What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-02 · 181 added, 120 removed, 257 unchanged (54% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Astronics, through its subsidiaries, is a leading supplier of advanced, high-performance electrical power generation, distribution and seat motion solutions, lighting and safety systems, avionics products, systems certification, aircraft structures and automated test systems.

Our strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and use those capabilities to provide innovative solutions to the aerospace & defense and other markets where our technology can be beneficial.

Astronics Corporation, through its subsidiaries, is a leading supplier of advanced technologies and products to the global aerospace and defense and other mission-critical industries.

We have two reportable segments, Aerospace and Test Systems.

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We have engineering offices in the Ukraine and India.

Our Aerospace segment serves three primary markets.

They are the military, commercial transport and business jet markets.

Our Test Systems segment serves the aerospace & defense and mass transit markets.

Important factors affecting our growth and profitability are the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft.

Our Aerospace segment designs and manufactures products for the global aerospace industry.

Product lines include lighting and safety systems, electrical power generation, distribution and seat motions systems, aircraft structures, avionics products, systems certification, and other products.

Our primary Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft for the commercial, military and general aviation markets, suppliers to those OEM’s, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S.

Department of Defense.

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.

In the Test Systems segment, Astronics’ products are sold to a global customer base including OEM's and prime government contractors for both electronics and military products.

Our strategy is to increase our value by developing technologies and capabilities, either internally or through acquisition, and using those capabilities to provide innovative solutions to our targeted markets where our technology can be beneficial.

Important factors affecting our growth and profitability are the ongoing impacts of the COVID-19 pandemic and the timing and extent of recovery (as discussed more fully below), the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft.

New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy.

Once designed into a new aircraft, the spare parts business is frequently retained by the Company.

Future growth and profitability of the test business is dependent on developing and procuring new and follow-on business in the mass-transit market as well as with the military.

The nature of our Test Systems business is such that it pursues large multi-year projects.

Future growth and profitability of the test business is dependent on developing and procuring new and follow-on business.

The nature of our Test Systems business is such that it pursues large, often multi-year, projects.

There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.

Test Systems segment customers include the Department of Defense, prime contractors to the Department of Defense, mass transit operators and prime contractors to mass transit operators.

Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term.

We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.

Challenges which continue to face us include improving shareholder value through increasing profitability.

Challenges which continue to face us include the ongoing COVID-19 pandemic and its continued impact on the aerospace industry and improving shareholder value through increasing profitability.

Increasing profitability is dependent on many things, primarily sales growth, both acquired and organic, and the Company’s ability to control operating expenses and to identify means of creating improved productivity.

Sales are driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft and our products, continued government funding of defense programs, the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for new aircraft platforms and continually identifying and winning new business for our Test Systems segment.

Reduced aircraft build rates driven by a weak economy, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand for our products, which will result in lower profits.

Reduced aircraft build rates driven by a weak economy, aircraft groundings, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand for our products, which will result in lower profits.

Reduction of defense spending may result in fewer opportunities for us to compete, which could result in lower profits in the future.

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We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.

RESTRUCTURING

The COVID-19 pandemic caused a significant impact on our sales and net income for fiscal 2020 and is expected to continue to do so into fiscal 2021.

This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer

demand for all market channels, with commercial transport (both OEM and aftermarket channels) being the most adversely impacted due to the pandemic's impact on air travel worldwide.

As a result, the Company executed restructuring activities in the form of workforce reduction, primarily in the second quarter of 2020, to better align capacity with expected demand.

Restructuring charges of $4.9 million in severance expense associated primarily with the Aerospace segment was recorded in the year ended December 31, 2020.

In the fourth quarter of 2019, in an effort to reduce the significant operating losses at our AeroSat business, we initiated a restructuring plan to reduce costs and minimize losses of our AeroSat antenna business.

The plan focused the initiatives for the AeroSat business on near-term opportunities pertaining to business jet connectivity.

The plan has a downsized manufacturing operation remaining in New Hampshire, with significantly reduced personnel and operating expenses.

Impairments and restructuring charges recorded in 2019 as a result of the restructuring plan amounted to $28.8 million, all of which is included in the Aerospace segment.

The Company incurred an impairment charge to right-of-use assets of approximately $0.7 million and $0.4 million in additional restructuring charges associated with severance at AeroSat during the year ended December 31, 2020.

On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom Communication Technologies, Inc.

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The total consideration for the transaction was $21.8 million, net of $0.6 million in cash acquired.

On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus an earn-out estimated at a fair value of $2.5 million.

Diagnosys is included in our Test Systems segment.

On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus earnouts estimated at a fair value of $2.5 million at acquisition.

Diagnosys Inc.

and its affiliates (“Diagnosys”) is included in our Test Systems segment.

Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets.

The terms of the

acquisition allow for a potential earn-out of up to an additional $13.0 million over the next three years based on achievement of new order levels of over $72.0 million during that period.

The terms of the 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.

No earnout was payable for the period from acquisition through December 31, 2020.

The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India.

Refer to Note 21 for additional information.

On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment.

The business was not core to the future of the Test Systems segment.

The total proceeds received for the sale amounted to $103.8 million.

The total cash proceeds received upon 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.

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the sales in such annual period do not carry over to the next annual period.

Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company will recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable.

No amounts were due under the First Earnout.

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 year ended December 31, 2019.

On February 13, 2021, the Company was notified by the purchaser that they have calculated $10.7 million as being payable to the Company under the First and Second Earnouts for the year ended December 31, 2020.

There is a period by which we and the purchaser will review the earnout calculation, which is underway.

Upon completion of the review and agreement of any adjustments, the Company expects to record the additional gain on the sale in the first quarter of 2021.

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.

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The Company recorded a pre-tax loss on the sale of approximately $1.3 million.

RESTRUCTURING

The plan narrows the initiatives for the AeroSat business to focus primarily on near-term opportunities pertaining to business jet connectivity.

The plan has a downsized manufacturing operation remaining in New Hampshire, with significantly reduced personnel and operating expenses.

The Company's total impairments and restructuring charges recorded in the fourth quarter of 2019 amounted to $28.8 million all of which is included in the Aerospace segment.

Refer to Note 23 for additional discussion.

Commercial Transport Market

Sales to the commercial transport market include sales of electrical power generation, distribution, seat motion, lighting & safety products, avionics products, systems certification and structures products.

The commercial transport market is our largest end market with sales driven by new aircraft production and aftermarket airline retrofit programs.

In the commercial transport market, while many of our key long-term fundamentals remain intact, we continue to see near-term market pressure due to COVID-19.

Despite solid progress on the vaccine front, 2021 will remain very challenging for our commercial transport products with improvement expected beginning in the second half of 2021 driven by the return to production of the 737 MAX and an expectation of improved activity with our airline customers.

Aircraft build rates are expected to improve modestly during 2021 from current levels as production of the 737 MAX picks up, and the aftermarket is expected to strengthen over the course of the year as aircraft utilization and load factors increase.

On the other hand, wide-body production rates and usage are expected to remain depressed throughout 2021 and possibly for several years due to low international travel demand caused by the pandemic.

Sales to the commercial transport market include sales of lighting and safety systems, electrical power generation, distribution and motions systems, aircraft structures, avionics products, systems certification, and other products.

Sales to this market totaled approximately $262.6 million or 52.3% of our consolidated sales in 2020.

Maintaining and growing sales to the commercial transport market will depend on airlines’ capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines.

As a result of the COVID-19 pandemic and its adverse impact on air travel worldwide, the commercial aerospace industry has been significantly disrupted.

The significant impact of the COVID-19 pandemic on the commercial transport market channels has led to this market comprising a lower percentage of our net sales in fiscal 2020 than typical.

When the commercial transport industry recovers from the disruption caused by the COVID-19 pandemic, we would expect commercial transport market sales to account for a percentage of net sales that is relatively in line with our historical results prior to the COVID-19 pandemic.

Maintaining and growing sales to the commercial transport market will depend not only on market recovery from the impacts of the COVID-19 pandemic, but also on airlines’ capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines.

This spending by the airlines is impacted by their profits, cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers.

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This market has historically experienced strong growth from airlines installing in-seat passenger power systems on their existing and newly delivered aircraft.

Although we expect, based on information that Boeing has made publicly available, that deliveries of the 737 MAX program will resume and the demand for the aircraft in the long-term has not changed, a prolonged grounding of the 737 MAX could substantially decrease sales to this market in the near or long term which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The 737 MAX situation affects us not only because it has been our largest production program, but also because the grounding has reduced capacity in the world’s airline fleets, challenging our aftermarket business.

Although the 737 MAX was re-certified in the United States in November 2020 and in Europe in January 2021, and that the demand for the aircraft in the long-term has not changed, further delays in regulatory approval of the Boeing 737 MAX in one or more jurisdictions could substantially decrease sales to this market in the near or long term which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The 737 MAX situation affected us not only because it has been our largest production program, but also because the grounding reduced capacity in the world’s airline fleets, challenging our aftermarket business.

Our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines.

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Business Jet Market

The business jet market has also been impacted by the pandemic with new aircraft build rates significantly lower than the previous year.

Most of our sales in this market are line-fit products driven by aircraft build rates although there are some aftermarket sales as well.

We expect some improvement in the second half of 2021 moving into 2022 as build rates are expected to improve.

Sales to the business jet market include sales of lighting & safety products, avionics products, and electrical power & motion products.

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Business jet OEM build rates are impacted by global wealth creation and corporate profitability.

We continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies in this market.

We continue to see opportunities on new

aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies in this market.

There is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts.

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Sales to the aerospace & defense market were approximately $81.1 million in 2020.

Sales to the semiconductor market were approximately $9.7 million.

The Company completed a divestiture of its semiconductor test business on February 13, 2019.

Sales to the semiconductor market were approximately $3.5 million from residual warranty revenue following the Company’s divestiture of its semiconductor test business on February 13, 2019.

No further semiconductor revenues are expected beyond 2020.

CRITICAL ACCOUNTING POLICIES

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Start-up costs are expensed as incurred.

Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Condensed Balance

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, 2019, the Company does not have material capitalized fulfillment costs.

Capitalized fulfillment costs were $9.6 million as of December 31, 2018.

These costs were associated with a contract that is included in the divestiture of the semiconductor business and as such, the balance is included in Assets Held for Sale in the accompanying consolidated balance sheet at December 31, 2018.

Amortization of fulfillment costs recognized within Cost of Products Sold was approximately $1.0 million for the year ended December 31, 2018.

As of December 31, 2020 and 2019, 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.

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Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we would consider in determining whether to perform a quantitative test.

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.

Quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value.

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If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.

Goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

Goodwill impairment

is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

As a result of the qualitative factors related to the COVID-19 pandemic that surfaced during the first quarter of 2020, we performed interim quantitative assessments for the eight reporting units which had goodwill as of March 28, 2020, and an additional quantitative assessment for our PECO reporting unit as of June 27, 2020 driven by reductions from previously forecasted aircraft build rates.

Based on our quantitative assessments, the Company recorded goodwill impairment charges associated with four Aerospace reporting units, totaling $86.3 million within the Impairment Loss line in the December 31, 2020 Consolidated Statements of Operations.

The Company’s five reporting units remaining with goodwill as of the first day of our fourth quarter were subject to the annual goodwill impairment test.

Based on our quantitative assessments of our reporting units performed during our annual goodwill impairment test, we concluded that no additional goodwill impairment was required.

In 2019, we performed quantitative assessments for the reporting units which had goodwill as of the first day of the fourth quarter.

Based on our quantitative assessment, the Company recorded a full goodwill impairment charge of approximately $1.6 million in the December 31, 2019 consolidated statement of operations associated with the AeroSat reporting unit.

Based on our quantitative assessment, the Company recorded a full goodwill impairment charge of approximately $1.6 million in the December 31, 2019 Consolidated Statements of Operations associated with the AeroSat reporting unit.

The impairment loss was incurred in the Aerospace segment and is reported within the Impairment Loss line of the Consolidated Statements of Operations.

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Effective Tax Rate (3.0) % 23.8 % 10.5 %

Net Income $ 52,017 $ 46,803 $ 19,679

(1) Our results of operations for 2017 include the operations of CCC, beginning April 3, 2017, and the operations of CSC, beginning December 1, 2017.

(2) Our results of operations for 2019 include the operations of Freedom, beginning July 1, 2019, and the operations of Diagnosys, beginning October 4, 2019.

2019 results also reflect the divestiture of the semiconductor business on February 13, 2019.

Net (Loss) Income $ (115,781) $ 52,017 $ 46,803

(1) Financial results reflect the divestiture of the Test Systems’ semiconductor business on February 13, 2019, and the acquisitions of Freedom acquired in July 2019, and Diagnosys acquired in October 2019 (collectively, the “Acquired Businesses”).

A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.

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2020 Compared With 2019

Consolidated sales were down $270.1 million to $502.6 million compared to the prior year.

Aerospace sales were down $274.6 million.

Test System sales increased $4.5 million.

Consolidated cost of products sold decreased $210.8 million to $405.7 million in 2020 from $616.6 million in the prior year.

The decrease was primarily due to lower sales volume in 2020 due to the combination of the impacts of the COVID-19 pandemic on aerospace markets and the continued 737 MAX grounding.

The Company rapidly adjusted to the changed environment by aggressively adjusting its cost structure to changed demand, initiating workforce reduction activities and cost conservation activities including suspension of certain benefit programs and wage adjustments and reduction or elimination of discretionary spending.

The lower volume and the impact of these measures resulted in a significant reduction in cost of products sold in 2020 compared with the prior year.

Consolidated cost of products sold in 2019 included charges recorded for tariff expense of $5.9 million and $15.4 million of charges associated with the restructuring and impairment charges of our AeroSat antenna business which required classification within cost of products sold.

Selling, general and administrative (“SG&A”) expenses were $110.5 million compared with $143.4 million for the prior year period.

The decrease in 2020 was due to the cost conservation activities referred to above, though these savings were partially offset by associated severance charges of $5.3 million.

The prior year period included charges for a long-term patent dispute of

$19.6 million and impairment and restructuring charges related to the antenna business classified within SG&A expense of $2.4 million.

Further, non-cash impairment charges of $87.0 million in the Aerospace segment were recognized in the current year due to reduced expectations of future operating results due to the COVID-19 pandemic, which has significantly impacted the global economy, and particularly the aerospace industry.

During the first quarter, the Company recognized full impairments of the goodwill of Astronics Connectivity Systems and Certification (“CSC”), PGA and Custom Control Concepts (“CCC”) reporting units, and a partial impairment of the goodwill of the PECO reporting unit.

During the second quarter of 2020, an additional partial impairment of the PECO reporting unit goodwill was recorded.

The Company recorded in the prior-year period a gain of $80.1 million upon the sale of the semiconductor business on February 13, 2019, partially offset by a $1.3 million loss on the sale of the airfield lighting product line on July 12, 2019.

Consolidated net loss was $115.8 million, or $(3.76) per diluted share, compared with net income of $52.0 million, or $1.60 per diluted share in the prior year.

The after-tax impact of the impairment loss in 2020 was $81.4 million, or $(2.64) per diluted share.

The $80.1 million pre-tax gain on the sale of the semiconductor test business in contributed $60.4 million to net income after taxes in 2019.

Other expense, net of other income includes charges of $3.5 million and $5.0 million related to impairments of equity investments in 2020 and 2019, respectively.

The effective tax rate for 2020 was (3.0)%, compared with 23.8% in 2019.

The effective tax rate in 2020 was impacted by a $21.5 million valuation allowance against federal deferred tax assets as well as permanently non-deductible goodwill impairments.

See Note 11 of the consolidated financial statements at Item 8 of this report for additional information regarding the valuation allowance recorded in 2020.

2019 Compared With 2018

Consolidated sales for the full year of 2019 decreased $30.6 million to $772.7 million, primarily because of the divested semiconductor business which had sales of $9.7 million in 2019 and $84.3 million in 2018.

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The decline was due to lower sales, primarily due to the divestiture of the semiconductor business, partially offset with incremental tariff expense of $5.9 million and $15.4 million of charges associated with the restructuring and impairment charges of our AeroSat antenna business which required classification within cost of products sold.

Selling, general and administrative (“SG&A”) expenses were $143.4 million, or 18.6% or sales, compared with $117.0 million, or 14.6% of sales, for the prior year period.

SG&A expenses were $143.4 million, or 18.6% or sales, compared with $117.0 million, or 14.6% of sales, for the prior year period.

The $26.3 million increase was due to increased legal reserves for the long-term patent dispute of $19.6 million and impairment and restructuring charges related to the antenna business classified within SG&A expense of $2.4 million.

The Company recorded a gain of $80.1 million upon the sale of the semiconductor business on February 13, 2019, offset by a $1.3 million loss on the sale of the airfield lighting product line on July 12, 2019.

Other expense, net in 2019 includes a $5.0 million impairment of an equity investment.

2018 Compared With 2017

Consolidated sales were $803.3 million, up 28.6%, or $178.8 million, from the same period last year.

Organic sales increased $94.0 million, or 15.0%.

Acquired sales for 2018 were $84.8 million related to CSC and CCC and all related to the Aerospace segment.

Aerospace segment sales of $675.6 million were up 26.4%, or $141.0 million, and Test Systems segment sales were up 42.0% to $127.6 million.

Consolidated cost of products sold increased $135.2 million to $622.6 million in 2018 from $487.4 million in the prior year.

The increase was due primarily to the cost associated with the higher organic sales volume, coupled with the cost of products sold related to CSC and CCC.

SG&A expenses were $117.0 million, or 14.6% or sales, compared with $88.8 million, or 14.2% of sales, for the prior year period.

The $28.3 million increase was due primarily to the incremental SG&A costs of CSC and CCC, which added $20.9 million.

This included $7.4 million of incremental intangible asset amortization expense in 2018.

Corporate overhead expenses increased $2.6 million due primarily to increased staffing and infrastructure development.

Interest expense increased in 2018 compared to 2017 due primarily to increased average debt levels.

Other expense, net of other income in 2019 includes a $5.0 million impairment of an equity investment.

Our effective tax rates for 2020, 2019 and 2018 were (3.0)%, 23.8% and 10.5%, respectively.

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It is also affected by discrete items that may occur in any given year, but are not consistent from year to year.

Our tax rate is also affected by the recognition of valuation allowances against deferred tax assets if, based on the available evidence, it is not more likely than not (defined as a likelihood of more than 50%) that all or a portion of such assets will not be realized.

In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S.

federal income tax rate (21% in 2019 and 2018 and 35% in 2017) and our effective tax rate:

federal income tax rate (21% in 2020, 2019 and 2018) and our effective tax rate:

Recognition of approximately $21.5 million of valuation allowance against federal deferred tax assets.

See Note 11 of the consolidated financial statements at Item 8 of this report for additional information.

Permanently non-deductible goodwill impairment

Recognition of approximately $1.8 million of 2020 U.S.

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R&D tax credits.

Benefit of approximately $3.5 million from revised state filing position.

Recognition of approximately $3.2 million of 2018 U.S.

R&D tax credits.

Permanent differences, primarily the impact of the Domestic Production Activities Deduction.

Provisional amounts related to the Federal tax expense on deemed repatriation of foreign earnings ($1.3 million), partially offset by revaluation of the deferred tax balances ($0.9 million) as a result of a reduction in the Federal tax rate from tax law changes enacted in 2017.

The continued grounding of the 737 MAX and the associated production pause has caused us to withdraw revenue guidance temporarily.

The MAX situation affects us not only because it is one of our largest production programs, but also because the grounding has reduced capacity for the world’s airlines, challenging our aftermarket business.

We look forward to the MAX’s return to service, and issuing sales guidance as soon as practical.

We expect first quarter sales in 2020 to be in the range of $155 million to $165 million, with Aerospace generating about 90% of the total.

We expect the first quarter will be the lightest quarter of 2020, with results strengthening throughout the year.

In 2019, we saw strong results at the beginning of the year which weakened towards the end.

We expect 2020 will be just the opposite, with a weaker start and a stronger finish.

We have not currently estimated the impact which could result if the COVID-19 coronavirus becomes more significant globally.

It is unknown whether and how global airline demand and spending, as well as global supply chains, may be affected if such an epidemic persists for an extended period of time.

Benefit of approximately $3.5 million from revised state filing position.

Impact of COVID-19 and Operational Adjustments

As previously discussed, we face risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic.

The challenges posed by the COVID-19 pandemic on the global economy, and more profoundly on the aerospace industry, increased significantly as 2020 progressed, and are expected to continue into 2021.

COVID-19 has caused disruption and volatility in the global capital markets, and has authored an economic slowdown.

In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.

Although our operations have been deemed essential and we follow the COVID-19 guidelines from the Centers for Disease Control (“CDC”) concerning the health and safety of our personnel, these measures have resulted in attenuating activity and, in some cases, required temporary closures of certain of our facilities, among other impacts.

The duration of these measures is unknown, may be extended and additional measures may be imposed.

In response to the global COVID-19 pandemic, we implemented actions to maintain the health of our employees as well as our financial health and liquidity.

These actions included:

• Implementing social distancing measures, the use of masks, restricting visitors and unnecessary travel, and working from home whenever possible;

• Workforce reduction activities to align capacity with expected demand, reducing headcount by approximately 20% to approximately 2,200 employees currently;

• Eliminated consultants and temporary labor where possible;

• Implemented significant cost conservation measures;

• Suspending cash bonus plans and wage adjustments;

• Amended our revolving credit facility on May 4, 2020, as further described in the “Liquidity and Capital Resources” section below;

• Suspending share repurchases;

• Reducing capital spending to $7.5 million from an initial plan of $20 to $25 million;

• Restrictions on marketing, trade shows, travel and discretionary spending.

These reductions collectively are substantial, lowering our cost structure by an estimated $55 million to $60 million for the year, beginning in the second quarter.

We will not provide fiscal 2021 guidance at this time, given the number of uncontrollable variables.

However, we do expect that customer demand in the first half of 2021 will be similar to that of the second half of 2020.

The year is expected to start slowly, however, with first quarter sales of about $100 million, strengthening as the year goes on.

Given our forecast expectations, and the structure of our revised lending agreement, combined with the earnout from the sale of the semiconductor business, we expect to have sufficient liquidity to operate through the COVID-19 pandemic and its economic impacts.

We expect to remain compliant with our debt covenants at least through 2021 based on our current outlook, and expect to manage the Company to generate cash in 2021, which will be used to reduce debt.

At December 31, 2020, our consolidated backlog was $283.4 million.

At December 31, 2019, our backlog was $359.6 million.

Excluding backlog related to the divested semiconductor business, our backlog was $403.3 million at December 31, 2018.

Backlog in the Aerospace segment was $191.1 million at December 31, 2020, of which $162.8 million is expected to be recognized as revenue in 2021.

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The Test Systems segment expects to recognize as revenue $54.1 million of backlog in 2021.

The effective tax rate for 2020 is expected to be approximately 18% to 22%.

Capital equipment spending in 2020 is expected to be in the range of $22 million to $25 million.

Depreciation and Amortization in 2020 is expected to in the range of $33 million and $35 million.

Cash taxes related to 2021 are expected to be insignificant.

Capital equipment spending in 2021 is expected to be in the range of $10 million to $11 million, up from $7.5 million in 2020 due to investments in customer programs.

SEGMENT RESULTS OF OPERATIONS AND OUTLOOK

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Sales $ 417,988 $ 692,609 $ 675,625

Operating Profit $ 16,657 $ 69,761 $ 38,888

Operating (Loss) Profit $ (89,833) $ 16,657 $ 69,761

Operating Margin (21.5) % 2.4 % 10.3 %

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2020 Compared With 2019

Aerospace segment sales decreased by $274.6 million, or (39.7)%, to $418.0 million, when compared with the prior-year period.

Sales were negatively affected by the grounding of the 737 MAX, overall lower build rates for commercial transport and general aviation aircraft and a weak commercial aircraft aftermarket as the airlines reduced spending and OEM’s reduced production due to the global COVID-19 pandemic.

Electrical Power & Motion sales decreased $159.0 million compared with the prior-year period.

Additionally, Lighting & Safety sales decreased $66.5 million and Avionics sales decreased by $30.7 million.

Aerospace operating loss for 2020 was $89.8 million compared with operating income of $16.7 million in the same period of 2019.

Aerospace operating profit was impacted by impairment charges of $87.0 million, of which $86.3 million was related to goodwill.

Restructuring-related severance charges of $5.3 million and leverage lost on reduced sales also significantly impacted operating results.

2019 Compared With 2018

Aerospace segment sales increased by $17.0 million, or 2.5%, to $692.6 million, when compared with the prior-year period.

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Lighting & Safety sales increased $11.1 million due to higher sales of products to the military market.

Avionics sales decreased by $25.1 million for similar reasons in the quarter.

Avionics sales decreased by $25.1 million due to lower demand for inflight entertainment and connectivity products and lower antenna sales.

Sales of Other products were down $3.5 million.

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Aerospace operating profit was impacted by the legal reserve for the patent dispute of $19.6 million for the full year incremental tariff expense of $5.9 million and antenna business impairment and restructuring charges of $28.8 million.

2018 Compared With 2017

Aerospace segment sales increased by $141.0 million, or 26.4%, to $675.6 million, when compared with the prior-year period of $534.6 million.

Organic sales increased $56.2 million, or 10.5%, to $590.8 million, while acquired sales from CSC and CCC were $84.8 million.

Avionics sales increased by $77.9 million, driven primarily by the acquisitions, which contributed incremental sales of $72.5 million.

Electrical Power & Motion sales increased $38.9 million, or 14.7%, due to higher sales of in-seat power and seat motion products.

Lighting & Safety sales increased $15.7 million due to a general increase in volume.

Sales of Other products were up $10.6 million, due to the CSC business.

The increases were slightly offset by a decrease in Structures sales of $1.7 million.

Aerospace operating profit for 2018 was $69.8 million, or 10.3% of sales, compared with $38.9 million, or 7.3% of sales, in the same period of 2017.

Aerospace operating profit benefited from higher organic sales and profits of CSC, offset partially by increased operating losses of CCC, AeroSat and Armstrong which improved by $3.8 million to $34.7 million compared with the prior year, excluding Armstrong’s 2017 goodwill impairment charge.

For the year, intangible asset amortization expense was $9.2 million related to CSC and CCC.

Operating profit in the prior year was negatively impacted by the $16.2 million impairment at Armstrong.

2021 Outlook for Aerospace – The Aerospace segment’s backlog at December 31, 2020 was $191.1 million, compared to $275.8 million at December 31, 2019.

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Backlog $ 92,337 $ 83,837

(1) Test Systems backlog as of December 31, 2018, includes $12.2 million related to the divested semiconductor business.

Sales by Market 2020 2019 2018

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2020 Compared With 2019

Test Segment sales decreased from $127.6 million to $80.1 million for 2019, primarily due to the divestiture of the semiconductor test business, which contributed sales of $84.3 million in 2018 and $9.7 million in 2019.

Operating profit was $4.5 million, or 5.6% of sales, compared with $10.7 million, or 8.4% of sales, in 2018.

Test Systems Segment sales were $84.6 million, up $4.5 million compared with the prior year.

The Acquired Businesses contributed an incremental $6.2 million in sales.

Sales related to the Semiconductor business, which was sold in early 2019, decreased $6.2 million.

Test Systems operating profit was $5.5 million, or 6.6% of sales, compared with operating profit of $4.5 million, or 5.6% of sales, in 2019.

Operating profit in the prior-year period was impacted by restructuring-related severance charges of $2.0 million.

2019 Compared With 2018

Sales in 2018 increased 42.0% to $127.6 million compared with sales of $89.9 million for 2017.

The growth was driven by a $52.3 million increase in sales to the Semiconductor market, offset by a decrease in Aerospace & Defense sales of $14.5 million.

Operating profit was $4.5 million, or 5.6% of sales, compared with $10.7 million, or 8.4% of sales, in 2018.

This was primarily due to increased sales volume partially offset by approximately $2.0 million in increased engineering costs and elevated initial costs associated with new products.

2020 Outlook for Test Systems – Backlog in the Test Systems segment was $83.8 million at December 31, 2019, compared to Test Systems backlog, exclusive of the divested semiconductor business, of $77.3 million at December 31, 2018.

2021 Outlook for Test Systems – Backlog in the Test Systems segment was $92.3 million at December 31, 2020, compared to $83.8 million at December 31, 2019.

The Test Systems segment expects to recognize as revenue $54.1 million of backlog in 2021.

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Notes to Contractual Obligations Table

Long-term Debt — See Item 8, Financial Statements and Supplementary Data, Note 8, Long-Term Debt and Note Payable in this report.

The timing of the payments above consider the amendment to the revolving credit facility as discussed in Note 8.

Long-term Debt — See Item 8, Financial Statements and Supplementary Data, Note 8, Long-Term Debt.

in this report.

Interest on Long-term Debt — Future interest payments have been calculated using the applicable interest rate of each debt facility based on actual borrowings as of December 31, 2020.

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Lease Obligations — Financing and operating lease obligations are primarily related to the Company's facility leases and interest.

Other Long-term Liabilities — Balance in 2021-2022 includes $4.5 million litigation accrual related to damages awarded to Lufthansa in the patent dispute related to direct sales.

See Note 19 of the Consolidated Financial Statements for additional information.

Table excludes the $16.1 million accrual recorded as management's best estimate of damages related to indirect sales claim, as this will not become a contractual obligation until the appeals process is complete and amount of damages has been finalized.

Other Long-term Liabilities — Table excludes the $16.7 million accrual recorded as management's best estimate of damages related to Lufthansa’s indirect sales claim in Germany, as discussed in Item 8, Financial Statements and Supplementary Data, Note 19, Legal Proceedings in this report.

LIQUIDITY AND CAPITAL RESOURCES

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Our cash flow from operations and available borrowing capacity provide us with the financial resources needed to run our operations and reinvest in our business.

Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results.

Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.

Operating Activities

Cash provided by operating activities was $37.3 million in 2020 compared with $42.7 million in 2019.

The decrease of $12.2 million in 2019 was primarily due to the net non-cash effect on net income of the net gain from the sale of businesses, the legal reserve and the antenna business impairment and restructuring charges, partially offset by a change in net operating assets.

Cash provided by operating activities was $54.9 million in 2018 compared with $37.8 million in 2017.

The increase of $17.1 million in 2018 was primarily a result of increased net income in 2018 when compared with 2017, offset with a change in net operating assets.

The decrease of $5.4 million in 2020 was primarily due to lower net income adjusted for non-cash expenses and income in 2020 compared with 2019, due to the impacts of the COVID-19 pandemic on our business, partially offset by a change in net operating assets, driven largely by receivable collections.

Cash provided by operating activities was $42.7 million in 2019 compared with $54.9 million in 2018.

The decrease of $11.1 million in 2017 was primarily a result of decreased net income and net operating assets in 2017 when compared with 2016.

Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers and employees.

Sales and operating results of our Aerospace segment are influenced by the build rates of new aircraft, which are subject to general economic conditions, airline passenger travel and spending for government and military programs.

Sales and operating results of our Aerospace segment are influenced by the impact in 2020 of the COVID-19 pandemic on the aerospace industry, in particular, build rates of new aircraft, which are subject to general economic conditions, airline passenger travel and spending for government and military programs.

Our Test Systems segment sales depends in part on capital expenditures of the aerospace & defense industry which, in turn, depend on current and future demand for those products.

A reduction in demand for our customers’ products would adversely affect our operating results and cash flows.

We maintain a revolving credit facility to fund our short and long-term capital requirements including acquisitions and share repurchase efforts.

We maintain a revolving credit facility to fund our short and long-term capital requirements including working capital, acquisitions and share repurchase efforts.

Investing Activities

Cash used for investing activities in 2020 was $5.8 million, primarily the result of purchases of property, plant and equipment (“PP&E”) of $7.5 million, partially offset by proceeds from sales of PP&E.

Cash provided by investing activities in 2019 was $64.6 million, primarily the result of the $103.8 million in proceeds from the divestiture of the semiconductor business offset by purchases of property, plant and equipment (“PP&E”) of $12.1 million.

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Cash used for investing activities in 2018 was $19.7 million, primarily related to purchases of PP&E of $16.3 million.

Cash used for investing activities in 2017 was $129.6 million, primarily related to the acquisitions of CCC and CSC of $114.0 million and purchases of PP&E of $13.5 million.

Our expectation for 2021 is that we will invest between $10 million and $11 million for PP&E.

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Financing Activities

Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results.

Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.

The Company's Fifth Amended and Restated Credit Agreement (the “Agreement”) provides for a $500 million revolving credit line with the option to increase the line by up to $150 million.

The Company's Fifth Amended and Restated Credit Agreement (the “Agreement”) provided for a $500 million revolving credit line with the option to increase the line by up to $150 million.

The maturity date of the loans under the Agreement is February 16, 2023.

At December 31, 2019, there was $188.0 million outstanding on the revolving credit facility and there remains $310.9 million available, net of outstanding letters of credit.

The maximum leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.75 to 1, increasing to 4.50 to 1 for up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations.

The Company paid 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 also paid 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 COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s future operating results.

As a result, the Company was projected to exceed its maximum leverage ratio in the fourth quarter of 2020.

Accordingly, on May 4, 2020, the Company executed an amendment to the Agreement (the “Amended Facility”), which reduced the revolving credit line from $500 million to $375 million.

The Amended Facility suspends the application of the maximum net leverage ratio up through and including the second quarter of 2021 (the “suspension period”).

The maximum net leverage ratio will be 6.00 to 1 for the third quarter of 2021, 5.50 to 1 for the fourth quarter of 2021, 4.50 to 1 for the first quarter of 2022, and return to 3.75 to 1 for each quarter thereafter.

Through the third quarter of 2021, the Amended Facility requires the Company to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments, of $180.0 million at all times.

Through the second quarter of 2021, the Company is required to maintain a minimum interest coverage ratio of 1.75x on a quarterly basis, except for the first quarter of 2021, which is set at 1.50x.

The interest coverage ratio at December 31, 2020 was 6.34x.

The Company was in compliance with its financial covenants at December 31, 2020.

During the suspension period, the Company will pay interest on the unpaid principal amount of the Amended Facility at a rate equal to one-, three- or six-month LIBOR (which shall be at least 1.00%) plus 2.25%.

The Company will also pay a commitment fee to the lenders in an amount equal to 0.35% on the undrawn portion of the Amended Facility.

After the suspension period, the Company will pay interest on the unpaid principal amount of the Amended Facility at a rate equal to one-, three- or six-month LIBOR (which shall be at least 1.00%) plus between 1.00% to 2.25% based upon the Company’s leverage ratio.

The Company will also pay a commitment fee to the lenders in an amount equal to 0.10% to 0.35% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio.

The Amended Facility provided for the payment of a consent fee of 15 basis points of the commitment for each consenting lender.

The Amended Facility also temporarily restricts certain activities, including acquisitions and share repurchases, and requires mandatory prepayments during the suspension period when the Company’s cash balance exceeds $100 million.

In the first quarter of 2020, before executing the Amended Facility, we incurred approximately $150 million in new incremental

borrowings as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic.

Subsequent to the execution of the Amended Facility, the Company made prepayments approximating $165.0 million.

The Company’s obligations under the Amended Facility are jointly and severally guaranteed by each domestic subsidiary of the Company other than non-material subsidiaries.

The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.

At December 31, 2020, there was $173.0 million outstanding on the revolving credit facility and there remains $200.9 million available subject to the minimum liquidity covenant discussed above, net of outstanding letters of credit.

The credit facility allocates up to $20 million of the $375 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit.

At December 31, 2020, outstanding letters of credit totaled $1.1 million.

The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.75 to 1, increasing to 4.50 to 1 for up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations.

The Company is in compliance with its financial covenant at December 31, 2019.

The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company’s leverage ratio.

The Company will also pay a commitment fee to the Lenders in an amount equal to between 0.10% and 0.20% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio.

The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary.

The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.

In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable.

The primary financing activities in 2020 were related to net payments on our senior credit facility of $15.0 million and repurchase of approximately 282,000 shares at an aggregate cost of $7.7 million.

The primary financing activities in 2019 related to a repurchase of approximately 1,851,000 shares at an aggregate cost of $50.8 million under our share purchase program, coupled with net payments on our senior credit facility of $39.0 million.

In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Amended Facility automatically become due and payable.

Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the agent the option to declare all such amounts immediately due and payable.

The primary financing activities in 2019 related to the repurchase of approximately 1,851,000 shares at an aggregate cost of $50.8 million under our share purchase program, coupled with net payments on our senior credit facility of $39.0 million.

The primary financing activities in 2018 related to net repayments on our senior facility of $35.0 million.

The Company’s cash needs for working capital, debt service, capital equipment, and acquisition opportunities during 2021 is expected to be met by cash flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.

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At December 31, 2019, our backlog was $359.6 million.

Excluding backlog related to the divested semiconductor business, our backlog was $403.3 million at December 31, 2018.

Backlog in the Aerospace segment was $191.1 million at December 31, 2020, of which $162.8 million is expected to be recognized as revenue in 2021.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis