement, which reduced the revolving credit line from $375 million to $225 million and extended the maturity date of the loans under the facility from February 16, 2023 to May 30, 2023. On August 9, 2022, the Company executed a further amendment to the Agreement, which reduced the revolving credit line from $225 million to $190 million until September 12, 2022 with further reductions to $180 million effective September 12, 2022 and $170 million effective October 11, 2022. The amendment extended the maturity date of the loans under the facility from May 30, 2023 to August 31, 2023. On October 21, 2022, the Company executed an additional amendment to the Agreement, under which the lenders waived enforcement of their rights against the Company arising from the Company’s failure to comply with the maximum net leverage ratio and minimum liquidity covenants, each as of September 30, 2022. The amendment increased the revolving credit line to $180 million as of October 21, 2022, with a reduction to $170 million effective November 21, 2022. Another amendment to the Agreement was executed on November 14, 2022 (the “Amended Facility”), which extended the maturity date of the loans under the facility from August 31, 2023 to November 30, 2023. Under the Amended Facility, the revolving credit line was set at $180 million, with a reduction to $170 million effective December 21, 2022. The amendment required the Company to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments ($10 million as of November 30, 2022 and December 31, 2022). The Amended Facility required the Company to comply with a minimum Adjusted EBITDA covenant on a trailing twelve month basis. The amendment eliminated the net leverage ratio covenant for the remaining term of the agreement. Each amendment executed in 2022 required payment of a consent fee of 5 to 10 basis points of the commitment for each consenting lender.
At December 31, 2022, there was $164.0 million outstanding on the Amended Facility and there remained $6.0 million available subject to the minimum liquidity covenant discussed above. The credit facility allocated up to $20 million of the $170 million revolving credit line for the issuance of letters of credit. Interest on the debt outstanding at December 31, 2022 was payable on the unpaid principal amount of the facility at a rate equal to the Secured Overnight Financing Rate (“SOFR”, which is required to be at least 1.00%), plus 5.50% with an increase to a rate equal to SOFR (which is required to be at least 1.00%), plus 8.50% effective January 17, 2023. The Company also was required to pay a commitment fee to the lenders in an amount equal to 0.40% on the undrawn portion of the Amended Facility.
The Company amended its existing revolving credit facility on January 19, 2023 by entering into the Sixth Amended and Restated Credit Agreement (the “ABL Revolving Credit Facility”). The ABL Revolving Credit Facility set the maximum aggregate amount that the Company can borrow under the revolving credit line at $115 million, with borrowings subject to a borrowing base determined primarily by certain domestic inventory and accounts receivable. The maturity date of borrowings under the ABL Revolving Credit Facility is January 19, 2026. Under the terms of the ABL Revolving Credit Facility, the Company will now pay interest on the unpaid principal amount of the facility at a rate equal to SOFR (which is required to be at least 1.00%) plus 2.25% to 2.75%. The Company will pay a quarterly commitment fee under the ABL Revolving Credit Facility in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability. Under the provisions of the ABL Revolving Credit Facility, the Company has a cash dominion arrangement with the lead banking institution whereby eligible daily cash receipts are contractually utilized to pay down outstanding borrowings. Eligible cash receipts that have not yet been applied to outstanding debt balance will be classified as restricted cash in the accompanying consolidated balance sheets.
The Company also entered into a $90 million asset-based Term Loan Facility on January 19, 2023. The Term Loan Facility is secured primarily by fixed assets, real estate and intellectual property. The maturity date of the Term Loan Facility is the earlier of the stated maturity date of the ABL Revolving Credit Facility or January 19, 2027, provided the ABL Revolving Credit Facility is extended beyond that date. The Company will pay interest under the Term Loan Facility at a rate equal to SOFR (which is required to be at least 2.50%) plus 8.75%. The Company will pay a commitment fee under the Term Loan Facility of 5% of the total aggregate commitment, or $4.5 million, $1.8 million which was paid on the closing date, $1.8 million of which will be paid on June 19, 2023 and $0.9 million of which will be paid on the date that the financial statements and compliance certificate for the fiscal quarter of the Company ending on or about March 31, 2024 are required to be delivered under the Term Loan Facility.
Amortization of the principal under the Term Loan Facility will begin in April with a monthly amortization rate of 0.292% of the outstanding term loan principal balance for the period April 1, 2023 through June 1, 2023, increasing to 0.542% per month for the period July 1, 2023 through September 1, 2023 then increasing to 0.833% thereafter. Total scheduled principal payments of $4.5 million are payable in 2023 and as such, have been classified as current in the accompanying consolidated balance sheet as of December 31, 2022. The weighted-average interest rate on current maturities of long-debt is 13.60%.
Pursuant to the ABL Revolving Credit Facility and the Term Loan Facility, the Company is required to comply with a minimum trailing four quarter EBITDA of $14.7 million for the Company’s first quarter of 2023, $23.3 million in the second quarter, $39.2 million in the third quarter, $51.7 million in the fourth quarter, $57.6 million in the first quarter of 2024, $65.2 million in the second quarter of 2024 and $70 million thereafter. In addition, mandatory prepayment of a portion of excess cash flow, as defined by the Term Loan Facility, is payable towards the principle amount outstanding at the end of 2023. Any voluntary prepayments made are subject to a prepayment fee, as defined by the Term Loan Facility. The Company is also required to maintain minimum liquidity of $20 million through the date of delivery of the compliance certificate for the quarter ended March 31, 2024, and $10 million thereafter. Beginning with the first quarter of 2024, the Company is subject to a minimum fixed charge coverage ratio of 1.10 to 1.00. Further, the Company is subject to excess cash flow repayment provisions, restrictions on additional indebtedness, share repurchases and dividend payments, and a limitation on capital expenditures.
Upon execution of the amendment to its ABL Revolving Credit Facility and the Term Loan Facility on January 19, 2023, the Company incurred an additional $6.1 million in debt issuance costs, allocated between the ABL Revolving Credit Facility and the Term Loan Facility. Deferred debt issuance costs associated with the ABL Revolving Credit Facility will be recorded within other assets and those associated with the Term Loan Facility will be recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets.
Certain of the Company’s subsidiaries are borrowers or guarantors under the ABL Revolving Credit Facility and the Term Loan Facility.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the credit facilities 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, cross default under other material debt agreements, and a going concern qualification for any reason other than loan maturity date give the agent the option to declare all such amounts immediately due and payable.
The Company expects its sales growth and reductions in working capital will provide sufficient cash flows to fund operations. However, the Company may also evaluate various actions and alternatives to enhance its profitability and cash generation from operating activities, which could include manufacturing efficiency initiatives, cost-reduction measures, working with vendors and suppliers to reduce lead times and expedite shipment of critical components, and working with customers to expedite receivable collections.
Our ability to maintain sufficient liquidity and comply with financial debt covenants is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing or access our existing financing, and our operations in the future and could allow our debt holders to demand payment of all outstanding amounts. Refer to Item 1A, Risk Factors, for further discussion.
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) | 2022 | | 2021 | | 2020 |
| Balance at Beginning of the Year | $ | 8,183 | | | $ | 7,018 | | | $ | 7,660 | |
| | | | | |
| Warranties Issued | 3,407 | | | 6,083 | | | 1,725 | |
| Reassessed Warranty Exposure | (65) | | | (1,474) | | | (1,029) | |
| Warranties Settled | (3,516) | | | (3,444) | | | (1,338) | |
| Balance at End of the Year | $ | 8,009 | | | $ | 8,183 | | | $ | 7,018 | |
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 office equipment under 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 Sheets, 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 and financing lease liabilities and corresponding right-of-use (“ROU”) assets are based on the present value of the remaining minimum rental payments. The Company's operating lease liability increased approximately $3.0 million as a result of acquiring ROU assets from new leases entered into during the year ended December 31, 2022. In determining the incremental borrowing rate, we have considered borrowing data for secured debt obtained from our lending institution.
The following is a summary of the Company's ROU assets and liabilities at December 31: | | | | | | | | | | |
| (In thousands) | 2022 | 2021 | | |
| Operating Leases: | | | | |
| Operating Right-of-Use Assets, Gross | $ | 29,466 | | $ | 30,318 | | | |
| Less Accumulated Right-of-Use Asset Impairment | 1,710 | | 1,710 | | | |
| Less Accumulated Amortization | 14,728 | | 12,439 | | | |
| Operating Right-of-Use Assets, Net | $ | 13,028 | | $ | 16,169 | | | |
| Short-term Operating Lease Liabilities | $ | 4,441 | | $ | 6,778 | | | |
| Long-term Operating Lease Liabilities | 9,942 | | 12,018 | | | |
| Operating Lease Liabilities | $ | 14,383 | | $ | 18,796 | | | |
| | | | |
| Finance Leases: | | | | |
| Finance Right-of-Use Assets, Gross | $ | 231 | | $ | 177 | | | |
| Less Accumulated Amortization | 138 | | 106 | | | |
| Finance Right-of-Use Assets, Net — Included in Other Assets | $ | 93 | | $ | 71 | | | |
Short-term Finance Lease Liabilities — Included in Other Accrued Expenses | $ | 29 | | $ | 72 | | | |
| Long-term Finance Lease Liabilities — Included in Other Liabilities | 67 | | — | | | |
| Finance Lease Liabilities | $ | 96 | | $ | 72 | | | |
The following is a summary of the Company's total lease costs as of December 31: | | | | | | | | | | | |
| (In thousands) | | 2022 | 2021 |
| Finance Lease Cost: | | | |
| Amortization of ROU Assets | | $ | 94 | | $ | 573 | |
| Interest on Lease Liabilities | | 4 | | 78 | |
| Total Finance Lease Cost | | 98 | | 651 | |
| Operating Lease Cost | | 6,627 | | 5,881 | |
| | | |
| Variable Lease Cost | | 1,757 | | 1,546 | |
| Short-term Lease Cost (excluding month-to-month) | | 602 | | 271 | |
| Less Sublease and Rental Income | | (1,329) | | (1,265) | |
| Total Operating Lease Cost | | 7,657 | | 6,433 | |
| Total Net Lease Cost | | $ | 7,755 | | $ | 7,084 | |
The following is a summary of cash paid for amounts included in the measurement of lease liabilities as of December 31: | | | | | | | | | | | | | |
| (In thousands) | | 2022 | 2021 | | |
| Operating Cash Flow for Finance Leases | | $ | 4 | | $ | 78 | | | |
| Operating Cash Flow for Operating Leases | | $ | 7,873 | | $ | 6,711 | | | |
| Financing Cash Flow for Finance Leases | | $ | 93 | | $ | 901 | | | |
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 ROU 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 weighted-average remaining term for the Company's operating and financing leases are approximately 4 years and 3 years, respectively. The weighted-average discount rates for the Company's operating and financing leases are each approximately 3.6%.
The following is a summary of the Company's maturity of lease liabilities: | | | | | | | | | | | | | | |
| (In thousands) | | Operating Leases | | Financing Leases |
| 2023 | | $ | 4,876 | | | $ | 32 | |
| 2024 | | 3,879 | | | 32 | |
| 2025 | | 3,310 | | | 18 | |
| 2026 | | 1,216 | | | 14 | |
| 2027 | | 859 | | | 6 | |
| Thereafter | | 1,298 | | | — | |
| Total Lease Payments | | 15,438 | | | 102 | |
| Less: Interest | | 1,055 | | | 6 | |
| Total Lease Liability | | $ | 14,383 | | | $ | 96 | |
These amounts exclude annual operating lease payments of approximately $1.7 million per year through 2033, which represents legal binding lease payments for leases signed, but not yet commenced.
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 more likely than not to be realized.
The provision for (benefit from) income taxes at December 31 consists of the following: | | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Current | | | | | |
| U.S. Federal | $ | 5,338 | | | $ | (1,713) | | | $ | (8,679) | |
| State | (153) | | | (667) | | | (4,539) | |
| Foreign | 750 | | | 1,439 | | | 1,036 | |
| Current | 5,935 | | | (941) | | | (12,182) | |
| | | | | |
| Deferred | | | | | |
| U.S. Federal | 113 | | | (237) | | | 17,044 | |
| State | (239) | | | (87) | | | (92) | |
| Foreign | 145 | | | (117) | | | (1,399) | |
| Deferred | 19 | | | (441) | | | 15,553 | |
| Total | $ | 5,954 | | | $ | (1,382) | | | $ | 3,371 | |
The effective tax rates differ from the statutory federal income tax rate as follows: | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Statutory Federal Income Tax Rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Permanent Items | | | | | |
| Stock Compensation Expense | (2.2) | % | | (2.1) | % | | (0.3) | % |
| Non Deductible Goodwill Impairment | — | % | | — | % | | (10.2) | % |
| Contingent Consideration Liability Fair Value Adjustment | — | % | | 1.7 | % | | — | % |
| Other | (0.3) | % | | (0.7) | % | | — | % |
| Foreign Tax Rate Differential | (2.8) | % | | (2.7) | % | | (1.0) | % |
| State Income Tax, Net of Federal Income Tax Effect | 1.0 | % | | 2.2 | % | | 3.3 | % |
| Research and Development Tax Credits | 7.7 | % | | 12.8 | % | | 2.2 | % |
| Change in Valuation Allowance | (44.6) | % | | (29.8) | % | | (19.2) | % |
| Net GILTI and FDII Tax Expense | 1.8 | % | | — | % | | — | % |
| Foreign Tax Credit for Dividend Withholding | (1.5) | % | | 1.7 | % | | — | % |
| Tax Rate Change on 2020 Federal Net Operating Loss Carryback | — | % | | 0.9 | % | | 1.3 | % |
| Other | (0.1) | % | | 0.1 | % | | (0.1) | % |
| Effective Tax Rate | (20.0) | % | | 5.1 | % | | (3.0) | % |
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 as well as tax attributes.
Significant components of the Company’s deferred tax assets and liabilities at December 31, are as follows: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Deferred Tax Assets: | | | |
| Asset Reserves | $ | 17,680 | | | $ | 17,462 | |
| Deferred Compensation | 6,798 | | | 7,424 | |
| Section 163(j) - Interest Expense Limitation | — | | | 891 | |
| State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax | 1,128 | | | 4,674 | |
| Customer Advanced Payments and Deferred Revenue | 1,917 | | | 1,301 | |
| Net Operating Loss Carryforwards and Other | 11,307 | | | 15,617 | |
| Goodwill and Intangible Assets | 1,277 | | | 1,082 | |
| ASC 606 Revenue Recognition | 197 | | | 1,817 | |
| Research & Development Costs | 19,892 | | | — | |
| Lease Liabilities | 3,201 | | | 4,178 | |
| Other | 6,135 | | | 5,540 | |
| Total Gross Deferred Tax Assets | 69,532 | | | 59,986 | |
| Valuation Allowance for Federal and State Deferred Tax Assets and Tax Credit Carryforwards, Net of Federal Tax | (57,369) | | | (43,519) | |
| Deferred Tax Assets | 12,163 | | | 16,467 | |
| Deferred Tax Liabilities: | | | |
| Depreciation | 8,886 | | | 9,393 | |
| ASC 606 Revenue Recognition - Section 481(a) Adjustment | 525 | | | 1,030 | |
| Lease Assets | 2,905 | | | 3,539 | |
| Earnout Income Accrual | — | | | 2,603 | |
| Other | 1,005 | | | 1,050 | |
| Deferred Tax Liabilities | 13,321 | | | 17,615 | |
| Net Deferred Tax Liabilities | $ | (1,158) | | | $ | (1,148) | |
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Other Assets — Long-term | $ | 712 | | | $ | 273 | |
| | | |
| Deferred Tax Liabilities — Long-term | (1,870) | | | (1,421) | |
| | | |
| Net Deferred Tax Liabilities | $ | (1,158) | | | $ | (1,148) | |
The Company records a valuation allowance against the deferred tax assets if and to the extent it is more likely than not that the Company will not recover the deferred tax assets. In evaluating the need for a valuation allowance, the Company weighs all relevant positive and negative evidence, and considers among other factors, historical financial performance, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, and tax planning strategies. Losses in recent periods and cumulative pre-tax losses in the three year period ending with the current year, combined with the significant uncertainty brought about by the COVID-19 pandemic, is collectively considered significant negative evidence under ASC 740 when assessing whether an entity can use projected income as a basis for concluding that deferred tax assets are realizable on a more-likely than not basis. For purposes of assessing the recoverability of deferred tax assets, the Company determined that it could not include future projected earnings in the analysis due to the recent history of losses and therefore had insufficient objective positive evidence that the Company will generate sufficient future taxable income to overcome the negative evidence of cumulative losses. Accordingly, during the years ended December 31, 2022, 2021, and 2020, the Company determined that a portion of its deferred tax assets are not expected to be realizable in the future. As a result, the Company recorded a provision for valuation allowances against its U.S. federal deferred tax assets of approximately $11.9 million, $6.0 million, and $23.3 million during the years ended December 31, 2022, 2021 and 2020, respectively. In addition, during the years ended December 31, 2022 and 2021, the Company recorded a valuation allowance against certain foreign deferred tax assets of approximately $0.4 million and $1.3 million, respectively.
Beginning January 1, 2022, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the option to deduct research and development expenditures in the current year and now requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the TCJA, deferred tax assets related to capitalized research expenses increased by approximately $19.9 million during the year ended December 31, 2022. Given the recent history of losses, the Company determined that it could not include future projected income as a source of taxable income to realize this deferred tax asset in the future. As a result, a valuation allowance has been recorded.
At December 31, 2022, gross federal net operating losses, amounted to approximately $3.1 million. In the current year, the Company generated approximately $51.5 million of taxable income, net of utilized net operating losses of approximately $25.7 million. The remaining prior year carry forward net operating losses of approximately $3.1 million can be carried forward and are subject to annual limitations under Internal Revenue Code Section 382. Of these net operating losses, $2.7 million expire in 2038 and the remaining $0.4 million will carryforward indefinitely. Given the recent history of losses, the Company determined that it could not include future projected income as a source of taxable income to realize this deferred tax asset in the future. As a result, a valuation allowance has been recorded.
At December 31, 2022, gross state net operating loss carryforwards amounted to approximately $134.1 million. These state net operating loss carryforwards begin to expire at various dates from 2022 through 2042. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future along with the recent history of losses resulting in the Company excluding future projected income as a source of taxable income to realize certain of these state net operating losses in the future, a valuation allowance has been recorded.
At December 31, 2022, state income tax credit carryforwards amounted to approximately $1.1 million and begin to expire at various dates from 2022 to 2037. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future along with the recent history of losses resulting in the Company excluding future projected income as a source of taxable income to realize certain of these state net operating losses in the future, a valuation allowance has been recorded.
At December 31, 2022, the Company has approximately $0.2 million of foreign tax credits that it can carry forward through 2031. Given the recent history of losses, the Company determined that it could not include future projected income as a source of taxable income to realize this deferred tax asset in the future. As a result, a valuation allowance has been recorded.
During the year ended December 31, 2020, the Company determined that a revised state filing position could be taken which would reduce the taxable income apportioned for state income tax purposes and recorded a state income tax receivable of approximately $3.0 million as a component of Prepaid Expenses and Other Current Assets. The Company has filed amended state income tax returns for tax years 2015 and 2016 and intends to file amended state income tax returns for tax years 2017 through 2019 in order to claim these refunds.
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. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Balance at Beginning of the Year | $ | 1,412 | | | $ | 1,890 | | | $ | 2,565 | |
| Decreases as a Result of Tax Positions Taken in Prior Years | (969) | | | (478) | | | (775) | |
| Increases as a Result of Tax Positions Taken in the Current Year | — | | | — | | | 100 | |
| Balance at End of the Year | $ | 443 | | | $ | 1,412 | | | $ | 1,890 | |
There are no material penalties or interest liabilities accrued as of December 31, 2022, 2021, or 2020, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2022, 2021 and 2020. 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 2019 through 2022 for federal purposes and 2017 through 2022 for state purposes.
Pretax income (loss) from the Company’s foreign subsidiaries amounted to approximately $0.1 million, $(3.3) million and $(7.0) million for 2022, 2021 and 2020, respectively. The balance of pretax earnings or loss for each of those years were domestic.
Historically, we have asserted that the unremitted earnings of our foreign subsidiaries were indefinitely reinvested. However, as of December 31, 2022, we determined that we can no longer assert indefinite reinvestment on approximately $3.4 million of the unremitted earnings of Luminescent Systems Canada Inc. As a result, we have recorded a deferred tax liability of approximately $0.2 million at December 31, 2022, related to local country withholding taxes that are expected to be incurred upon ultimate repatriation of such earnings. All other foreign unremitted earnings, which total approximately $11.3 million, continue to be indefinitely reinvested. We continue to be permanently reinvested in outside basis differences other than unremitted earnings as we have no plans to liquidate or sell any foreign subsidiaries. In addition, we have not provided deferred taxes on any outside basis differences of our domestic subsidiaries as we have the ability and intent to recover these basis differences in a tax-free manner. It is not practicable to determine the amount of unrecognized deferred tax related to these basis differences.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. As a result of the on-going COVID-19 pandemic, the Company generated a significant tax loss for the year ended December 31, 2020, which was carried back under the CARES Act to recover previously paid income taxes. During the years ended December 31, 2021 and 2020, the Company recorded a tax benefit relating to the NOL carryback provisions and the technical correction for qualified improvement property provided for in the CARES Act of approximately $0.3 million and $1.5 million respectively. No tax benefit was recorded for the year ending December 31, 2022.
The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022. Key provisions under the IRA include a 15% corporate alternative minimum tax imposed on certain large corporations and the extension and expansion of clean energy tax incentives. There were no impacts related to the IRA recorded for the year ending December 31, 2022.
NOTE 12 — PROFIT SHARING/401K PLAN
The Company offers eligible domestic full-time employees participation in certain profit sharing/401K plans. The plans provide for a discretionary annual company contribution. In addition, employees may contribute a portion of their salary to the plans which, under certain of the profit sharing/401K plans, is partially matched by the Company. In response to the impact of the COVID-19 pandemic, both the discretionary Company contribution and the match were temporarily suspended beginning in the second quarter of 2020. The discretionary Company contribution and, where applicable, the matching contribution, were reinstated in the fourth quarter of 2021. The plans may be amended or terminated at any time.
Total charges to income before income taxes for these plans were approximately $4.7 million, $4.3 million and $3.3 million in 2022, 2021 and 2020, respectively. The Company has funded the 2021 and 2022 contributions to date with treasury stock in lieu of cash and will fund the remaining 2022 contribution with treasury stock in the first quarter of 2023.
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, 2022 and 2021 amounts to $20.5 million and $28.5 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, 2022 or 2021 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 $1.0 million ($1.6 million net of $0.6 million in taxes) and unrecognized actuarial losses of $0.8 million ($2.4 million net of $1.6 million in taxes) are included in AOCI at December 31, 2022 and have not yet been recognized in net periodic pension cost.
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) | 2022 | | 2021 |
| Funded Status | | | |
| Projected Benefit Obligation | | | |
| Beginning of the Year — January 1 | $ | 30,503 | | | $ | 31,730 | |
| Service Cost | 138 | | | 195 | |
| Interest Cost | 834 | | | 764 | |
| Actuarial Gain | (4,917) | | | (1,838) | |
| Benefits Paid | (348) | | | (348) | |
| End of the Year — December 31 | $ | 26,210 | | | $ | 30,503 | |
In 2022, the net actuarial gain of $4.9 million is due principally to the increase of 225 basis points in the discount rate used to measure the benefit obligation as of December 31, 2022 compared to the prior year. The assumptions used to calculate the projected benefit obligation as of December 31 are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Discount Rate | 5.00% | | 2.75% |
| Future Average Compensation Increases | 2.00% - 3.00% | | 2.00% - 3.00% |
The plans are unfunded at December 31, 2022 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 $25.9 million. This also is the expected future contribution to the plan, since the plan is unfunded.
The service cost component of net periodic benefit cost is included in SG&A expenses, and all other net periodic benefit costs components (such as interest cost, prior service cost amortization and actuarial gain/loss amortization) are reported outside of operating income, within Other Expense, Net of Other Income in the accompanying Consolidated Statements of Operations.
The following table summarizes the components of the net periodic cost for the years ended December 31: | | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Net Periodic Cost | | | | | |
| Service Cost — Benefits Earned During Period | $ | 138 | | | $ | 195 | | | $ | 223 | |
| Interest Cost | 834 | | | 764 | | | 836 | |
| Amortization of Prior Service Cost | 386 | | | 386 | | | 386 | |
| Amortization of Losses | 949 | | | 1292 | | | 648 | |
| Net Periodic Cost | $ | 2,307 | | | $ | 2,637 | | | $ | 2,093 | |
The assumptions used to determine the net periodic cost are as follows: | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Discount Rate | 2.75% | | 2.42% | | 3.17% |
| Future Average Compensation Increases | 2.00% - 3.00% | | 2.00% - 3.00% | | 2.00% |
The Company expects the benefits to be paid in the next year to be $0.3 million, each of the next three years to be $0.6 million, $1.0 million in the year following, and $10.5 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 accumulated postretirement benefit obligation is $0.8 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively. The plan is recognized in the accompanying Consolidated Balance Sheets as a current accrued pension liability of $0.1 million and a long-
term accrued pension liability of $0.7 million. The net periodic cost for the years ended December 31, 2022, 2021 and 2020 is immaterial.
The Company also has a defined benefit plan related to its subsidiary in France. The measurement date for determining the plan obligation and cost is December 31. The defined benefit plan has an overfunded asset of $0.1 million and an unfunded liability of $0.3 million for the years ended December 31, 2022 and 2021, respectively. The plan is recognized in the accompanying Consolidated Balance Sheets as a long-term asset and long-term liability, respectively. The net periodic cost for the years ended December 31, 2022, 2021 and 2020 is immaterial.
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 98.0% funded as of January 1, 2022. The Company’s contributions to the plan were $0.5 million in 2022, $0.4 million in 2021 and $0.5 million in 2020. These contributions represent less than 1% of total contributions to the plan.
NOTE 14 — SHAREHOLDERS’ EQUITY
Share Buyback Program
The Company’s Board of Directors from time to time authorizes the repurchase of common stock, which allows the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. In the year ended December 31, 2020, the Company repurchased 282,000 shares, at an aggregate cost of $7.7 million. The Company has the capacity under the currently authorized program to repurchase additional shares of its common stock with a maximum dollar value of $41.5 million. The Company’s Rule 10b5-1 plan associated with the program was terminated on February 3, 2020. Under its current credit agreement, and as described further in Note 8, the Company is restricted from further stock repurchases under this program.
Reserved Common Stock
At December 31, 2022, approximately 10.8 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 Loss and Accumulated Other Comprehensive Loss
Comprehensive income or loss consists of net income or loss 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 loss are as follows:
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Foreign Currency Translation Adjustments | $ | (7,335) | | | $ | (5,407) | |
| Retirement Liability Adjustment – Before Tax | (4,473) | | | (11,370) | |
| Tax Benefit | 2,282 | | | 2,282 | |
| Retirement Liability Adjustment – After Tax | (2,191) | | | (9,088) | |
| Accumulated Other Comprehensive Loss | $ | (9,526) | | | $ | (14,495) | |
The components of other comprehensive income (loss) are as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Foreign Currency Translation Adjustments | $ | (1,928) | | | $ | (939) | | | $ | 2,574 | |
| Retirement Liability Adjustment | 6,897 | | | 2,894 | | | (3,396) | |
| | | | | |
| | | | | |
| Other Comprehensive Income (Loss) | $ | 4,969 | | | $ | 1,955 | | | $ | (822) | |
In 2022, 2021 and 2020, no tax benefit was recognized as the Company had recorded a full valuation allowance.
NOTE 15 — LOSS PER SHARE
Loss per share computations are based upon the following table: | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | 2022 | | 2021 | | 2020 |
| Net Loss | $ | (35,747) | | | $ | (25,578) | | | $ | (115,781) | |
| Basic Earnings Weighted Average Shares | 32,164 | | | 31,061 | | | 30,795 | |
| Net Effect of Dilutive Stock Options | — | | | — | | | — | |
| Diluted Earnings Weighted Average Shares | 32,164 | | | 31,061 | | | 30,795 | |
| Basic Loss Per Share | $ | (1.11) | | | $ | (0.82) | | | $ | (3.76) | |
| Diluted Loss Per Share | $ | (1.11) | | | $ | (0.82) | | | $ | (3.76) | |
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 1.4 million for the year ended December 31, 2022, 1.2 million for the year ended December 31, 2021, and 0.8 million for the year ended December 31, 2020.
The Company has funded substantially all of its 2021 and 2022 401K contributions, and will fund the remaining 2022 401K contributions outstanding, with treasury stock in lieu of cash. The earnings per share computation for the years ended December 31, 2022 and 2021 are is inclusive of approximately 0.1 million and 0.4 million in shares outstanding for the equivalent shares needed to fulfill the respective period’s 401K obligation using the closing share price as of December 31, 2022 and 2021, respectively. Actual shares issued may differ based on the share price on the settlement date.
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, is equal to the fair market value of the Common Stock on the grant date. Options become exercisable over periods not exceeding ten years, and must be exercised within 10 years from the grant date. The Company’s practice has been to issue new shares upon the exercise of the options.
The Company established its 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. At December 31, 2022, the Company had options outstanding for 521,973 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. At December 31, 2022, the Company had options outstanding for 63,149 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 Long Term Incentive Plan contemplates the use of a mix of equity award types. 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, 2022, the Company had stock options and RSU's outstanding that covered 1,369,810 shares under the Long Term Incentive Plan, and there were 1,226,057 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 or RSU’s 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 three- to five-year period from the date of grant. RSU’s granted to officers and key employees generally 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) | 2022 | | 2021 | | 2020 |
| Equity-based Compensation Expense | $ | 6,497 | | | $ | 6,460 | | | $ | 5,184 | |
| Tax Benefit | (1,068) | | | (924) | | | (709) | |
| Equity-based Compensation Expense, Net of Tax | $ | 5,429 | | | $ | 5,536 | | | $ | 4,475 | |
Tax benefit excludes the impact of valuation allowances recorded against deferred tax assets.
Stock Options
No options were granted during the year ending December 31, 2020. | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Weighted Average Fair Value of the Options Granted | $ | 5.97 | | | $ | 7.05 | | | $ | — | |
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 assumptions: | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Risk-free Interest Rate | 3.48% – 3.62% | | 0.45% - 1.52% | | —% |
| Dividend Yield | —% | | —% | | —% |
| Volatility Factor | 0.61 | | 0.58 | | — |
| Expected Life in Years | 5 – 9 years | | 5 - 10 years | | — |
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 year ended December 31 is as follows: | | | | | | | | | | | | | | | | | |
| 2022 |
| (Aggregate intrinsic value in thousands) | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Outstanding at January 1 | 1,263,658 | | | $ | 21.64 | | | $ | — | |
| Options Granted | 276,298 | | | $ | 9.74 | | | $ | — | |
| Options Exercised | (51,138) | | | $ | 9.85 | | | $ | — | |
| Options Forfeited | (112,100) | | | $ | 13.33 | | | $ | — | |
| Outstanding at December 31 | 1,376,718 | | | $ | 20.37 | | | $ | — | |
| Exercisable at December 31 | 687,682 | | | $ | 27.35 | | | $ | — | |
The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the closing stock price of the Company’s Common Stock which would have been received by the option holders had all option holders exercised their options as of that date. The closing stock price of the Company’s Common Stock was $10.30, $12.00 and $13.23 as of December 31, 2022, 2021 and 2020, respectively. As the stock price of $10.30 was below the weighted average exercise price, intrinsic value is zero.
The weighted average fair value of options vested during 2022, 2021 and 2020 was $12.89, $14.58 and $14.77, respectively. The total fair value of options that vested during the year amounted to $2.4 million, $1.2 million and $1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, total compensation costs related to non-vested option awards not yet recognized amounts to $4.6 million and will be recognized over a weighted average period of approximately 3 years.
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 – $14.45 | 757,791 | | | 8.9 | | $ | 11.59 | | | 140,770 | | | 7.9 | | $ | 12.28 | |
$22.69 – $35.82 | 609,800 | | | 4.5 | | $ | 30.91 | | | 537,785 | | | 4.1 | | $ | 30.97 | |
$45.89 – $45.89 | 9,127 | | | 2.2 | | $ | 45.89 | | | 9,127 | | | 2.2 | | $ | 45.89 | |
| 1,376,718 | | | 6.9 | | $ | 20.37 | | | 687,682 | | | 4.9 | | $ | 27.35 | |
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 granted to employees generally cliff vest three years from the date of grant, while RSU’s granted to directors cliff vest six months from the date of grant. There were 314,264 RSU’s granted in 2022 at a weighted-average price of $13.56, of which 129,422 awards were vested and issued during 2022. Forfeitures during the year were 25,781. Included in total equity-based compensation expense for the year ended December 31, 2022 was $3.5 million related to RSU’s. At December 31, 2022, total compensation costs related to non-vested awards not yet recognized amounts to $3.5 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. 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, 2022, employees had subscribed to purchase 473,666 shares at $7.10 per share. The weighted average fair value of the options was approximately $2.39, $5.00 and $3.43 for options granted during the year ended December 31, 2022, 2021 and 2020, 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 assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Risk-free Interest Rate | 4.01 | % | | | 0.09 | % | | | 0.12 | % | |
| Dividend Yield | — | % | | | — | % | | | — | % | |
| Volatility Factor | 0.50 | | | 0.71 | | | 1.00 | |
| 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.
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. The purchase consideration included an earnout estimated at a fair value of $2.5 million at the time of acquisition. The terms of the Diagnosys acquisition allow for a potential earnout of up to an additional $13.0 million over the three years post-acquisition based on achievement of new order levels of over $72.0 million during that period. The fair value assigned to the earnout was determined using the real options method, which requires Level 3 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. Based on actual and forecasted new orders, the fair value was zero as of December 31, 2021, with the contingent consideration liability fair value adjustment of $2.2 million recorded within the Selling, General and Administrative line in the Consolidated Condensed Statements of Operations in the year ended December 31, 2021. No amounts have been paid or are payable related to this earnout.
There were no other financial assets or liabilities carried at fair value measured on a recurring basis at December 31, 2022 or 2021.
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.
There were no impairment charges to goodwill in any of the Company’s reporting units in 2022 or 2021.
As further discussed in Note 7, we performed interim quantitative assessments for the reporting units which had goodwill as of March 28, 2020. Based on our quantitative assessments, the Company recorded non-cash goodwill impairment charges associated with four Aerospace reporting units, totaling approximately $86.3 million within the Impairment Loss line in the Consolidated Statements of Operations in the year ended December 31, 2020. The impairment loss was calculated as the difference between the fair value of the reporting unit (which was calculated using level 3 inputs) and the carrying value of the reporting unit.
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 of the asset or asset group (which are Level 3 inputs) with the asset of asset group’s 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. As of December 31, 2022 and 2021, the Company concluded that no indicators of impairment relating to long-lived assets existed.
In conjunction with the deteriorating economic conditions associated with the COVID-19 pandemic, we recorded an impairment charge to ROU assets of approximately $0.7 million incurred in the Aerospace segment within the Impairment Loss line in the Consolidated Statements of Operations for the year ended December 31, 2020.
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 $3.5 million recorded within the Other Expense, Net of Other Income line
in the accompanying Consolidated Statements of Operations for the year ended December 31, 2020. No such impairment was recorded in 2022 or 2021. These are Level 3 measurements as there were no observable price changes during the year.
Of the severance charges recorded, $0.6 million and $2.6 million in 2021 and 2020, respectively, qualify as one-time termination benefit arrangements and were initially measured at fair value using level 3 inputs.
Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable and accounts 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 2022 and 2021: | | | | | | | | | | | |
| | Quarter Ended |
| (Unaudited) | December 31, | | December 31, |
| (In thousands, except for per share data) | 2022 | | 2021 |
| Sales | $ | 158,153 | | | $ | 116,052 | |
| Gross Profit (Sales Less Cost of Products Sold) | $ | 21,510 | | | $ | 18,464 | |
| Net Gain on Sale of Facility | $ | — | | | $ | 5,014 | |
| Earnout on Previous Sale of Business | $ | — | | | $ | 10,677 | |
| Loss Before Income Taxes | $ | (7,208) | | | $ | (151) | |
| Net (Loss) Income | $ | (6,779) | | | $ | 1,604 | |
| Basic (Loss) Earnings Per Share | $ | (0.21) | | | $ | 0.05 | |
| Diluted (Loss) Earnings Per Share | $ | (0.21) | | | $ | 0.05 | |
A former customer filed a lawsuit alleging damages associated with defective product in 2019. Mediation of the matter was held in November 2022. The Company agreed to make a payment of $2.0 million to settle the matter in the third quarter of 2022. The Company was indemnified by other parties for approximately $1.5 million and recorded a gain as an offset to Selling, General and Administrative expense in the fourth quarter of 2022. The Company has also experienced material and labor inflation throughout 2022 which also impacts the comparability against the fourth quarter of 2021.
In the fourth quarter of 2021, a portion of the AMJP grant received of $7.6 million was recognized as an offset to cost of products sold. This benefit was offset by a legal accrual recorded of $8.4 million relating to an adverse ruling of an ongoing patent infringement case. In addition, the Company agreed to an earnout, shown above, with the buyer of the former semiconductor test business as more fully described in Note 21 and sold one of its Aerospace facilities, resulting in $5.0 million gain on sale discussed in Note 22. In the fourth quarter of 2021, after completion of the tax returns for the year ended December 31, 2020, the Company recorded a current federal tax benefit of approximately $1.7 million related to additional net operating loss and R&D tax credits that will be carried back to prior tax years in order to claim a refund.
NOTE 19 — LEGAL PROCEEDINGS
Lufthansa
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”).
In February 2015, the Regional State Court of Mannheim, Germany held 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.
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Higher Regional Court of Karlsruhe upheld the lower court’s decision. The Company sought permission to appeal to the German Federal Supreme Court. 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 AES’s direct sales of the product into Germany. A first instance decision 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. 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 recognized an incremental reserve of $3.5 million in its December 31, 2019 financial statements related to this matter. In 2020, AES made payment of $4.7 million, inclusive of interest, in satisfaction of the first instance judgment. Both AES and Lufthansa have appealed this decision and the appeal is currently pending before the Higher Regional Court of Karlsruhe. An oral hearing has been scheduled by the appellate court for April 12, 2023. A decision is expected on the appeals of both parties in the second quarter of 2023. If the first instance judgment is later reversed on appeal, the Company could reclaim any amounts that were previously paid to Lufthansa that are in excess of the amount awarded by the appellate court, but there can be no assurances that we will be successful on such appeal. Further, if Lufthansa is successful on their appeal, additional damages may be awarded to them.
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. No amount of claimed damages has been specified by Lufthansa.
A first instance decision in this matter was issued on December 6, 2019. The Court found that indirect sales (as defined above) by AES to international customers infringe the patent under the conditions specified in the judgment and that the sale of components of the EmPower system to Germany constitutes an indirect patent infringement. The Court rejected Lufthansa's claim that AES is also liable for damages for the sale of modified products. This means that AES is not liable for damages based on the sale of modified outlet units that removed the infringing feature. AES and Lufthansa both appealed this decision and the appeal is currently pending before the Higher Regional Court of Karlsruhe. An oral hearing is scheduled for June 14, 2023, with a decision expected approximately one month later. In its appeal, Lufthansa requested an additional finding that AES shall be held liable for all damages (in an unspecified amount) caused by AES’s alleged incorrect accounting of its past sales.
If the December 6, 2019 decision of the Regional State Court of Mannheim is confirmed on appeal, 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 substantially all of the modified outlet units sold from 2015 do not infringe the patent of Lufthansa. As a result, the period for which AES is liable for damages in connection with indirect sales into Germany substantially 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 most likely 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 (unless the latter ruling of the Mannheim court is reversed on appeal). Based on the information available and the determination of the damages in the direct sales claim discussed above, we estimated that the Company’s total exposure related to these matters that was probable and that could be reasonably estimated at December 31, 2019 was approximately $11.6 million plus approximately $4.5 million of accrued interest, for a total of approximately $16.1 million. Interest will accrue at a rate of 5% above the European Central Bank rate until final payment to Lufthansa. Approximately $0.6 million was recorded within Selling, General and Administrative Expenses in the Company’s Consolidated Statements of Operations in each of 2022, 2021 and 2020, respectively, for additional interest accrued during such periods.
In connection with the indirect sales claims, we currently believe it is unlikely that the appeals process will be completed and any damages and related interest will be paid before December 31, 2023. Therefore, the liability related to this matter, totaling $17.8 million and $17.3 million, is classified within Other Liabilities (non-current) in the Consolidated Balance Sheets at December 31, 2022 and 2021, respectively. This amount may be adjusted depending on the decision of the court on the direct sales damages appeal referred to previously.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom (“UK”) and in France. The Lufthansa patent expired in May 2018. In those cases, Lufthansa accuses AES and certain of its customers 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 normal course of its supply arrangements, AES has indemnified its customers from liability arising from such matters, and as such will bear responsibility for any monetary damages arising from such claims.
In the French matter, there was a hearing on the validity of the patent in October 2020. On December 4, 2020, the Court held the French patent invalid for all asserted claims. There can consequently be no finding of infringement on first instance. Lufthansa has appealed this judgment. The appeal hearing took place on December 8, 2022 and on February 24, 2023, the court
upheld the first instance judgment in favor of AES. As loss exposure is not probable and estimable at this time, the Company has not recorded any liability with respect to the French matter as of December 31, 2022 or 2021.
In the UK matter, a trial took place in June 2020 to address the issues of infringement and validity of the patent. On June 22, 2020, the Court held the UK patent valid and 3 out of 4 asserted claims infringed. In contrast to the decisions in Germany, the UK Court found that the modified components infringed a valid claim of the patent, and accordingly, the period for which AES or its customers would be liable for damages in connection with direct sales into the UK extends until the expiration of the patent in May 2018. AES appealed the ruling, and the appeal hearing took place on November 2, 2021. On January 14, 2022, the Court dismissed the appeal on all grounds. Lufthansa has yet to plead its case for monetary compensation, which would be determined at a separate trial, expected to be held in the latter half of 2023. The case for damages will require extensive data gathering and analysis which has not yet been completed. This analysis will include evaluating whether any units sold into the UK were subsequently shipped into Germany, where they would be subject to the indirect sales claim discussed above. If this is the case, damages may be assessed in either the UK, or in the indirect sales matter in Germany, but not in both matters.
Under English law, Lufthansa has the option of pursuing a claim in relation to the defendants’ profits from their infringing activities or pursuing a claim in relation to Lufthansa's own lost profits. That election has not yet been made by Lufthansa and there is currently no date set for it to make this election. However, as we concluded a loss was probable and reasonably estimable based upon the information available to AES, we estimated damages of approximately $6.2 million, plus accrued interest of approximately $1.1 million, for AES and its indemnified customers. Interest will accrue until final payment to Lufthansa. Approximately $7.3 million was reflected for this matter as a liability in the Consolidated Balance Sheet as of December 31, 2021, and was recorded within Selling, General & Administrative Expenses in the accompanying Consolidated Statement of Operations for the year then ended. This amount is subject to change as additional data is received and evaluated, and as additional information regarding the damages methodology is claimed by Lufthansa in advance of the damages trial. The damages trial is scheduled to be heard starting in October 2024, with payment likely due in late 2024 or early 2025. Therefore, the liability related to this matter, totaling $7.0 million and $7.3 million, is classified within Other Liabilities (non-current) in the Consolidated Balance Sheets at December 31, 2022 and 2021, respectively. The variance is due to currency fluctuation.
Separate from any such damages Lufthansa may seek in connection with the UK infringement decision discussed above, as a result of the first instance judgement in their favor, Lufthansa was entitled to reimbursement from AES of a proportion of its legal expenditures in the UK case. An interim reimbursement of approximately $1.3 million was paid to Lufthansa in August 2020. The associated expense was recorded in the Consolidated Statements of Operations in the year ended December 31, 2020 within Selling, General & Administrative Expenses. As a result of the appeal decision, Lufthansa will be entitled to reimbursement from AES of a larger proportion of its first instance legal expenditures, as well as a portion of its legal expenditures associated with the appeal. We recorded an estimated liability of approximately $1.1 million in our Consolidated Balance Sheet at December 31, 2021. The associated expense is recorded within Selling, General & Administrative Expenses in the Consolidated Statement of Operations for the year then ended. A payment of $0.3 million was made in 2022. It is likely the remaining amount will be payable within the next twelve months, and as such, the liability of $0.7 million has been classified as a current liability in the accompanying Consolidated Balance Sheets within Other Accrued Expenses at December 31, 2022.
Each of the German, France and UK claims are separate and distinct. Validity and infringement of the Lufthansa patent in each country is a matter for the courts in each of these countries, whose laws differ from each other. In addition, the principles of calculating damages in each jurisdiction differ substantially. Therefore, the Company has assessed each matter separately and cannot apply the same calculation methodology as in the German direct and indirect matters. However, it is reasonably possible that additional damages and interest could be incurred if the appellate court in France was to rule in favor of Lufthansa, or if damages in the UK matter are calculated on a different basis than our estimate or using information not currently available.
Other
On March 23, 2020, Teradyne, Inc. filed a complaint against the Company and its subsidiary, Astronics Test Systems (“ATS”) (together, “the Defendants”) in the United States District Court for the Central District of California alleging patent and copyright infringement, and certain other related claims. The Defendants moved to dismiss certain claims from the case. On November 6, 2020, the Court dismissed the Company from the case, and also dismissed a number of claims, though the patent and copyright infringement claims remain. The case proceeded to discovery. In addition, on December 21, 2020, ATS filed a petition for inter partes review (“IPR”) with the US Patent Trial and Appeal Board (“PTAB”), seeking to invalidate the subject patent, and on July 21, 2021, the PTAB instituted IPR. ATS requested and, on August 26, 2021, the District Court granted, a stay of litigation during the IPR proceeding. Oral arguments on the IPR were held on April 21, 2022. The PTAB issued its decision on July 20, 2022, in which it invalidated all of Teradyne’s patent claims. Teradyne will not appeal the decision. The stay of litigation was lifted with respect to the remaining claims in August 2022 and discovery has resumed. Trial is scheduled for December 5, 2023. No amounts have been accrued for this matter in the December 31, 2022 or 2021 financial statements, as loss exposure was neither probable nor estimable at such times.
In 2019, a former customer filed a lawsuit alleging damages associated with defective product. Mediation of the matter was held in November 2022. The Company agreed to make a payment of $2.0 million to settle the matter in the third quarter of 2022. The Company was indemnified by other parties for approximately $1.5 million and recorded a gain as an offset to Selling, General and Administrative expense in the fourth quarter of 2022.
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) | 2022 | | 2021 | | 2020 |
| Sales: | | | | | |
| Aerospace | $ | 461,206 | | | $ | 365,261 | | | $ | 418,079 | |
| Less Inter-segment Sales | (10) | | | (23) | | | (91) | |
| Total Aerospace Sales | 461,196 | | | 365,238 | | | 417,988 | |
| | | | | |
| Test Systems | 73,717 | | | 80,027 | | | 85,589 | |
| Less Inter-segment Sales | (19) | | | (357) | | | (990) | |
| Test Systems | 73,698 | | | 79,670 | | | 84,599 | |
| Total Consolidated Sales | $ | 534,894 | | | $ | 444,908 | | | $ | 502,587 | |
| Operating Loss and Margins: | | | | | |
| Aerospace | $ | (1,883) | | | $ | (8,614) | | | $ | (89,833) | |
| (0.4) | % | | (2.4) | % | | (21.5) | % |
| Test Systems | (8,118) | | | (3,765) | | | 5,549 | |
| (11.0) | % | | (4.7) | % | | 6.6 | % |
| Total Operating Loss | $ | (10,001) | | | $ | (12,379) | | | $ | (84,284) | |
| (1.9) | % | | (2.8) | % | | (16.8) | % |
| Additions to (Deductions from) Operating Profit: | | | | | |
| Net Gain on Sale of Businesses | $ | 11,284 | | | $ | 10,677 | | | $ | — | |
| Interest Expense, Net of Interest Income | (9,422) | | | (6,804) | | | (6,741) | |
| Corporate and Other Expenses, Net | (21,654) | | | (18,454) | | | (21,385) | |
| Loss before Income Taxes | $ | (29,793) | | | $ | (26,960) | | | $ | (112,410) | |
| Depreciation and Amortization: | | | | | |
| Aerospace | $ | 22,384 | | | $ | 23,349 | | | $ | 25,624 | |
| Test Systems | 4,341 | | | 5,022 | | | 5,577 | |
| Corporate | 1,052 | | | 634 | | | 653 | |
| Total Depreciation and Amortization | $ | 27,777 | | | $ | 29,005 | | | $ | 31,854 | |
| Assets: | | | | | |
| Aerospace | $ | 481,416 | | | $ | 458,334 | | | |
| Test Systems | 111,513 | | | 105,335 | | | |
| Corporate | 22,102 | | | 45,469 | | | |
| Total Assets | $ | 615,031 | | | $ | 609,138 | | | |
| Capital Expenditures: | | | | | |
| Aerospace | $ | 4,289 | | | $ | 4,932 | | | $ | 6,494 | |
| Test Systems | 3,299 | | | 1,082 | | | 952 | |
| Corporate | 87 | | | 20 | | | 13 | |
| Total Capital Expenditures | $ | 7,675 | | | $ | 6,034 | | | $ | 7,459 | |
Operating loss 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. Operating loss in the Aerospace segment in 2020 included goodwill impairment and restructuring charges, discussed in Note 7 and Note 22, respectively.
The following table summarizes the Company’s sales into the following geographic regions for the years ended December 31: | | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| United States | $ | 419,431 | | | $ | 350,428 | | | $ | 377,218 | |
| North America (excluding United States) | 9,222 | | | 6,990 | | | 7,656 | |
| Asia | 21,242 | | | 21,089 | | | 27,579 | |
| Europe | 78,625 | | | 62,138 | | | 85,306 | |
| South America | 3,629 | | | 1,082 | | | 1,788 | |
| Other | 2,745 | | | 3,181 | | | 3,040 | |
| Total | $ | 534,894 | | | $ | 444,908 | | | $ | 502,587 | |
The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31: | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| United States | $ | 82,317 | | | $ | 85,681 | |
| France | 6,974 | | | 7,688 | |
| India | 653 | | | 936 | |
| Canada | 714 | | | 931 | |
| Total | $ | 90,658 | | | $ | 95,236 | |
Sales recorded by the Company’s foreign operations were $50.0 million, $36.6 million and $52.3 million in 2022, 2021 and 2020, respectively. Net loss was $0.2 million, $3.8 million and $6.6 million in 2022, 2021 and 2020, respectively. Net assets held outside of the U.S. total $36.6 million and $40.5 million at December 31, 2022 and 2021, respectively. The exchange gain (loss) included in determining net (loss) income was insignificant in 2022, 2021 and 2020. Cumulative translation adjustments amounted to $7.3 million and $5.4 million at December 31, 2022 and 2021, respectively.
The Company had a significant concentration of business in 2022 and 2021 with The Boeing Company (“Boeing”), and had a significant concentration with Panasonic Aviation Corporation (“Panasonic”) in 2020. Sales to Boeing and Panasonic are primarily in the Aerospace segment. The following is information relating to the activity with those customers:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Percent of Consolidated Sales | | | | | |
| Boeing | 11.0% | | 10.0% | | * |
| Panasonic | * | | * | | 11.1% |
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Accounts Receivable at December 31, | | | |
| Boeing | $ | 16,860 | | | $ | 14,545 | |
| Panasonic | * | | * |
* Sales represented less than 10% of total consolidated sales in during the given period.NOTE 21 — DIVESTITURE ACTIVITIES
Semiconductor Test Business
On February 13, 2019, the Company completed a divestiture of its semiconductor business within the Test Systems segment. The total proceeds of the divestiture included 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 has elected an accounting policy to recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. We consider the proceeds realizable when we have received communication from the purchaser of its calculation of the earnout and the parties reach agreement on the calculation. No amounts were payable to the Company under either earnout for the calendar 2019 earnout. The Company agreed to an earnout payment of $10.7 million for the calendar 2020 earnout, which was recorded in the fourth quarter of 2021 as Other Income and was paid to the Company in early January 2022. In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $11.3 million. The Company recorded the gain and received the payment in the first quarter of 2022.
On February 14, 2023, the Company was notified by the purchaser that they have calculated $3.4 million as being payable for the calendar 2022 earnout. We are in the process of reviewing the calculation, and expect to record the additional gain on the sale, and receive the payment, in the first quarter of 2023. We are not eligible for any further earnout payments related to this divestiture.
Other Disposal Activity
On October 6, 2021, as part of a planned consolidation effort, the Company sold one of its Aerospace buildings for $9.2 million. Net cash proceeds were approximately $8.8 million. A gain on sale of approximately $5.0 million was recorded in the Consolidated Statements of Operations in Net Gain on Sale of Facility in the year ended December 31, 2021. The operation has been integrated into another facility.
In 2020, the Company sold certain facilities within the Aerospace segment for $1.5 million in cash. The net gain on the sale was insignificant.
NOTE 22 — IMPAIRMENTS, RESTRUCTURING AND OTHER CHARGES
Goodwill Impairment
The 2022 and 2021 goodwill impairment tests resulted in no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charges were recognized in 2022 or 2021. See Note 7 for discussion of the $86.3 million of goodwill impairment charges in 2020, respectively, within the Aerospace segment. Such amounts are reported within the Impairment Loss line of the Consolidated Statements of Operations in the respective year.
Restructuring Activities
The Company incurred an impairment charge to ROU assets of approximately $0.7 million during 2020 related to its AeroSat subsidiary, which had been restructured in 2019. Additional charges of $0.2 million and $0.4 million associated with restructuring at AeroSat were recorded during 2021 and 2020, respectively. All such charges were included in the Aerospace segment.
The COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s anticipated future operating results. As a result, the Company executed restructuring activities in the form of workforce reduction, primarily in the second quarter of 2020, to align capacity with expected demand. Accordingly, restructuring charges of $4.9 million in severance expense associated primarily with the Aerospace segment were recorded in 2020. Additional restructuring charges of $0.6 million occurred during 2021 to align the workforce to expected activities and to consolidate certain facilities. Severance expense during 2021 included $0.3 million related with the Aerospace segment and $0.3 million related with the Test Systems segment. Restructuring-related severance charges and other charges were insignificant in 2022. Any future restructuring actions will depend upon market conditions, customer actions and other factors.
The above restructuring and impairment charges are presented in the Consolidated Statements of Operations for the years ended December 31 as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Cost of Products Sold | $ | — | | | $ | 221 | | | $ | 280 | |
| Selling, General and Administrative Expenses | 195 | | | 577 | | | 5,047 | |
| Impairment Loss | — | | | — | | | 87,016 | |
| Total Restructuring and Impairment Charges | $ | 195 | | | $ | 798 | | | $ | 92,343 | |
The following table reconciles the beginning and ending liability for restructuring charges:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Balance as of January 1 | $ | 2,400 | | | $ | 5,631 | | | $ | 5,190 | |
| Restructuring Charges Recognized | 195 | | | 798 | | | 5,327 | |
| Cash Paid | (2,595) | | | (4,029) | | | (4,886) | |
| Balance as of December 31 | $ | — | | | $ | 2,400 | | | $ | 5,631 | |
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 became impaired in 2020 which resulted in an impairment charge of $3.5 million recorded within the Other Expense, Net of Other Income line in the accompanying Consolidated Statements of Operations for the year ended December 31, 2020.