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Item 1. Business

2022-03-04 compared with 2021-03-01 · 53 added, 63 removed, 105 unchanged (52% of the section changed)

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We have principal operations in the United States (“U.S.”), Canada, France and England, as well as engineering offices in the Ukraine and India.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in Wuhan, China, and has since spread to other countries, including the United States.

In March 2020, the World Health Organization characterized COVID-19 as a pandemic.

The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures.

As a result, global demand for travel declined at a rapid pace and has remained depressed.

The exact timing and pace of a recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines.

The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally.

The pandemic has had a significant adverse impact on our business in 2020.

The impact of COVID-19 is fluid and continues to evolve, and the shape and speed of recovery for the commercial aerospace industry remains uncertain.

We currently expect it may take up to three years or more for travel to return to 2019 levels.

There is significant uncertainty with respect to when the commercial transport market, the largest market we serve, will recover, and whether and at what point capacity will return to and/or exceed pre-COVID-19 levels.

We took immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and reduce costs.

Since the early days of the pandemic, we have been following guidance from the World Health Organization and the U.S.

Center for Disease Control (“CDC”) to protect employees and prevent the spread of the virus within all of our facilities globally.

Some of the actions implemented include:

social distancing;

appropriate personal protective equipment;

facility deep cleaning;

flexible work-from-home scheduling;

pre-shift temperature screenings, where allowed by law;

and restrictions on facility visitors and unnecessary travel.

Material actions to reduce costs included:

(1) reducing our workforce to align operations with customer demand;

(2) suspension of certain benefit programs;

and (3) delaying non-essential capital projects and minimizing discretionary spending.

At the same time, we addressed the ongoing needs of our business to continue to serve our customers.

Additionally, Astronics has pursued business opportunities from other markets, taking advantage of its technical design expertise and manufacturing capabilities, which are currently underutilized.

These opportunities can be meaningful, and some are directly related to the fight against COVID-19.

We also executed an amendment to our credit agreement, as more fully described in Item 8, Financial Statements and Supplementary Data, Note 8, Long-Term Debt in this report.

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

Freedom, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market.

Freedom is included in our Test Systems segment.

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

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

Impact of the COVID-19 Pandemic

The spread of the COVID-19 outbreak has disrupted businesses on a global scale.

On March 11, 2020, the World Health Organization classified the outbreak as a pandemic.

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

As we entered this crisis, the Company established two clear priorities:

first and foremost the health and safety of our employees and their families, and second, continuing to meet the needs of our customers and secure the financial well-being of the Company.

Substantially all of our operations and production activities have, to-date, remained operational.

In response to the COVID-19 crisis, we implemented changes in our work practices to maintain a safe working environment for production employees at our facilities, while enabling other employees to productively work from home.

As we bring employees back to the workplace and return to in-person meetings with customers and suppliers, we have adopted a flexible work approach.

This allows for a smooth transition from COVID-19 conditions to a future that better meets the needs of the business and the interests of our employees.

In terms of maintaining our financial health and liquidity, in early 2020, we implemented workforce reduction activities to align capacity with expected demand.

We also implemented significant cost conservation measures, and we continue to closely monitor spending priorities.

As economic activity recovers, we continue to monitor the situation, to assess further possible implications on our operations, supply chain, liquidity, cash flow and customer orders, and to take actions in an effort to mitigate adverse consequences.

While the industry is seeing some improvement on rising vaccination rates and easing travel restrictions, the ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, vaccination rates and efficacy and the related length of impact on the global economy, supply chain and the aerospace industry, which are uncertain and cannot be predicted at this time.

We believe that our existing financial arrangements are sufficient to meet our operating needs.

See Part I, Item 1A, Risk Factors, for an additional discussion of risk related to supply chain disruptions and the recent government vaccine mandates.

The Company qualified for government subsidies from the Canadian and French governments as a result of the COVID-19 pandemic’s impact on our foreign operations.

The Canadian and French subsidies are income-based grants intended to reimburse the Company for certain employee wages.

The grants are recognized as income over the periods in which the Company recognizes as expenses the costs the grants are intended to defray.

In September 2021 the Company was awarded a grant of up to $14.7 million from the U.S.

Department of Transportation (“USDOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”).

The Company received $7.4 million under the grant in 2021, and expects to receive the remainder in 2022.

The receipt of the full award is primarily conditioned upon the Company committing to not furlough, lay off or reduce the compensation levels of a defined group of employees during the six-month period of performance between September 2021 and March 2022.

The grant benefit is being recognized ratably over the six-month performance period as a reduction to cost of products sold in proportion to the compensation expense that the award is intended to defray.

During the year ended December 31, 2021, the Company recognized $8.7 million of the award.

For additional details regarding the subsidies and grants, and their impact on consolidated results of operations and financial position, see Note 1 to the consolidated financial statements in Item 8 of this report.

On July 1, 2019, the Company acquired Freedom Communication Technologies, Inc.

(“Freedom”) for $21.8 million, net of $0.6 million in cash acquired.

Freedom is a leader in wireless communication testing, primarily for the civil land mobile radio market and is included in our Test Systems segment.

On October 4, 2019, the Company acquired mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash.

Contingent purchase consideration (“earnout”), estimated at a fair value of $2.5 million at acquisition, was reduced to zero in 2021 based on actual and forecasted order levels.

Diagnosys Inc.

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

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 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.

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The transaction also includes two elements of contingent earnouts.

The “First Earnout” is calculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in each annual period from 2019 through 2022.

The First Earnout may not exceed $35.0 million in total.

The “Second Earnout” is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for each annual period from 2019 through 2022.

The Second Earnout is not capped.

For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, no amounts will be paid relative to such annual period;

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

Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company 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.

No earnout was payable to the Company for calendar 2019 activity.

In December 2021, the Company agreed to a payment of $10.7 million for the calendar 2020 earnout, which was recorded in the fourth quarter of 2021 and was received by the Company in early January 2022.

On February 14, 2022, the Company was notified by the purchaser that they have calculated $11.2 million as being payable for the calendar 2021 earnout.

We are in the process of reviewing the calculation, and expect to record the additional gain on the sale related to the 2021 earnout and receive the payment in the first quarter of 2022.

For further information, see Note 22 of Item 8, Financial Statements and Supplementary Data in this report.

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.

On October 6, 2021, the Company sold one of its Aerospace facilities for $9.2 million.

Net cash proceeds were approximately $8.8 million and a gain on sale of approximately $5.0 million was recorded.

Products and Customers

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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 adverse 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.

Most of this segment’s sales are a result of contracts or purchase orders received from customers, placed on a day-to-day basis or for single year procurements rather than long-term multi-year contract commitments.

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Sales by segment, geographic region, major customer and foreign operations are provided in Note 20 of Item 8, Financial Statements and Supplementary Data in this report.

We have a significant concentration of business with two major customers;

We have historically had a significant concentration of business with two major customers;

Panasonic Avionics Corporation (“Panasonic”) and The Boeing Company (“Boeing”).

Sales to Panasonic accounted for 11.1% of sales in 2020, 13.0% of sales in 2019, and 14.4% of sales in 2018.

While sales to Panasonic accounted for less than 10% of sales in 2021, they accounted for 11.1% of sales in 2020, and 13.0% of sales in 2019.

Sales to Boeing accounted for 10.0% of sales in 2021, 9.5% of sales in 2020, and 13.6% of sales in 2019.

Sales to Panasonic and Boeing are primarily in the Aerospace segment.

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

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Our revenue stream relies on military spending.

Approximately 16% of our consolidated sales were made to the military aircraft and military test systems markets combined.

Approximately 18% of our 2021 consolidated sales were made to government-related markets.

Raw Materials

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We believe that the loss of any one source, although potentially disruptive in the short-term, would not materially affect our operations in the long-term.

The COVID-19 pandemic has significantly disrupted the global supply chain for certain components.

See further discussion within the Risk Factor discussion in Item 1A.

Our business is typically not seasonal.

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

The decrease in backlog is attributable to the adverse impact that the COVID-19 pandemic has had on customer demand, particularly our commercial aerospace and business jet customers, domestically and internationally.

The uncertainty of the duration of the pandemic and its impact on the aerospace industry is expected to continue to inhibit sales order backlog growth in the commercial OEM and commercial aftermarket channels until OEM build rates increase and commercial airlines increase spending on fleet improvements.

The increase in backlog is driven primarily by recovering demand from our commercial aerospace and business jet customers, with increased OEM build rates and increased spending by commercial airlines on fleet improvements.

Backlog in the Aerospace segment was $334.7 million at December 31, 2021, of which $299.4 million is expected to be recognized as revenue in 2022.

Backlog in the Test Systems segment was $81.0 million at December 31, 2021.

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

The Test Systems segment expects to recognize $40.5 million of backlog as revenue in 2022.

We have a number of patents.

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We strongly believe that a focus on learning and supporting career development can lead to success.

With low attrition and high referral rates, Astronics Corporation regularly earns “best employer” awards.

Astronics Corporation regularly earns “best employer” awards.

As it relates to customers, investors, suppliers and partners, our Company is dedicated to conducting business with integrity and responsibility for the greater good.

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• Community service opportunities

The COVID-19 pandemic has had a sudden and significant impact on the global economy, and particularly in the aerospace industry, causing us to make difficult cost conservation measures including workforce reductions activities to align capacity with expected demand as well as suspension of certain benefit programs.

The COVID-19 pandemic had a sudden and significant impact on the global economy, and particularly in the aerospace industry, causing us to make difficult cost conservation measures including workforce reductions activities to align capacity with expected demand as well as suspension of certain benefit programs.

These measures were taken to maintain the financial health and liquidity of the business.

We are continuously evaluating the impact of the COVID-19 pandemic, which is dependent on future developments, including the duration of the pandemic and the its impact on the global economy and the aerospace industry, which are uncertain and cannot be predicted at this time.

We will continue to strive to return to a normal level of employment opportunity and benefit offering for the valued employees of Astronics.

While we have already reinstituted several of the previously-suspended benefits, we will continue to strive to return to a normal level of employment opportunity and benefit offerings for the valued employees of Astronics.

Employee Engagement

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Diversity and Inclusion

Much of our success is rooted in the diversity of our teams and our commitment to inclusion.

We believe that diversity and inclusion is critical for the attraction and retention of top talent.

We employ policies and procedures to recruit women and minority talent as well as policies to ensure pay equality.

Astronics has an Equal Employment Opportunity Policy whereby we commit to providing equal employment opportunity for all qualified employees and applicants.

The Company believes that diversity and inclusion is critical for the attraction and retention of top talent and employs policies and procedures to recruit women and minority talent as well as policies to ensure pay equality.

Astronics has an Equal Employment Opportunity Policy whereby the Company commits to providing equal employment opportunity for all qualified employees and applicants without regard to race, color, sex, sexual orientation, gender identity, religion, national origin, disability, veteran status, age, marital status, pregnancy, genetic information or other legally protected status.

Health and Safety

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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 1. Business