What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2023-03-10 compared with 2022-03-04 · 84 added, 68 removed, 90 unchanged (63% of the section changed)

Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense and other mission-critical industries.

Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense and electronics industries.

Our products and services include advanced, high-performance electrical power generation, distribution and seat motion systems, lighting and safety systems, avionics products, systems and certification, aircraft structures and automated test systems.

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

The operation in Ukraine is a small engineering office and we have not experienced any significant disruption in staffing or services as a result of the Ukrainian and Russian conflict.

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.

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic.

The spread of the COVID-19 pandemic disrupted businesses on a global scale, led to significant volatility in financial markets and affected the aviation and industrial industries.

The impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by customer demand variability.

Although we saw stable and growing backlog during 2022 in our aerospace business, COVID-19 related disruptions are ongoing and continue to adversely challenge our markets.

While we remain bullish about the aerospace business, we believe the recovery to pre-pandemic activity, particularly in the widebody market, will take longer than originally anticipated at the outset of the pandemic.

As economic activity continues to recover, we will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders.

See Part I, Item 1A, Risk Factors, for an additional discussion of risk related to supply chain disruptions.

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

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

The Company received $7.4 million under the grant in 2021, $5.2 million in the first quarter of 2022 and $2.1 million in the third quarter of 2022.

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

During the years ended December 31, 2022 and 2021, the Company recognized $6.0 million and $8.7 million of the award, respectively.

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

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

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

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.

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

The amounts recognized during 2022 were immaterial.

On January 19, 2023, the Company completed a financing transaction totaling $205 million, which refinanced its previous revolving credit facility which was scheduled to mature in November 2023.

The new financing consists of a $90 million asset-based term loan (the “Term Loan Facility”) and a $115 million asset-based revolving credit facility (the “ABL Revolving Credit Facility”).

The Term Loan Facility requires monthly amortization beginning in April 2023, bears interest at the Secured Overnight Financing Rate (“SOFR”) plus 8.75%, is collateralized by real estate, fixed assets and intellectual property, and is scheduled to mature on the earlier of the maturity of the ABL Revolving Credit Facility or January 19, 2027.

The ABL Revolving Credit Facility bears interest at SOFR plus between 2.25% and 2.75%, is collateralized by certain domestic accounts receivable and inventory, and is scheduled to mature on January 19, 2026.

For additional information, see discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 8, Long-Term Debt, of Item 8, Financial Statements and Supplementary Data, of this report.

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 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 Company recorded income tax expense relating to the gain of $19.7 million.

The transaction also includes two elements of contingent earnouts.

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.

The Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue.

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

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

The total proceeds of the divestiture included two elements of contingent purchase consideration (“earnout”).

In the fourth quarter of 2021, the Company agreed to an earnout payment of $10.7 million for the calendar 2020 earnout, which was

recorded in 2021 as a separate line item below operating loss and was received by the Company in early January 2022.

In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $11.3 million.

The Company recorded the gain and received the payment in the first quarter of 2022.

In February 2023, the Company was notified by the buyer that they have calculated $3.4 million as being payable for the calendar 2022 earnout.

The Company is in the process of reviewing the calculation and expects to record the additional gain on sale, and receive the payment, in the first quarter of 2023.

We are not eligible for any further earnout payments related to this divestiture.

For further information, see Note 21 in Item 8, Financial Statements and Supplementary Data, of this report.

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

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

The operation has been integrated into another facility.

Products and Customers

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

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

Our 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.

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

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

Department of Defense.

During 2021, this segment’s sales were divided 55% to the commercial transport market, 19% to the military aircraft market, 16% to the business jet market and 10% to other markets.

During 2022, this segment’s sales were divided 68% to the commercial transport market, 12% to the military aircraft market, 14% to the general aviation market and 6% to other markets.

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

2 unchanged sentences

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.

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

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

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.

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

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

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

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 accounted for less than 10% of sales in 2022 and 2021, and 11.1% of sales in 2020.

Sales to Boeing accounted for 11.0% of sales in 2022, 10.0% of sales in 2021, and less than 10% of sales in 2020.

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.

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 our targeted markets where our technology can be beneficial.

Practices as to Maintaining Working Capital

1 unchanged sentence

Competitive Conditions

We experience considerable competition in the market sectors we serve, principally with respect to product performance and price, from various competitors, many of which are substantially larger and have greater resources.

Success in the markets we serve depends upon product innovation, customer support, responsiveness and cost management.

5 unchanged sentences

Approximately 11% of our 2022 consolidated sales were made to government-related markets.

Government Regulation

The Federal Aviation Administration (“FAA”) regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States.

Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft.

Similar rules apply in other countries.

All aircraft must be maintained under a continuous condition monitoring program and must periodically undergo thorough inspection and maintenance.

The inspection, maintenance and repair procedures for the various types of aircraft and equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians.

Certification and conformance is required prior to installation of a part on an aircraft.

Our operations may in the future be subject to new and more stringent regulatory requirements.

In that regard, we closely monitor the FAA and industry trade groups in an attempt to understand how possible future regulations might impact us.

Our businesses which sell products directly to the U.S.

Government or for use in systems delivered to the U.S.

Government can be subject to various laws and regulations governing pricing and other factors.

There has been no material adverse effect to our consolidated financial statements nor competitive positions as a result of these government regulations.

Raw Materials

6 unchanged sentences

At December 31, 2021, our backlog was $415.7 million.

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.

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

Backlog in the Aerospace segment was $477.7 million at December 31, 2022, of which $402.4 million is expected to be recognized as revenue in 2023.

Backlog in the Test Systems segment was $93.7 million at December 31, 2022.

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

The Test Systems segment expects to recognize $49.0 million of this backlog as revenue in 2023.

We have a number of patents.

3 unchanged sentences

We have trademark protection in our major markets.

Research, Development and Engineering Activities

We are 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 our existing technologies.

These costs are expensed when incurred and included in cost of products sold.

Research, development and engineering costs amounted to approximately $85.3 million in 2021, $86.8 million in 2020 and $108.9 million in 2019.

Research and Development Expenses

Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation.

Research and development expenses amounted to $48.3 million in 2022, $43.3 million in 2021 and $40.2 million in 2020.

These costs are included in Cost of products sold.

Human Capital Resources

28 unchanged sentences

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.

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.

We have reinstituted all of the previously-suspended benefits.

Employee Engagement

7 unchanged sentences

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.

Astronics has an Equal

Employment Opportunity Policy whereby the Company commits to providing equal employment opportunity and affirmative action plans 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

Astronics is committed to the safety of our customers and our employees.

Each Astronics operation maintains environmental, health and safety policies that seek to promote the operation of its businesses in a manner that is protective of the health and safety of the public and its employees, particularly in the response to the global COVID-19 pandemic.

We have implemented actions to maintain the health of our employees including social distancing measures, the use of masks, restricting visitors and unnecessary travel, and working from home whenever possible.

Each Astronics operation maintains environmental, health and safety policies and practices that seek to promote the operation of its businesses in a manner that is protective of the health and safety of the public and its employees.

Our operations offer several health and welfare programs to employees to promote fitness and wellness and to encourage preventative healthcare.

4 unchanged sentences

These materials can be accessed electronically via the Internet at www.sec.gov.

Such materials and other information about the Company are also available through our website at www.astronics.com.

We also make available free of charge through our website at www.astronics.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file those reports with, or furnish them to, the SEC.

The information contained on our website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.

Information About Our Executive Officers

The executive officers of the Company, their ages, their positions and offices with the Company, and the date each assumed their office with the Company as of December 31, 2022, are as follows:

Name and Age of Executive Officer Positions and Offices with Astronics Year First

Elected Officer

President, Chief Executive Officer and Director of the Company 2001

Executive Vice President, Secretary and Chief Financial Officer of the Company 2003

President, Aerospace Segment and Executive Vice President of Astronics Corporation 2010

Luminescent Systems Inc.

President and Executive Vice President of Astronics Corporation 2010

Age 62 President of Astronics Test Systems, Inc.

and Executive Vice President of Astronics Corporation 2019

Age 62 Astronics Connectivity Systems & Certification Corp.

President and Executive Vice President of Astronics Corporation 2019

The principal occupation and employment for Messrs.

Gundermann, Burney, Kramer, Kuehn, Mulato and Peabody for over five years has been with the Company in their respective current roles.

Kuehn and Mr.

Mulato became Executive Vice Presidents of the Company on January 1, 2019.

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