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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 29, 2019
or
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☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-7087
ASTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
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New York (State or other jurisdiction of incorporation or organization) | 16-0959303 (IRS Employer Identification Number) |
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130 Commerce Way, East Aurora, New York (Address of principal executive offices) | 14052 (Zip code) |
(716) 805-1599
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $.01 par value per share | ATRO | NASDAQ Stock Market |
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ |
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Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of July 31, 2019, 32,675,358 shares of common stock were outstanding consisting of 24,766,477 shares of common stock ($.01 par value) and 7,908,881 shares of Class B common stock ($.01 par value).
TABLE OF CONTENTS
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PART I | | | | | | | |
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| | Item 1 | | | | | |
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| | Item 2 | | | | | |
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| | Item 3 | | | | | |
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| | Item 4 | | | | | |
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PART II | | | | | | | |
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| | Item 1 | | | | | |
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| | Item 1a | | | | | |
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| | Item 2 | | | | | |
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| | Item 3 | | | | | |
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| | Item 4 | | | | | |
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| | Item 5 | | | | | |
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| | Item 6 | | | | | |
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Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
June 29, 2019 with Comparative Figures for December 31, 2018
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| June 29, 2019 | | December 31, 2018 |
| | | |
Current Assets: | | | |
Cash and Cash Equivalents | $ | 17,106 | | $ | 16,622 |
Accounts Receivable, Net of Allowance for Doubtful Accounts | 177,102 | | 182,308 |
Inventories | 142,853 | | 138,685 |
Prepaid Expenses and Other Current Assets | 17,587 | | 17,198 |
Assets Held for Sale | — | | 19,358 |
Total Current Assets | 354,648 | | 374,171 |
Property, Plant and Equipment, Net of Accumulated Depreciation | 117,389 | | 120,862 |
Other Assets | 45,189 | | 21,272 |
Intangible Assets, Net of Accumulated Amortization | 125,039 | | 133,383 |
Goodwill | 124,998 | | 124,952 |
Total Assets | $ | 767,263 | | $ | 774,640 |
Current Liabilities: | | | |
Current Maturities of Long-term Debt | $ | 170 | | $ | 1,870 |
Accounts Payable | 42,964 | | 50,664 |
Accrued Expenses and Other Current Liabilities | 51,054 | | 47,772 |
Customer Advance Payments and Deferred Revenue | 25,402 | | 26,880 |
Liabilities Held for Sale | — | | 906 |
Total Current Liabilities | 119,590 | | 128,092 |
Long-term Debt | 122,113 | | 232,112 |
Other Liabilities | 50,594 | | 27,811 |
Total Liabilities | 292,297 | | 388,015 |
Shareholders’ Equity: | | | |
Common Stock | 344 | | 343 |
Accumulated Other Comprehensive Loss | (12,421) | | (13,329) |
Other Shareholders’ Equity | 487,043 | | 399,611 |
Total Shareholders’ Equity | 474,966 | | 386,625 |
Total Liabilities and Shareholders’ Equity | $ | 767,263 | | $ | 774,640 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 29, 2019 With Comparative Figures for 2018
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | Three Months Ended | | |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Sales | $ | 397,272 | | $ | 387,665 | | $ | 189,098 | | $ | 208,606 |
Cost of Products Sold | 304,832 | | 300,961 | | 148,735 | | 159,034 |
Gross Profit | 92,440 | | 86,704 | | 40,363 | | 49,572 |
Selling, General and Administrative Expenses | 58,986 | | 59,943 | | 29,790 | | 29,443 |
Income from Operations | 33,454 | | 26,761 | | 10,573 | | 20,129 |
Gain on Sale of Business | 80,133 | | — | | — | | — |
Other Expense, Net of Other Income | 733 | | 838 | | 518 | | 463 |
Interest Expense, Net of Interest Income | 3,029 | | 4,815 | | 1,225 | | 2,484 |
Income Before Income Taxes | 109,825 | | 21,108 | | 8,830 | | 17,182 |
Provision for Income Taxes | 24,953 | | 3,789 | | 2,104 | | 3,157 |
Net Income | $ | 84,872 | | $ | 17,319 | | $ | 6,726 | | $ | 14,025 |
Earnings Per Share: | | | | | | | |
Basic | $ | 2.60 | | $ | 0.54 | | $ | 0.21 | | $ | 0.43 |
Diluted | $ | 2.56 | | $ | 0.52 | | $ | 0.20 | | $ | 0.42 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income
Three and Six Months Ended June 29, 2019 With Comparative Figures for 2018
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | Three Months Ended | | |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Net Income | $ | 84,872 | | $ | 17,319 | | $ | 6,726 | | $ | 14,025 |
Other Comprehensive Income (Loss): | | | | | | | |
Foreign Currency Translation Adjustments | 614 | | (1,572) | | 884 | | (1,805) |
Retirement Liability Adjustment – Net of Tax | 294 | | 430 | | 144 | | 215 |
Total Other Comprehensive Income (Loss) | 908 | | (1,142) | | 1,028 | | (1,590) |
Comprehensive Income | $ | 85,780 | | $ | 16,177 | | $ | 7,754 | | $ | 12,435 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 29, 2019 With Comparative Figures for 2018
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six Months Ended | | |
| June 29, 2019 | | June 30, 2018 |
Cash Flows From Operating Activities: | | | |
Net Income | $ | 84,872 | | $ | 17,319 |
Adjustments to Reconcile Net Income to Cash Provided By Operating Activities: | | | |
Depreciation and Amortization | 15,980 | | 18,584 |
Provisions for Non-Cash Losses on Inventory and Receivables | 4,429 | | 1,819 |
Equity-based Compensation Expense | 2,145 | | 1,637 |
Deferred Tax Benefit | (3,371) | | (516) |
Gain on Sale of Business, Before Taxes | (80,133) | | — |
Other | 263 | | (431) |
Cash Flows from Changes in Operating Assets and Liabilities: | | | |
Accounts Receivable | 5,266 | | (33,347) |
Inventories | (11,276) | | (19,761) |
Accounts Payable | (7,685) | | 7,981 |
Accrued Expenses | (9,141) | | 53 |
Other Current Assets and Liabilities | (975) | | (404) |
Customer Advanced Payments and Deferred Revenue | (1,234) | | 14,469 |
Income Taxes | 9,181 | | (189) |
Supplemental Retirement and Other Liabilities | 735 | | 896 |
Cash Provided By Operating Activities | 9,056 | | 8,110 |
Cash Flows From Investing Activities: | | | |
Proceeds on Sale of Business | 103,793 | | — |
Capital Expenditures | (6,917) | | (8,495) |
| | | |
Cash Provided By (Used For) Investing Activities | 96,876 | | (8,495) |
Cash Flows From Financing Activities: | | | |
Proceeds from Long-term Debt | 27,000 | | 30,015 |
Payments for Long-term Debt | (132,053) | | (36,416) |
| | | |
Debt Acquisition Costs | — | | (516) |
Proceeds from Exercise of Stock Options | 416 | | 281 |
| | | |
| | | |
Other Financing Activities | (834) | | — |
Cash Used For Financing Activities | (105,471) | | (6,636) |
Effect of Exchange Rates on Cash | 23 | | (285) |
Increase (Decrease) in Cash and Cash Equivalents | 484 | | (7,306) |
Cash and Cash Equivalents at Beginning of Period | 16,622 | | 17,914 |
Cash and Cash Equivalents at End of Period | $ | 17,106 | | $ | 10,608 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders' Equity
Three and Six Months Ended June 29, 2019 With Comparative Figures for 2018
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | Three Months Ended | | |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Common Stock | | | | | | | |
Beginning of Period | $ | 260 | | $ | 229 | | $ | 262 | | $ | 231 |
| | | | | | | |
Exercise of Stock Options and Equity-based Compensation Expense – Net of Taxes | 1 | | — | | 1 | | — |
| | | | | | | |
Class B Stock Converted to Common Stock | 3 | | 3 | | 1 | | 1 |
End of Period | $ | 264 | | $ | 232 | | $ | 264 | | $ | 232 |
Convertible Class B Stock | | | | | | | |
Beginning of Period | $ | 83 | | $ | 111 | | $ | 81 | | $ | 109 |
Exercise of Stock Options and Equity-based Compensation Expense – Net of Taxes | — | | 1 | | — | | 1 |
| | | | | | | |
Class B Stock Converted to Common Stock | (3) | | (3) | | (1) | | (1) |
End of Period | $ | 80 | | $ | 109 | | $ | 80 | | $ | 109 |
Additional Paid in Capital | | | | | | | |
Beginning of Period | $ | 73,044 | | $ | 67,748 | | $ | 74,396 | | $ | 68,839 |
| | | | | | | |
| | | | | | | |
Exercise of Stock Options and Equity-based Compensation Expense - Net of Taxes | 2,560 | | 1,917 | | 1,208 | | 826 |
End of Period | $ | 75,604 | | $ | 69,665 | | $ | 75,604 | | $ | 69,665 |
Accumulated Comprehensive Loss | | | | | | | |
Beginning of Period | $ | (13,329) | | $ | (13,352) | | $ | (13,449) | | $ | (14,277) |
Adoption of ASU 2018-02 | — | | (1,373) | | — | | — |
Foreign Currency Translation Adjustments | 614 | | (1,572) | | 884 | | (1,805) |
| | | | | | | |
Retirement Liability Adjustment – Net of Taxes | 294 | | 430 | | 144 | | 215 |
End of Period | $ | (12,421) | | $ | (15,867) | | $ | (12,421) | | $ | (15,867) |
Retained Earnings | | | | | | | |
Beginning of Period | $ | 376,567 | | $ | 325,191 | | $ | 454,713 | | $ | 333,126 |
Adoption of ASU 2018-02 | — | | 1,373 | | — | | — |
Adoption of ASU 2014-09 | — | | 3,268 | | — | | — |
Net income | 84,872 | | 17,319 | | 6,726 | | 14,025 |
| | | | | | | |
| | | | | | | |
End of Period | $ | 461,439 | | $ | 347,151 | | $ | 461,439 | | $ | 347,151 |
Treasury Stock | | | | | | | |
Beginning of Period | $ | (50,000) | | $ | (50,000) | | $ | (50,000) | | $ | (50,000) |
Purchase of Shares | — | | — | | — | | — |
Retirement of Treasury Shares | — | | — | | — | | — |
End of Period | $ | (50,000) | | $ | (50,000) | | $ | (50,000) | | $ | (50,000) |
Total Shareholders’ Equity | $ | 474,966 | | $ | 351,290 | | $ | 474,966 | | $ | 351,290 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders' Equity, Continued
Three and Six Months Ended June 29, 2019 With Comparative Figures for 2018
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | Three Months Ended | | |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Common Stock | | | | | | | |
Beginning of Period | 25,978 | | 22,861 | | 26,178 | | 23,106 |
| | | | | | | |
Exercise of Stock Options | 34 | | 26 | | 13 | | 7 |
Class B Stock Converted to Common Stock | 331 | | 332 | | 152 | | 106 |
End of Period | 26,343 | | 23,219 | | 26,343 | | 23,219 |
Convertible Class B Stock | | | | | | | |
Beginning of Period | 8,290 | | 11,083 | | 8,146 | | 10,891 |
Exercise of Stock Options | 48 | | 38 | | 13 | | 4 |
| | | | | | | |
Class B Stock Converted to Common Stock | (331) | | (332) | | (152) | | (106) |
End of Period | 8,007 | | 10,789 | | 8,007 | | 10,789 |
Treasury Stock | | | | | | | |
Beginning of Period | (1,675) | | (1,675) | | (1,675) | | (1,675) |
Purchase of Shares | — | | — | | — | | — |
Retirement of Treasury Shares | — | | — | | — | | — |
End of Period | (1,675) | | (1,675) | | (1,675) | | (1,675) |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
June 29, 2019
(Unaudited)
1) Basis of Presentation
The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.
Share quantities and per share data reported have been restated to reflect the impact of the three-for-twenty Class B stock distribution to shareholders of record on October 12, 2018.
Operating Results
The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the six months ended June 29, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s 2018 annual report on Form 10-K.
Description of the Business
Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense and electronics industries. Our products and services include advanced, high-performance electrical power generation, distribution and motion systems, lighting and safety systems, avionics products, systems and certification, aircraft structures and automated test systems.
We have operations in the United States (“U.S.”), Canada and France. We design and build our products through our wholly owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Armstrong Aerospace, Inc. (“Armstrong”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”); Astronics Connectivity Systems and Certification Corp. (“CSC”); Astronics Custom Control Concepts Inc. (“CCC”); Astronics DME LLC (“DME”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc. (“Max-Viz”); Peco, Inc. (“Peco”); and PGA Electronic s.a. (“PGA”). On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom Communication Technologies, Inc. (“FCT”).
On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The total proceeds of the divestiture amounted to $103.8 million. The Company recorded a pre-tax gain on the sale of $80.1 million in the first quarter of 2019. The income tax expense relating to the gain is expected to be $21.3 million.
On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of FCT. FCT, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market. Freedom will be included in our Test Systems segment. The total consideration for the transaction was $22.0 million in cash. The purchase price allocation for this acquisition is not determinable as the fair value valuation of assets and liabilities is not complete. The Company expects to complete a preliminary allocation during the third quarter of 2019. Purchased intangible assets and goodwill are not deductible for tax purposes.
On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. The transaction did not meet the criteria for the assets to be classified as held for sale at June 29, 2019. The Airfield Lighting product line, part of the Aerospace segment, represented less than 1% of the our 2018 revenue. The Company expects to record a loss on sale of approximately $1.3 million in the 2019 third quarter.
Cost of Products Sold, Engineering and Development, Interest, 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 development costs. The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. These costs are expensed when incurred and included in cost of products sold. Research and development, design and related engineering amounted to $27.7 million and $28.9 million for the three months ended and $54.4 million and $57.8 million for the six months ended June 29, 2019 and June 30, 2018, respectively. Selling, general and administrative expenses include costs primarily related to our sales and marketing departments and administrative departments. Interest expense is shown net of interest income. Interest income was insignificant for the three and six months ended June 29, 2019 and June 30, 2018.
Foreign Currency Translation
The aggregate transaction gain or loss included in operations was insignificant for the three and six months ended June 29, 2019 and June 30, 2018.
Newly Adopted and Recent Accounting Pronouncements
During the first quarter of 2018, the Company early-adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company applied the guidance as of the beginning of the period of adoption and reclassified approximately $1.4 million from accumulated other comprehensive loss to retained earnings due to the change in federal corporate tax rate.
In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 required entities to adopt the new standard using a modified retrospective method and initially apply the related guidance at the beginning of the earliest period presented in the financial statements. During July 2018, the FASB issued ASU 2018-11, which allows for an additional and optional transition method under which an entity would record a cumulative-effect adjustment at the beginning of the period of adoption (“cumulative-effect method”).
We have adopted this guidance as of January 1, 2019 using the cumulative-effect method. The standard requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged. Prior year financial statements were not recast under the new method. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
The implementation of this standard did not have a material effect on our financial statements. As of January 1, 2019, ROU assets of approximately $18.4 million and lease liabilities of approximately $18.5 million were recognized on our balance sheet for our leased office and manufacturing facilities and equipment leases. There was a reclassification to ROU assets of approximately $3.5 million from net property plant and equipment for assets under existing finance leases at the transition date. The standards did not impact the Company's consolidated statements of operations or retained earnings. Refer to Note 9 for additional information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. In November 2018, the FASB issued ASU 2018-19 which clarifies the guidance in ASU 2016-13. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this ASU. We do not expect this ASU to have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements, as it only includes changes to disclosure requirements.
In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this ASU.
2) Revenue
ASU 2014-09 was adopted on January 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings. We recognized a transition adjustment of $3.3 million, net of tax effects, which increased our January 1, 2018 retained earnings.
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 Condensed 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 60 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 June 29, 2019, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year, and therefore such costs are expensed as incurred.
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 anticipated contracts that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Condensed Balance Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. As of June 29, 2019, the Company does 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. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. 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. 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 aggregate effect of all modifications have 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 satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying 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. Therefore, due to control transferring over time, the Company typically recognizes revenue on a straight-line basis throughout the contract period.
On June 29, 2019, we had $379.7 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $263.9 million of our remaining performance obligations as revenue in 2019. The Company has not recognized any material amount of revenue from performance obligations that were satisfied or partially satisfied in previous periods.
Costs in excess of billings includes unbilled amounts resulting from revenues under contracts with customers that are satisfied over time and when the cost-to-cost measurement method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs in excess of billings are classified as current assets, within Accounts Receivable, Net of Allowance for Doubtful Accounts on our Consolidated Condensed Balance Sheet.
Billings in excess of cost includes billings in excess of revenue recognized as well as deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are classified as current liabilities, reported in our Consolidated Condensed Balance Sheet within Customer Advance Payments and Deferred Revenue. 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 $7.8 million and $8.4 million during the three months ended June 29, 2019 and June 30, 2018, respectively, and $13.2 million and $11.6 million for the six months ended June 29, 2019 and June 30, 2018, respectively, in revenues that were included in the contract liability balance at the beginning of the period.
The Company's contract assets and contract liabilities consist primarily of costs in excess of billings and billings in excess of cost, respectively. The following table presents the beginning and ending balances of contract assets and contract liabilities during the six months ended June 29, 2019:
| | | | | | | | | | | |
(In thousands) | | Contract Assets | Contract Liabilities |
Beginning Balance, January 1, 2019 | | $ | 33,030 | $ | 27,347 |
Ending Balance, June 29, 2019 | | $ | 36,223 | $ | 26,050 |
The following table presents our revenue disaggregated by Market Segments as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | Three Months Ended | | |
(In thousands) | | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Aerospace Segment | | | | | | | | |
Commercial Transport | | $ | 271,509 | | $ | 265,847 | | $ | 129,731 | | $ | 132,797 |
Military | | 40,498 | | 30,285 | | 19,545 | | 16,270 |
Business Jet | | 37,123 | | 21,002 | | 17,286 | | 10,338 |
Other | | 13,658 | | 13,670 | | 7,725 | | 6,799 |
Aerospace Total | | 362,788 | | 330,804 | | 174,287 | | 166,204 |
| | | | | | | | |
Test Systems Segment | | | | | | | | |
Semiconductor | | 5,596 | | 38,465 | | 2,242 | | 31,405 |
Aerospace & Defense | | 28,888 | | 18,396 | | 12,569 | | 10,997 |
Test Systems Total | | 34,484 | | 56,861 | | 14,811 | | 42,402 |
| | | | | | | | |
Total | | $ | 397,272 | | $ | 387,665 | | $ | 189,098 | | $ | 208,606 |
The following table presents our revenue disaggregated by Product Lines as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | Three Months Ended | | |
(In thousands) | | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Aerospace Segment | | | | | | | | |
Electrical Power & Motion | | $ | 176,579 | | $ | 140,321 | | $ | 84,042 | | $ | 67,643 |
Lighting & Safety | | 95,375 | | 85,763 | | 46,770 | | 44,121 |
Avionics | | 59,543 | | 69,295 | | 25,682 | | 36,272 |
Systems Certification | | 5,666 | | 9,655 | | 4,048 | | 4,872 |
Structures | | 11,967 | | 12,100 | | 6,020 | | 6,497 |
Other | | 13,658 | | 13,670 | | 7,725 | | 6,799 |
Aerospace Total | | 362,788 | | 330,804 | | 174,287 | | 166,204 |
| | | | | | | | |
Test Systems | | 34,484 | | 56,861 | | 14,811 | | 42,402 |
| | | | | | | | |
Total | | $ | 397,272 | | $ | 387,665 | | $ | 189,098 | | $ | 208,606 |
3) Inventories
Inventories are as follows:
| | | | | | | | | | | |
(In thousands) | June 29, 2019 | | December 31, 2018 |
Finished Goods | $ | 30,847 | | $ | 33,100 |
Work in Progress | 26,641 | | 27,409 |
Raw Material | 85,365 | | 78,176 |
| $ | 142,853 | | $ | 138,685 |
Additionally, net Inventories of $14,385 are classified in Assets Held for Sale at December 31, 2018. Refer to Note 18.
4) Property, Plant and Equipment
Property, Plant and Equipment are as follows:
| | | | | | | | | | | |
(In thousands) | June 29, 2019 | | December 31, 2018 |
Land | $ | 11,185 | | $ | 11,191 |
Buildings and Improvements | 76,670 | | 83,812 |
Machinery and Equipment | 111,937 | | 106,327 |
Construction in Progress | 6,072 | | 6,404 |
| 205,864 | | 207,734 |
Less Accumulated Depreciation | 88,475 | | 86,872 |
| $ | 117,389 | | $ | 120,862 |
Additionally, net Property, Plant and Equipment of $3,521 are classified in Assets Held for Sale at December 31, 2018. Refer to Note 18.
5) Intangible Assets
The following table summarizes acquired intangible assets as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 29, 2019 | | | | December 31, 2018 | | |
(In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Patents | 11 years | | $ | 2,146 | | $ | 1,760 | | $ | 2,146 | | $ | 1,716 |
Non-compete Agreement | 4 years | | 10,900 | | 6,177 | | 10,900 | | 4,680 |
Trade Names | 10 years | | 11,449 | | 5,716 | | 11,454 | | 5,182 |
Completed and Unpatented Technology | 10 years | | 36,396 | | 16,761 | | 36,406 | | 14,964 |
Customer Relationships | 15 years | | 136,878 | | 42,316 | | 136,894 | | 37,875 |
Total Intangible Assets | 13 years | | $ | 197,769 | | $ | 72,730 | | $ | 197,800 | | $ | 64,417 |
Additionally, net Intangible Assets of $651 are classified in Assets Held for Sale at December 31, 2018. Refer to Note 18.
All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | Three Months Ended | | |
(In thousands) | | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Amortization Expense | | $ | 8,352 | | $ | 10,868 | | $ | 4,128 | | $ | 4,867 |
Amortization expense for acquired intangible assets expected for 2019 and for each of the next five years is summarized as follows:
| | | | | |
(In thousands) | |
2019 | $ | 16,628 |
2020 | 15,903 |
2021 | 13,993 |
2022 | 13,569 |
2023 | 12,402 |
2024 | 10,931 |
6) Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the six months ended June 29, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | December 31, 2018 | | Acquisition/Adjustments | | Foreign Currency Translation | | June 29, 2019 |
Aerospace | $ | 124,952 | | $ | — | | $ | 46 | | $ | 124,998 |
Test Systems | — | | — | | — | | — |
| $ | 124,952 | | $ | — | | $ | 46 | | $ | 124,998 |
7) Long-term Debt and Notes Payable
The Company's Fourth Amended and Restated Credit Agreement (the “Original Facility”) provided for a $350 million revolving credit line with the option to increase the line by up to $150 million. The maturity date of the Original Facility was January 13, 2021. On February 16, 2018, the Company modified and extended the Original Facility by entering into the Fifth Amended and Restated Credit Agreement (the “Agreement”), which provides for a $500 million revolving credit line with the option to increase the line by up to $150 million. A new lender was added to the facility as well. The outstanding balance of the Original Facility was rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February 16, 2023. At June 29, 2019, there was $122.0 million outstanding on the revolving credit facility and there remains $376.9 million available, net of outstanding letters of credit. The credit facility allocates up to $20 million of the $500 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At June 29, 2019, outstanding letters of credit totaled $1.1 million.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is 3.75 to 1, increasing to 4.50 to 1 for up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations. The Company is in compliance with its financial covenant at June 29, 2019. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between 0.10% and 0.20% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio.
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
8) Product Warranties
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from 12 to 60 months. The Company determines warranty reserves needed by product line based on experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | Three Months Ended | | |
(In thousands) | | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Balance at Beginning of Period | | $ | 5,027 | | $ | 5,136 | | $ | 4,829 | | $ | 5,115 |
Warranties Divested in Sale of Business | | (123) | | — | | — | | — |
Warranties Issued | | 1,245 | | 1,301 | | 716 | | 734 |
Warranties Settled | | (1,180) | | (1,285) | | (592) | | (645) |
Reassessed Warranty Exposure | | (163) | | 28 | | (147) | | (24) |
Balance at End of Period | | $ | 4,806 | | $ | 5,180 | | $ | 4,806 | | $ | 5,180 |
9) Leases
The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. At inception of arrangements with vendors, the Company determines whether the contract is or contains a lease based on each party’s rights and obligations under the arrangement. At inception, any new additional operating lease liabilities and corresponding ROU assets are based on the present value of the remaining minimum rental payments. 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. 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 as of the January 1, 2019 transition date.
The present value of the Company’s lease liability at transition was calculated using a weighted-average incremental borrowing rate of 3.7%. In determining the incremental borrowing rate, we have considered borrowing data for secured debt obtained from our lending institution as of the transition date. As of June 29, 2019, the Company recognized an operating right-of-use asset and lease liability of approximately $22.1 million and $22.3 million, respectively. The Company's operating lease liability increased approximately $0.1 million and $5.6 million as a result of acquiring right-of-use-assets from new leases entered into during the three and six months ended June 29, 2019. As of June 29, 2019, the Company recognized a financing right-of-use asset and lease liability of approximately $3.0 million and $5.6 million, respectively. No new financing lease liabilities were not entered into during the three and six months ended June 29, 2019. The right-of-use asset is included within Other assets in the Consolidated Condensed Balance Sheets, while the lease liability is included within Other current liabilities and Other liabilities, as appropriate.
As permitted by ASC 842, leases with expected durations of less than 12 months from inception (i.e. short-term leases) were excluded from the Company’s calculation of its lease liability and right-of-use asset. Furthermore, as permitted by ASC 842, the Company elected to apply the package of practical expedients, which allows companies not to reassess: (a) whether its expired or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases, and (c) initial direct costs for any existing leases.
The following is a summary of the Company's total lease costs:
| | | | | | | | | | | | | | |
| | Six months ended | | Three months ended |
(In thousands) | | June 29, 2019 | | June 29, 2019 |
Finance Lease Cost: | | | | |
Amortization of Right-of-use Assets | | $ | 510 | | $ | 255 |
Interest on Lease Liabilities | | 167 | | 81 |
Total Finance Lease Cost | | 677 | | 336 |
Operating Lease Cost | | 2,406 | | |