NASDAQ: ATRO
2017 Annual Report
POWER | CONNEC T IVIT Y | LIGHTING | INTERIORS | SERVICES | TEST
2017 SALES BY:
Astronics Corporation (NASDAQ: ATRO) serves the
world’s aerospace, defense and semiconductor
industries with proven, innovative technology solutions.
Astronics works side-by-side with our customers,
integrating our array of power, connectivity, lighting,
structures, interiors, and test technologies to solve
complex challenges.
For 50 years, we have delivered creative, customer-
focused solutions with exceptional responsiveness.
Today, global airframe manufacturers, airlines, military
branches, completion centers and Fortune 500
manufacturing organizations rely on the collaborative
spirit and innovation of Astronics.
($ in thousands)
MARKETS
Aerospace Segment
2017
2016
2015
2014
2013
Commercial Transport
$414,523
$435,552
$455,569
$396,075
$237,725
Military
Business Jet
Other
61,270
41,298
17,512
54,556
25,407
18,526
43,295
32,796
18,078
42,434
38,819
17,419
48,669
29,784
14,352
Aerospace Total
534,603
534,041
549,738
494,747
330,530
31,999
57,862
89,861
37,939
61,143
99,082
92,136
50,405
142,541
130,859
35,433
166,292
-
9,407
9,407
$624,464
$633,123
$692,279
$661,039
$339,937
2017
$264,286
158,663
53,960
14,333
25,849
17,512
2016
$288,465
156,871
32,761
16,531
20,887
18,526
2015
$279,752
157,143
56,150
21,317
16,372
19,004
2014
2013
$254,455
$188,221
148,212
57,879
-
14,594
19,607
494,747
130,859
35,433
166,292
102,233
18,733
-
6,331
15,012
330,530
-
9,407
9,407
Aerospace Total
534,603
534,041
549,738
Test Systems Segment
Semiconductor
Aerospace & Defense
Test Systems Total
31,999
57,862
89,861
37,939
61,143
99,082
92,136
50,405
142,541
TOTAL
$624,464
$633,123
$692,279
$661,039
$339,937
Test Systems Segment
Semiconductor
Aerospace & Defense
Test Systems Total
TOTAL
PRODUCTS
Aerospace Segment
Electrical Power & Motion
Lighting & Safety
Avionics
Systems Certification
Structures
Other
Dear Shareholders,
2017 was another challenging year for Astronics Corporation. The year was colored early on by weaker-
than-expected demand in our core in-flight entertainment (IFE) and semiconductor test product areas.
These two developments together cost us approximately $100 million in lost revenue compared with our
original plan. For the year, revenue was $624.5 million, down 1.4% compared with the prior year.
At the same time, we found increased demand in the market for our new products under development
and opportunities with new programs. We decided to pursue many of these with the expectation that the
weak demand environment was temporary. The combination of lower revenue and continued investment
challenged our margins. We also booked an impairment charge of $16.2 million associated with goodwill
from the Armstrong Aerospace acquisition we made three years ago. In the end, operating income was
$30.4 million, or 4.9% of revenue, compared with $73.1 million, or 11.6% of revenue in 2016.
As anticipated, demand picked up solidly in the second half of the year, when bookings exceeded shipments
by more than 30%. It was our strongest six months of bookings ever and left us with a record backlog of
$393.7 million at the end of the year. This surge in orders did not happen early enough to help our income
statement in 2017, but sets us up well for a strong recovery in 2018. Net income in 2017 was $19.7 million,
or $0.67 per diluted share, down from $48.4 million, or $1.61 per diluted share in the prior year.
In December 2017, we acquired Telefonix PDT, a welcome addition to our family of companies. The
acquisition strengthens our management team and rounds out our suite of products servicing the IFE
industry. We believe we now have the broadest suite of hardware in the world to offer to service providers,
allowing them the convenience of a one-stop shop for a suite of connectivity solutions that can be delivered
a la carte or as a complete solution set, according to customer needs. With all of this capability in-house, we
anticipate shortening a customer’s time to market for new, certified IFEC systems. Telefonix has been part
of our company for only a few months as of this writing, but we are very pleased with the progress so far.
Record backlog, expanded offerings and continued strength in order activity
sets us up for a very strong recovery in 2018.
Our initial expectation is for growth of approximately 25% in 2018 including the Telefonix acquisition and
with both segments improving solidly. Our guidance at the midpoint calls for aerospace growth in excess
of 20% and Test Systems growth of almost 40%.
We are obviously excited by the prospects ahead of us in 2018 and beyond. We believe we are well
positioned in our major markets with leading technologies and product offerings, the result of consistent
investment over time and the excellent performance by our 2,500 employees, who demonstrate a high
level of professionalism in all that they do.
We are motivated to create value both for our customers and our shareholders, and we thank you for
your interest in our company.
Peter J. Gundermann
President and CEO
SALES
(in millions)
BOOKINGS
(in millions)
BACKLOG
(in millions)
FIVE-YEAR PERFORMANCE HIGHLIGHTS
(in thousands, except employee and per share data)PERFORMANCESales:Aerospace Segment$534,724$534,408$549,738$494,747$330,530Test Systems Segment$89,861$99,082$142,596$166,769$10,103Less Intersegment Sales$(121)$(367)$(55)$(477)$(696)Total Sales$624,464$633,123$692,279$661,039$339,937Gross Profit$137,113$159,467$187,942$167,042$87,858Gross Margin22.0%25.2%27.1%25.3%25.8%Impairment Loss$16,237------------Selling, General and Administrative Expense$90,516$86,328$89,141$79,680$45,553Operating Profit$30,360$73,139$98,801$87,362$42,305Operating Margin4.9%11.6%14.3%13.2%12.4%Net Income $19,679$48,424$66,974$56,170$27,266Diluted Earnings Per Share$0.67$1.61$2.22$1.87$0.94Weighted Average Shares Outstanding - Diluted29,32030,03230,17929,97029,136Return on Average Shareholders' Equity5.9%15.2%25.3%28.1%18.4%YEAR END FINANCIAL POSITIONTotal Assets $735,956$604,344$609,243$562,910$491,271Indebtedness$271,767$148,120$169,789$183,008$200,320Shareholders' Equity$329,927$337,449$300,225$228,177$171,509Book Value Per Share$11.77$11.60$10.21$7.87$6.05OTHER YEAR END DATADepreciation and Amortization$27,063$25,790$25,309$27,254$11,059Capital Expenditures$13,478$13,037$18,641$40,882$6,868Shares Outstanding28,03829,09829,40529,00328,342Number of Employees2,5162,3042,3042,0411,71520142013201720162015
SEC Form 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-K
___________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
Commission File Number 0-7087
___________________________________________________________
Astronics Corporation
(Exact Name of Registrant as Specified in its Charter)
___________________________________________________________
New York
(State or other jurisdiction of
incorporation or organization)
16-0959303
(I.R.S. Employer
Identification No.)
130 Commerce Way, East Aurora, N.Y. 14052
(Address of principal executive office)
Registrant’s telephone number, including area code (716) 805-1599
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock; $.01 par value Class B Stock
(Title of Class)
___________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
1
As of February 16, 2018, 28,066,764 shares were outstanding, consisting of 21,273,979 shares of Common Stock $.01 par
value and 6,792,785 shares of Class B Stock $.01 par value. The aggregate market value, as of the last business day of the
Company’s most recently completed second fiscal quarter, of the shares of Common Stock and Class B Stock of Astronics
Corporation held by non-affiliates was approximately $731,000,000 (assuming conversion of all of the outstanding Class B Stock
into Common Stock and assuming the affiliates of the Registrant to be its directors, executive officers and persons known to the
Registrant to beneficially own more than 10% of the outstanding capital stock of the Corporation).
Portions of the Company’s Proxy Statement for the 2018 Annual Meeting of Shareholders to be held May 31, 2018 are
incorporated by reference into Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
2
Table of Contents
ASTRONICS CORPORATION
Index to Annual Report
on Form 10-K
Year Ended December 31, 2017
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
PART III
Item 10. Directors, Executive Officers and Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
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FORWARD LOOKING STATEMENTS
Information included or incorporated by reference in this report that does not consist of historical facts, including statements
accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,”
“projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,”
are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several
factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the
expected results described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in
the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking
statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-
looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in
this report.
4
PART I
ITEM 1.
BUSINESS
Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace,
defense, electronics and semiconductor industries. Our products and services include advanced, high-performance electrical
power generation, distribution and motion systems, lighting & safety systems, avionics products, aircraft structures, systems
certification and automated test systems.
We have operations in the United States (“U.S.”), Canada and France. We design and build our products through our wholly
owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”);
Armstrong Aerospace, Inc. (“Armstrong”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”);
Astronics Connectivity Systems and Certification Corp. (“CSC”); Astronics Custom Control Concepts Inc. (“CCC”); Astronics
DME LLC (“DME”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc.
(“Max-Viz”); Peco, Inc. (“Peco”); and PGA Electronic s.a. (“PGA”).
Acquisitions
On January 14, 2015, the Company acquired all of the outstanding stock of Armstrong, located in Itasca, Illinois. Armstrong is
a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-
flight entertainment, and electrical power systems. Armstrong is included in our Aerospace segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially
all the assets and certain liabilities of Custom Control Concepts LLC, located in Kent, Washington. CCC is a provider of cabin
management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was
approximately $10.2 million, net of $0.5 million in cash acquired. CCC is included in our Aerospace segment.
On December 1, 2017, Astronics acquired substantially all of the assets of Telefonix Inc. and a related company, Product
Development Technologies, LLC and its subsidiaries, to become CSC, primarily located in Waukegan and Lake Zurich,
Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry
leading design consultancy services for the global aerospace industry. Under the terms of the Agreement, the total consideration
for the transaction was approximately $103.8 million, net of $0.2 million in cash acquired. CSC is included in our Aerospace
Segment.
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, connectivity 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
and branches of the U.S. Department of Defense as well as the Federal Aviation Administration and airport operators. During
2017, this segment’s sales were divided 78% to the commercial transport market, 11% to the military aircraft market, 8% to the
business jet market and 3% to other markets. 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. On occasion, the Company does receive contractual commitments or blanket purchase orders from our
customers covering multiple-year deliveries of hardware to our customers.
Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the
semiconductor, aerospace, communications and weapons test systems 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 OEMs and prime government contractors for both electronics and military products. During 2017, this segment’s
sales were divided 36% to the semiconductor market and 64% to the aerospace & defense market.
Sales by segment, geographic region, major customer and foreign operations are provided in Note 17 of Item 8, Financial
Statements and Supplementary Data in this report.
5
We have a significant concentration of business with two major customers; Panasonic Avionics Corporation (“Panasonic”) and
The Boeing Company (“Boeing”). Sales to Panasonic accounted for 19.1% of sales in 2017, 21.6% of sales in 2016, and 21.0%
of sales in 2015. Sales to Boeing accounted for 16.8% of sales in 2017, 15.2% of sales in 2016, and 13.0% of sales in 2015.
Strategy
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, semiconductor and other markets where our
technology can be beneficial.
Practices as to Maintaining Working Capital
Liquidity is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations, in the Liquidity and Capital Resources section of this report.
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. We continue to invest in
developing the technologies and engineering support critical to competing in our markets.
Government Contracts
All U.S. government contracts, including subcontracts where the U.S. government is the ultimate customer, may be subject to
termination at the election of the government. Our revenue stream relies on military spending. Approximately 19% of our
consolidated sales were made to the military aircraft and military test systems markets combined.
Raw Materials
Materials, supplies and components are purchased from numerous sources. 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.
Seasonality
Our business is typically not seasonal.
Backlog
At December 31, 2017, our backlog was $393.7 million million. At December 31, 2016, our backlog was $258.0 million.
Backlog in the Aerospace segment was $298.6 million at December 31, 2017, of which $271.4 million is expected to be
realized in 2018. Backlog in the Test Systems segment was $95.1 million at December 31, 2017, of which $75.3 million is
expected to be realized in 2018.
Patents
We have a number of patents. While the aggregate protection of these patents is of value, our only material business that is
dependent upon the protection afforded by these patents is our cabin power distribution products. Our patents and patent
applications relate to electroluminescence, instrument panels, cord reels and handsets, and a broad patent covering the cabin
power distribution technology. We regard our expertise and techniques as proprietary and rely upon trade secret laws and
contractual arrangements to protect our rights. 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 sales. Research, development and engineering costs amounted to approximately $95.0 million in 2017,
$88.9 million in 2016 and $90.3 million in 2015.
6
Employees
We employed approximately 2,500 employees at December 31, 2017. We consider our relations with our employees to be good.
We have approximately 200 hourly production employees at Peco who are subject to collective bargaining agreements.
Available information
We file our financial information and other materials as electronically required with the Securities and Exchange Commission
(“SEC”). 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.
ITEM 1A.
RISK FACTORS
The loss of Panasonic or Boeing as major customers or a significant reduction in sales to either of those customers would
reduce our sales and earnings. In 2017, we had a concentration of sales to Panasonic and Boeing representing approximately
19.1% and 16.8% of our sales, respectively. The loss of either of these customers or a significant reduction in sales to them
would significantly reduce our sales and earnings.
The amount of debt we have outstanding, as well as any debt we may incur in the future, could have an adverse effect
on our operational and financial flexibility. As of December 31, 2017, we had approximately $271.8 million of debt
outstanding, of which $269.1 million is long-term debt. Changes to our level of debt subsequent to December 31, 2017 could
have significant consequences to our business, including the following:
•
•
•
•
•
Depending on interest rates and debt maturities, a substantial portion of our cash flow from operations could
be dedicated to paying principal and interest on our debt, thereby reducing funds available for our acquisition
strategy, capital expenditures or other purposes;
A significant amount of additional debt could make us more vulnerable to changes in economic conditions or
increases in prevailing interest rates;
Our ability to obtain additional financing for acquisitions, capital expenditures or for other purposes could be
impaired;
The increase in the amount of debt we have outstanding increases the risk of non-compliance with some of
the covenants in our debt agreements which require us to maintain specified financial ratios; and
We may be more leveraged than some of our competitors, which may result in a competitive disadvantage.
We are subject to debt covenant restrictions. Our credit facility contains several financial and other restrictive covenants. A
significant decline in our operating income could cause us to violate our covenants. A covenant violation would require a
waiver by the lenders or an alternative financing arrangement be achieved. This could result in our being unable to borrow
under our bank credit facility or being obliged to refinance and renegotiate the terms of our bank indebtedness. Historically
both choices have been available to us, however, it is difficult to predict the availability of these options in the future.
We are subject to financing and interest rate exposure risks that could adversely affect our business, liquidity and
operating results. Changes in the availability, terms and cost of capital, and increases in interest rates could cause our cost of
doing business to increase and place us at a competitive disadvantage. At December 31, 2017, approximately 4% of our debt
was at fixed interest rates with the remainder subject to variable interest rates.
Our future operating results could be impacted by estimates used to calculate impairment losses on long lived assets.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
to make significant and subjective estimates and assumptions that may affect the reported amounts of long lived assets in the
financial statements. These estimates are integral in the determination of whether a potential non-cash impairment loss exists as
well as the calculation of that loss. Actual future results could differ from those estimates.
A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net
worth. At December 31, 2017, goodwill and purchased intangible assets were approximately 17.1% and 20.9% of our total
assets, respectively. Our goodwill and other intangible assets may increase in the future since our strategy includes growing
through acquisitions. We may have to write-off all or part of our goodwill or purchased intangible assets if their value becomes
impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and net worth significantly.
7
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may
cause our operating results to fluctuate. Demand for our products is, to a large extent, dependent on the demand and success
of our customers' products where we are a supplier to an OEM. In our Aerospace segment, demand by the business jet markets
for our products is dependent upon several factors, including capital investment, product innovations, economic growth and
wealth creation and technology upgrades. In addition, the commercial airline industry is highly cyclical and sensitive to fuel
price increases, labor disputes, global economic conditions, availability of capital to fund new aircraft purchases and upgrades
of existing aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of air
travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would reduce orders for
new aircraft and would likely reduce airlines’ spending for cabin upgrades for which we supply products, thus reducing our
sales and profits. A reduction in air travel may also result in our commercial airline customers being unable to pay our invoices
on a timely basis or not at all.
We are a supplier on various new aircraft programs just entering or expected to begin production in the future. As with any new
program, there is risk as to whether the aircraft or program will be successful and accepted by the market. As is customary for
our business, we purchase inventory and invest in specific capital equipment to support our production requirements generally
based on delivery schedules provided by our customer. If a program or aircraft is not successful, we may have to write-off all or
a part of the inventory, accounts receivable and capital equipment related to the program. A write-off of these assets could result
in a significant reduction of earnings and cause covenant violations relating to our debt agreements. This could result in our
being unable to borrow additional funds under our bank credit facility or being obliged to refinance or renegotiate the terms of
our bank indebtedness.
In our Test Systems segment, the market for our products is concentrated with a limited number of significant customers
accounting for a substantial portion of the purchases of test equipment. In any one reporting period, a single customer or
several customers may contribute an even larger percentage of our consolidated revenues. In addition, our ability to increase
sales will depend, in part, on our ability to obtain orders from current or new significant customers. The opportunities to obtain
orders from these customers may be limited, which may impair our ability to grow revenues. We expect that sales of our Test
Systems products will continue to be concentrated with a limited number of significant customers for the foreseeable future.
Additionally, demand for some of our test products is dependent upon government funding levels for our products, our ability
to compete successfully for those contracts and our ability to develop products to satisfy the demands of our customers.
Our products are sold in highly competitive markets. Some of our competitors are larger, more diversified corporations and
have greater financial, marketing, production and research and development resources. As a result, they may be better able to
withstand the effects of periodic economic downturns. Our operations and financial performance will be negatively impacted if
our competitors:
•
•
•
•
develop products that are superior to our products;
develop products that are more competitively priced than our products;
develop methods of more efficiently and effectively providing products and services; or
adapt more quickly than we do to new technologies or evolving customer requirements.
We believe that the principal points of competition in our markets are product quality, price, design and engineering
capabilities, product development, conformity to customer specifications, quality of support after the sale, timeliness of
delivery and effectiveness of the distribution organization. Maintaining and improving our competitive position will require
continued investment in manufacturing, engineering, quality standards, marketing, customer service and support and our
distribution networks. If we do not maintain sufficient resources to make these investments, or are not successful in maintaining
our competitive position, our operations and financial performance will suffer.
Our future success depends to a significant degree upon the continued contributions of our management team and
technical personnel. The loss of members of our management team could have a material and adverse effect on our business.
In addition, competition for qualified technical personnel in our industry is intense, and we believe that our future growth and
success will depend on our ability to attract, train and retain such personnel.
Future terror attacks, war, or other civil disturbances could negatively impact our business. Continued terror attacks, war
or other disturbances could lead to economic instability and decreases in demand for our products, which could negatively
impact our business, financial condition and results of operations. Terrorist attacks world-wide have caused instability from
time to time in global financial markets and the aviation industry. The long-term effects of terrorist attacks on us are unknown.
These attacks and the U.S. government’s continued efforts against terrorist organizations may lead to additional armed
8
hostilities or to further acts of terrorism and civil disturbance in the U.S. or elsewhere, which may further contribute to
economic instability.
Our business and operations could be adversely impacted in the event of a failure of our information technology
infrastructure or adversely impacted by a successful cyber-attack. We are dependent on various information technologies
throughout our company to administer, store and support multiple business activities. We routinely experience various cybersecurity
threats, threats to our information technology infrastructure, unauthorized attempts to gain access to our company sensitive
information, and denial-of-service attacks as do our customers, suppliers and subcontractors. We conduct regular periodic training of
our employees as to the protection of sensitive information which includes security awareness training intended to prevent the
success of “phishing” attacks.
The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries,
including nation states, which target us and other defense contractors because we protect sensitive information. If we are unable to
protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and
detection processes and procedures, and depending on the severity of the incident, our customers’ data, our employees’ data, our
intellectual property, and other third party data (such as subcontractors, suppliers and vendors) could be compromised. As a
consequence of their persistence, sophistication and volume, we may not be successful in defending against all such attacks. Due to
the evolving nature of these security threats, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers, suppliers, and subcontractors to seek to minimize the impact of cyber threats,
other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the
security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with
U.S. government contractors, such as Astronics, may increase the likelihood that they are targeted by the same cyber threats we face.
Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement
could prevent or restrict our ability to compete. We rely on patents, trademarks and proprietary knowledge and technology,
both internally developed and acquired, in order to maintain a competitive advantage. Our inability to defend against the
unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition.
Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation
could result in significant costs and divert our management’s focus away from operations.
If we are unable to adapt to technological change, demand for our products may be reduced. The technologies related to
our products have undergone, and in the future may undergo, significant changes. To succeed in the future, we will need to
continue to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and
cost effective basis. Our competitors may develop technologies and products that are more effective than those we develop or
that render our technology and products obsolete or uncompetitive. Furthermore, our products could become unmarketable if
new industry standards emerge. We may have to modify our products significantly in the future to remain competitive, and new
products we introduce may not be accepted by our customers.
Our new product development efforts may not be successful, which would result in a reduction in our sales and
earnings. We may experience difficulties that could delay or prevent the successful development of new products or product
enhancements, and new products or product enhancements may not be accepted by our customers. In addition, the development
expenses we incur may exceed our cost estimates, and new products we develop may not generate sales sufficient to offset our
costs. If any of these events occur, our sales and profits could be adversely affected.
We depend on government contracts and subcontracts with defense prime contractors and sub-contractors that may not
be fully funded, may be terminated, or may be awarded to our competitors. The failure to be awarded these contracts,
the failure to receive funding or the termination of one or more of these contracts could reduce our sales. Sales to the
U.S. government and its prime contractors and subcontractors represent a significant portion of our business. The funding of
these programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change.
In addition, government expenditures for defense programs may decline or these defense programs may be terminated. A
decline in governmental expenditures or the termination of existing contracts may result in a reduction in the volume of
contracts awarded to us. We have resources applied to specific government contracts and if any of those contracts were
terminated, we may incur substantial costs redeploying those resources.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and
our ability to obtain future business could be materially and adversely impacted. Many of our contracts involve
subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers.
There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of
9
work performed by the subcontractor or customer concerns about the subcontractor. Failure by our subcontractors to
satisfactorily provide, on a timely basis, the agreed-upon supplies or perform the agreed-upon services may materially and
adversely impact our ability to perform our obligations with our customer. Subcontractor performance deficiencies could result
in a customer terminating our contract for default. A default termination could expose us to liability and substantially impair
our ability to compete for future contracts and orders. In addition, a delay in our ability to obtain components and equipment
parts from our suppliers may affect our ability to meet our customers’ needs and may have an adverse effect upon our
profitability.
Our results of operations are affected by our fixed-price contracts, which could subject us to losses in the event that we
have cost overruns. For the year ended December 31, 2017, fixed-price contracts represented almost all of the Company’s
sales. On fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price.
Depending on the fixed price negotiated, these contacts may provide us with an opportunity to achieve higher profits based on
the relationship between our costs and the contract’s fixed price. However, we bear the risk that increased or unexpected costs
may reduce our profit.
Some of our contracts contain late delivery penalties. Failure to deliver in a timely manner due to supplier problems,
development schedule slides, manufacturing difficulties, or similar schedule related events could have a material adverse effect
on our business.
The failure of our products may damage our reputation, necessitate a product recall or result in claims against us that
exceed our insurance coverage, thereby requiring us to pay significant damages. Defects in the design and manufacture of
our products may necessitate a product recall. We include complex system design and components in our products that could
contain errors or defects, particularly when we incorporate new technology into our products. If any of our products are
defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims. Such an
event could result in significant expenses, disrupt sales and affect our reputation and that of our products. We are also exposed
to product liability claims. We carry aircraft and non-aircraft product liability insurance consistent with industry norms.
However, this insurance coverage may not be sufficient to fully cover the payment of any potential claim. A product recall or a
product liability claim not covered by insurance could have a material adverse effect on our business, financial condition and
results of operations.
Changes in discount rates and other estimates could affect our future earnings and equity. Our goodwill asset impairment
evaluations are determined using valuations that involve several assumptions, including discount rates, cash flow estimates,
growth rates and terminal values. Certain of these assumptions, particularly the discount rate, are based on market conditions
and are outside of our control. Changes in these assumptions could affect our future earnings and equity.
Additionally, pension obligations and the related costs are determined using actual results and actuarial valuations that involve
several assumptions. The most critical assumption is the discount rate. Other assumptions include mortality, salary increases
and retirement age. The discount rate assumptions are based on current market conditions and are outside of our control.
Changes in these assumptions could affect our future earnings and equity.
Contracting in the defense industry is subject to significant regulation, including rules related to bidding, billing and
accounting kickbacks and false claims, and any non-compliance could subject us to fines and penalties or possible
debarment. Like all government contractors, we are subject to risks associated with this contracting. These risks include the
potential for substantial civil and criminal fines and penalties. These fines and penalties could be imposed for failing to follow
procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting
standards, receiving or paying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits
and investigations by government agencies. The failure to comply with the terms of our government contracts could harm our
business reputation. It could also result in suspension or debarment from future government contracts.
If we fail to meet expectations of securities analysts or investors due to fluctuations in our revenue or operating results,
our stock price could decline significantly. Our revenue and earnings may fluctuate from quarter to quarter due to a number
of factors, including delays or cancellations of programs. It is likely that in some future quarters our operating results may fall
below the expectations of securities analysts or investors. In this event, the trading price of our stock could decline
significantly.
Our operations in foreign countries expose us to political and currency risks and adverse changes in local legal and
regulatory environments. In 2017, approximately 8.6% of our sales were made by our subsidiaries in France and Canada. Net
assets held by these subsidiaries total $47.4 million at December 31, 2017. Our financial results may be adversely affected by
fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local
10
currencies into U.S. dollars. We expect international operations and export sales to continue to contribute to our earnings for the
foreseeable future. Both the sales from international operations and export sales are subject in varying degrees to risks inherent
in doing business outside of the U.S. Such risks include the possibility of unfavorable circumstances arising from host country
laws or regulations, changes in tariff and trade barriers and import or export licensing requirements, and political or economic
reprioritization, insurrection, civil disturbance or war.
Government regulations could limit our ability to sell our products outside the U.S. and could otherwise adversely affect
our business. Certain of our sales are subject to compliance with U.S. export regulations. Our failure to obtain, or fully adhere
to the limitations contained in, the requisite licenses, meet registration standards or comply with other government export
regulations would hinder our ability to generate revenues from the sale of our products outside the U.S. Compliance with these
government regulations may also subject us to additional fees and operating costs. The absence of comparable restrictions on
competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union
countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a
significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to
numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer
restrictions, foreign corrupt practices and anti-boycott provisions. Our failure, or failure by an authorized agent or
representative that is attributable to us, to comply with these laws and regulations could result in administrative, civil or
criminal liabilities and could, in the extreme case, result in monetary penalties, suspension or debarment from government
contracts or suspension of our export privileges, which would have a material adverse effect on us.
Our stock price is volatile. For the year ended December 31, 2017, our stock price ranged from a low of $25.13 to a high of
$43.87. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a
number of events and factors, such as:
•
•
•
•
•
•
quarterly variations in operating results;
variances of our quarterly results of operations from securities analyst estimates;
changes in financial estimates;
announcements of technological innovations and new products;
news reports relating to trends in our markets; and
the cancellation of major contracts or programs with our customers.
In addition, the stock market in general, and the market prices for companies in the aerospace & defense industry in particular,
have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the
companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our
common stock, regardless of our operating performance.
We may incur losses and liabilities as a result of our acquisition strategy. Growth by acquisition involves risks that could
adversely affect our financial condition and operating results, including:
•
•
•
•
•
•
diversion of management time and attention from our core business;
the potential exposure to unanticipated liabilities;
the potential that expected benefits or synergies are not realized and that operating costs increase;
the risks associated with incurring additional acquisition indebtedness, including that additional indebtedness
could limit our cash flow availability for operations and our flexibility;
difficulties in integrating the operations and personnel of acquired companies; and
the potential loss of key employees, suppliers or customers of acquired businesses.
In addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not
perform as planned, does not increase earnings, or does not prove otherwise to be beneficial to us.
We currently are involved or may become involved in the future, in legal proceedings that, if adversely adjudicated or
settled, could materially impact our financial condition. As an aerospace company, we may become a party to litigation in
11
the ordinary course of our business, including, among others, matters alleging product liability, warranty claims, breach of
commercial or government contract or other legal actions. In general, litigation claims can be expensive and time consuming to
bring or defend against and could result in settlements or damages that could significantly impact results of operations and
financial condition.
We are a defendant in actions filed in the Regional State Court of Mannheim, Germany (Lufthansa Technik AG v.
Astronics Advanced Electronics Systems Corp.) and the United States District for the Western District of Washington
relating to an allegation of patent infringement. On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a
Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES
sold, marketed and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa.
The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply
system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for
damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa only if it receives
a favorable ruling on the determination of infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The
judgment does not require AES to recall products that are already installed in aircraft or have been sold to other end users. On
July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required
AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate
of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company
may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been
issued to date. As of December 31, 2017 there are no products in the distribution channels in Germany.
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Court issued its ruling and
upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the Federal Supreme
Court. The Company believes it has valid defenses to refute the decision. Should the Federal Supreme Court decide to hear the
case, the appeal process is estimated to extend up to two years. We estimate AES’s potential exposure related to this matter to
be approximately $1 million to $3 million. As loss exposure is not probable at this time, the Company has not recorded any
liability with respect to this litigation as of December 31, 2017.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been
served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of
manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those
respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability
with respect to this litigation as of December 31, 2017.
Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will
result in a material adverse effect on our financial condition or results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
12
ITEM 2.
PROPERTIES
On December 31, 2017, we own or lease 1.2 million square feet of space in the U.S., Canada and France, distributed as follows:
Owned
Leased
Total
Aerospace:
Clackamas, OR
Kirkland, WA
East Aurora, NY
Ft. Lauderdale, FL
Lebanon, NH
Montierchaume, France*
Itasca, IL
Amherst, NH
Montreal, Quebec, Canada
Everett, WA
Chicago, IL
Kent, WA
Waukegan, IL
Lake Zurich, IL
Lviv City, Ukraine
Wheatley, Oxfordshire, UK
Carlsbad, CA
Aerospace Square Feet
Test Systems:
Irvine, CA*
Orlando, FL
Test Systems Square Feet
Total Square Feet
* - Capitalized leases.
237,000
97,000
125,000
96,000
83,000
—
49,000
—
—
—
—
—
—
—
—
—
—
687,000
—
—
—
687,000
—
39,000
—
—
—
80,000
—
28,000
25,000
22,000
2,000
65,000
41,000
36,000
6,000
3,000
1,000
348,000
99,000
51,000
150,000
498,000
237,000
136,000
125,000
96,000
83,000
80,000
49,000
28,000
25,000
22,000
2,000
65,000
41,000
36,000
6,000
3,000
1,000
1,035,000
99,000
51,000
150,000
1,185,000
Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for
or purchases of alternative locations at market terms. We believe that our properties have been adequately maintained and are
generally in good condition.
ITEM 3.
LEGAL PROCEEDINGS
On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of
Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES sold, marketed and brought into use in Germany a
power supply system that infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring
AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold
to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of
damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of
infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The
judgment does not require AES to recall products that are already installed in aircraft or have been sold to other end users. On
July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required
AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate
of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company
may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been
issued to date. As of December 31, 2017, there are no products in the distribution channels in Germany.
13
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Court issued its ruling and
upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the Federal Supreme
Court. The Company believes it has valid defenses to refute the decision. Should the Federal Supreme Court decide to hear the
case, the appeal process is estimated to extend up to two years. We estimate AES’s potential exposure related to this matter to
be approximately $1 million to $3 million. As loss exposure is not probable at this time, the Company has not recorded any
liability with respect to this litigation as of December 31, 2017.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington.
Lufthansa’s complaint in this action alleges that AES manufactures, uses, sells and offers for sale a power supply system that
infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that
involved in the German action. On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole
independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a
motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and
unenforceable. On July 20, 2016, the U.S. District Court granted the motion for summary judgment and issued an order
dismissing all claims against AES with prejudice. Lufthansa appealed the District Court's decision to the United States Court of
Appeals for the Federal Circuit. On October 19, 2017, the Federal Circuit affirmed the District Court's decision, holding that
the sole independent claim of the patent is indefinite, rendering all claims on the patent indefinite. Lufthansa did not file a
petition for en banc rehearing or petition the U.S. Supreme Court for a writ of certiorari. Therefore, there is no longer a risk of
exposure from that lawsuit.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been
served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of
manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those
respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability
with respect to this litigation as of December 31, 2017.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable
14
PART II
ITEM 5.
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
The table below sets forth the range of prices for the Company’s Common Stock, traded on the NASDAQ National Market
System, for each quarterly period during the last two years. The approximate number of shareholders of record as of
February 16, 2018, was 811 for Common Stock and 2,112 for Class B Stock.
2017
First
Second
Third
Fourth
2016
First
Second
Third
Fourth
High
Low
34.77 $
33.29 $
31.44 $
43.87 $
28.79
29.73
25.13
30.15
High
Low
34.55 $
34.22 $
39.17 $
40.70 $
21.76
27.65
28.05
30.76
$
$
$
$
$
$
$
$
The Company has not paid any cash dividends in the three-year period ended December 31, 2017. The Company has no plans
to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance growth in the business.
On September 26, 2016, the Company announced a three-for-twenty distribution of Class B Stock to holders of both Common
and Class B Stock. Stockholders received three shares of Class B Stock for every twenty shares of Common and Class B Stock
held on the record date of October 11, 2016. Fractional shares were paid in cash. All share quantities, share prices and per share
data reported throughout this report have been adjusted to reflect the impact of this distribution.
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the
“Buyback Program”). The Buyback Program allowed the Company to purchase shares of its common stock in accordance with
applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased
approximately 1,675,000 shares and has completed that program. On December 12, 2017, the Company’s Board of Directors
authorized an additional repurchase of up to $50 million of common stock. No amounts have been repurchased under the new
program as of December 31, 2017.
15
The following graph and table shows the performance of the Company’s common stock compared with the S&P 500 Index —
Total Return and the NASDAQ US and Foreign Companies for a $100 investment made December 31, 2012:
2013
2012
2014
30.51
2016
(1.75 )
— 122.90
2015
(15.99 )
2017
22.55
100.00 222.90 290.91 244.38 240.11 294.24
21.83
100.00 132.39 150.51 152.59 170.84 208.14
8.43
100.00 140.10 160.32 171.53 186.65 202.39
32.39
40.10
14.43
13.69
11.96
8.82
6.99
1.38
—
—
Astronics Corp.
S&P 500 Index - Total Returns
Return %
Cum $
Return %
Cum $
NASDAQ Stock Market (US and Foreign Companies) Return %
Cum $
16
ITEM 6.
SELECTED FINANCIAL DATA
Five-Year Performance Highlights
(Amounts in thousands, except for employee and per share data)
RESULTS OF OPERATIONS:
Sales
Net Income
Impairment Loss (6)
Net Margin
Diluted Earnings Per Share (1)
$
Weighted Average Shares Outstanding – Diluted (1)
2017 (5)
2016
2015 (4)
2014 (3)
2013 (2)
$ 624,464
19,679
$
16,237
$
3.2 %
0.67
29,320
$
$ 633,123
48,424
$
—
7.6 %
1.61
30,032
$ 692,279
66,974
$
—
9.7 %
2.22
30,179
$ 661,039
56,170
$
—
8.5 %
1.87
29,970
$ 339,937
27,266
$
—
8.0 %
0.94
29,136
$
$
$
$
$
$
$
Return on Average Equity
YEAR-END FINANCIAL POSITION:
Working Capital
Total Assets
Indebtedness
Shareholders’ Equity
Book Value Per Share (1)
OTHER YEAR-END DATA:
Depreciation and Amortization
Capital Expenditures
Shares Outstanding (1)
Number of Employees
5.9 %
15.2 %
25.3 %
28.1 %
18.4 %
$ 212,438
$ 735,956
$ 271,767
$ 329,927
11.77
$
$ 168,513
$ 604,344
$ 148,120
$ 337,449
11.60
$
$ 145,735
$ 609,243
$ 169,789
$ 300,225
10.21
$
$ 136,602
$ 562,910
$ 183,008
$ 228,177
7.87
$
$ 125,961
$ 491,271
$ 200,320
$ 171,509
6.05
$
$
$
$
$
27,063
13,478
28,038
2,516
$
$
25,790
13,037
29,098
2,304
$
$
25,309
18,641
29,405
2,304
27,254
40,882
29,003
2,041
$
$
11,059
6,868
28,342
1,715
(1) -
(2) -
(3) -
(4) -
(5) -
(6) -
Diluted Earnings Per Share, Weighted Average Shares Outstanding - Diluted, Book Value Per Share and Shares
Outstanding have been adjusted for the impact of the October 11, 2016 fifteen percent Class B stock distribution,
October 8, 2015 fifteen percent Class B stock distribution, the September 5, 2014 twenty percent Class B stock
distribution and the October 10, 2013 twenty percent Class B stock distribution.
Information includes the results of Peco, acquired on July 18, 2013, AeroSat acquired on October 1, 2013 and PGA
acquired December 5, 2013, each from the acquisition date forward.
Information includes the results of ATS, acquired on February 28, 2014, from the acquisition date forward.
Information includes the results of Armstrong, acquired on January 14, 2015, from the acquisition date forward.
Information includes the results of CCC acquired on April 3, 2017 and CSC acquired December 1, 2017, each from
the acquisition date forward.
The Company recorded a $16.2 million goodwill impairment charge during the fourth quarter of 2017. Refer to “Item
7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Note 5 of our
consolidated financial statements for additional information on Goodwill.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Astronics, through its subsidiaries, designs and manufactures advanced, high-performance electrical power generation,
distribution and motion systems, lighting & safety systems, avionics products, aircraft structures, systems certification 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, semiconductor and other markets where our
technology can be beneficial.
We have two reportable segments, Aerospace and Test Systems. Our Aerospace segment has thirteen principal operating
facilities with one located in New York State, Florida, Oregon, Quebec, Canada and Montierchaume, France; two located in
17
New Hampshire; and three located in each of Illinois and Washington State. Our Test Systems segment has facilities located in
Florida and California.
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 semiconductor 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. 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 semiconductor market as well as with the military.
The nature of our test systems business is such that it pursues large 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.
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. Increasing
profitability is dependent on many things, primarily revenue growth and the Company’s ability to control operating expenses
and to identify means of creating improved productivity. Revenue is 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. Our semiconductor
test products are highly dependent on winning new and follow-on programs with our current customers as well as developing
new customers. 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. Reduction of defense spending may result in fewer opportunities for us to compete, which could result in lower
profits in the future. Many of our newer development programs are based on new and unproven technology and at the same
time we are challenged to develop the technology on a schedule that is consistent with specific programs. 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.
ACQUISITIONS
On December 1, 2017, Astronics acquired substantially all of the assets of Telefonix Inc. and a related company Product
Development Technologies, LLC and its subsidiaries, to become CSC, located primarily in Waukegan and Lake Zurich,
Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry
leading design consultancy services for the global aerospace industry. Under the terms of the Agreement, the total consideration
for the transaction was approximately $103.8 million, net of $0.2 million in cash acquired. CSC is included in our Aerospace
Segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially
all the assets and certain liabilities of CCC, located in Kent, Washington. CCC is a provider of cabin management and in-flight
entertainment systems for a range of aircraft. The total consideration for the transaction was approximately $10.2 million, net
of $0.5 million in cash acquired. CCC is included in our Aerospace segment.
On January 14, 2015, the Company purchased 100% of the equity of Armstrong for approximately $52.3 million in cash.
Armstrong, located in Itasca, Illinois, is a leading provider of engineering, design and certification solutions for commercial
aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrong is included in our
Aerospace segment.
18
MARKETS
Commercial Transport Market
Sales to the commercial transport market include sales of electrical power generation, distribution and motion products,
lighting & safety products, avionics products, systems certification and structures products. Sales to this market totaled
approximately $414.5 million or 66.4% of our consolidated sales in 2017.
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. 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. We expect that new aircraft will be equipped with more passenger and aircraft connectivity and in-seat power
than previous generation aircraft. This market has experienced strong growth from airlines installing in-seat passenger power
systems on their existing and newly delivered aircraft. 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.
Military Aerospace Market
Sales to the military aerospace market include sales of lighting & safety products, avionics products, electrical power & motion
products and other products. Sales to this market totaled approximately 9.8% of our consolidated revenue and amounted to
$61.3 million in 2017.
The military market is dependent on governmental funding which can change from year to year. Risks are that overall spending
may be reduced in the future, specific programs may be eliminated or that we fail to win new business through the competitive
bid process. Astronics does not have significant reliance on any one program such that cancellation of a particular program will
cause material financial loss. We believe that we will continue to have opportunities similar to past years regarding this market.
Business Jet Market
Sales to the business jet aerospace market include sales of lighting & safety products, avionics products, and electrical power &
motion products. Sales to this market totaled approximately 6.6% of our consolidated revenue in 2017 and amounted to $41.3
million.
Sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft. Business jet
OEM build rates continue to be significantly impacted by slow global wealth creation and corporate profitability which have
been negatively affected during the past several years by global economic uncertainty among prospective buyers. Our sales to
the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not
expected to increase significantly during 2018. Despite the current market conditions, we continue to see opportunities on new
aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies in the business
jet 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.
Other Aerospace
Sales of our other aerospace products include sales of airfield lighting products and other Peco products. Sales to this market
totaled approximately 2.8% of our total revenue or $17.5 million in 2017.
Tests Systems Products
Our Test Systems segment accounted for approximately 14.4% of our consolidated sales in 2017 and amounted to $89.9
million. Sales to the semiconductor market were approximately $32.0 million. Sales to the aerospace & defense market were
approximately $57.9 million in 2017.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting
principles. The preparation of the Company’s financial statements requires management to make estimates, assumptions and
judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management’s
19
application of accounting policies, which are discussed in the Notes to Consolidated Financial Statements, Note 1 of Item 8,
Financial Statements and Supplementary Data of this report. The critical accounting policies have been reviewed with the Audit
Committee of our Board of Directors.
Revenue Recognition
The vast majority of our sales agreements are for standard products and services, with revenue recognized on the accrual basis
at the time of shipment of goods, transfer of title and customer acceptance, where required. There are no significant contracts
allowing for right of return. To a limited extent, certain contracts involve multiple elements (such as equipment and service).
The Company recognizes revenue for delivered elements when they have stand-alone value to the customer, they have been
accepted by the customer, and for which there are only customary refund or return rights. Arrangement consideration is
allocated to the deliverables by use of the relative selling price method. The selling price used for each deliverable is based on
vendor-specific objective evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated
selling price if neither VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used
to establish the price to sell the deliverable on a standalone basis.
For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical
evidence indicates the costs are incurred on other than a straight-line basis.
Revenue of approximately $21.0 million, $20.7 million and $17.2 million for the years ended December 31, 2017, 2016 and
2015, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of
accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to
the estimated total contract costs. The Company makes significant estimates involving its usage of percentage-of-completion
accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion,
and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is
reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause
the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross
profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods.
For contracts with anticipated losses at completion, a charge is taken against income for the amount of the entire loss in the
period in which it is estimated.
Reviews for Impairment of Long-Lived Assets
Goodwill Impairment Testing
Our goodwill is the result of the excess of purchase price over net assets acquired from acquisitions. As of December 31, 2017,
we had approximately $125.6 million of goodwill. As of December 31, 2016, we had approximately $115.2 million of
goodwill. The change in goodwill is primarily due to the goodwill recorded associated with the acquisitions of CCC and CSC
of $2.3 million and $23.4 million, respectively, offset by a goodwill impairment of $16.2 million at Armstrong.
We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which
discrete financial information is available and segment management regularly reviews the operating results of those
components. The Test Systems operating segment is its own reporting unit while the other reporting units are one level below
our Aerospace operating segment.
Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or
selected reporting units under certain circumstances. Companies are also allowed to bypass the qualitative analysis and perform
a quantitative analysis if desired. 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.
When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not
limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our
products and services, regulatory and political developments, entity specific factors such as strategy and changes in key
personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not
that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.
Quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value. We use the
discounted cash flow method to estimate the fair value of each of our reporting units. The discounted cash flow method
incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash
20
flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash
flows based on each reporting unit’s current business, expected developments and operational strategies. If the carrying value
of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. We early adopted
ASU No. 2017-04 on January 1, 2017. Accordingly, 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.
In 2017, we performed quantitative assessments for the nine reporting units which had goodwill as of the first day of the fourth
quarter. Based on our quantitative assessments of our reporting units, the Company recorded a full impairment charge of
approximately $16.2 million in the December 31, 2017 consolidated statement of operations associated to the Armstrong
reporting unit. The impairment loss was incurred in the Aerospace segment and is reported on the Impairment Loss line of the
Consolidated Statements of Operations.
Amortized Intangible Asset Impairment Testing
Amortizable intangible assets with a carrying value of $153.5 million at December 31, 2017 and $98.1 million at December 31,
2016 are amortized over their assigned useful lives. We test these long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of those assets may not be recoverable. The recoverability test consists of
comparing the projected undiscounted cash flows associated with the asset to its carrying amount. An impairment loss would
then be recognized for the carrying amount in excess of its fair value. There were no impairment charges in 2017, 2016 or
2015.
Depreciable Asset Impairment Testing
Property, plant and equipment with a carrying value of $125.8 million at December 31, 2017 and $122.8 million at December
31, 2016 are depreciated over their assigned useful lives. We test these long-lived assets for impairment when events or changes
in circumstances indicate that the carrying amount of those assets may not be recoverable. The recoverability test consists of
comparing the projected undiscounted cash flows, with its carrying amount. An impairment loss would then be recognized for
the carrying amount in excess of its fair value. There were no impairment charges in 2017, 2016 or 2015.
Inventory Valuation
We record valuation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower of
cost or net realizable value. In determining the appropriate reserve, management considers the age of inventory on hand, the
overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that we
believe is no longer salable. At December 31, 2017, our reserve for inventory valuation was $18.0 million, or 10.7% of gross
inventory. At December 31, 2016, our reserve for inventory valuation was $15.4 million, or 11.7% of gross inventory.
Deferred Tax Asset Valuation Allowances
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. We record a valuation allowance to reduce
deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. Significant
assumptions regarding future profitability is required to estimate the value of these deferred tax assets. We consider allowable
tax carryforward periods, historical earnings performance, tax planning strategies and recent earnings projections to determine
the amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would
impact our income tax expense and the carrying value of these assets when we determine that these factors have changed.
As of December 31, 2017, we had net deferred tax liabilities of $2.3 million. Included in the net deferred tax liabilities are
approximately $15.4 million in deferred tax assets net of a $7.8 million valuation allowance. These deferred tax assets
principally relate to employee benefit liabilities, asset reserves, leases, deferred revenue, state and foreign net operating loss
carry-forwards, and state general business tax credit carry-forwards.
As of December 31, 2016, we had net deferred tax liabilities of $8.7 million. Included in the net deferred tax liabilities are
approximately $24.2 million in deferred tax assets net of a $3.8 million valuation allowance. These deferred tax assets
principally relate to employee benefit liabilities, asset reserves, leases, deferred revenue, state net operating loss carry-forwards
and state general business tax credit carry-forwards.
Because of the uncertainty as to the Company’s ability to generate sufficient future taxable income in certain states, the
Company has recorded the valuation allowances accordingly in 2017 and 2016.
21
Supplemental Executive Retirement Plan (SERP) Assumptions
We maintain two non-qualified defined benefit supplemental retirement plans (“SERP” and “SERP II”) for certain executive
officers and retired former executive officers. Expense for these plans in 2017 was $1.9 million and in 2016 was $1.9 million.
Plan obligations and the related costs are determined using actuarial valuations that involve several assumptions that may be
highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used.
The most critical assumptions include the discount rate, future wage increases, retirement age and life expectancy. The discount
rate is used to state expected future cash flows at present value. Using a lower discount rate increases the present value of
pension obligations and increases pension expense. For determining the discount rate the Company considers long-term interest
rates for high-grade corporate bonds. The discount rate for determining the expense recognized in 2017 was 4.20% compared
with 4.45% in 2016. We will use a discount rate of 3.60% in determining our 2018 expense. The assumption for compensation
increases takes a long-term view of inflation and performance based salary adjustments based on the Company’s approach to
executive compensation. The rate used for future wage increases was 2-3%. It was assumed that each participant retires after
fully vesting in the plan at age 62 or 65. A 100 point increase in the discount rate we used would decrease our annual pension
expense for 2018 by $0.3 million. If we had assumed annual wage increases of 3-4%, our 2018 pension expense would increase
approximately $0.2 million.
Stock-Based Compensation
We have stock-based compensation plans, which include non-qualified stock options as well as incentive stock options.
Expense recognized for stock-based compensation was $2.6 million for 2017, $2.3 million for 2016 and $2.3 million for 2015.
We determine the fair value of the option awards at the date of grant using a Black-Scholes model. Option pricing models
require management to make assumptions and to apply judgment to determine the fair value of the award. These assumptions
and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee stock option
exercise behaviors and future employee turnover rates. Changes in these assumptions can materially affect the fair value
estimate.
Acquisitions
The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic
805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred,
identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination.
ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations.
Acquisition costs are expensed as incurred. Acquisition related expenses were $0.3 million in 2017, insignificant in 2016, and
$0.4 million in 2015.
When the Company acquires a business, we allocate the purchase price to the assets acquired and liabilities assumed in the
transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as
goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in
determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive
lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment, as explained previously.
With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such
as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair
value determinations and engage independent valuation specialists to assist in the fair value determination of the acquired long-
lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow
methods, independent market appraisals and other acceptable valuation techniques.
With respect to determining the fair value of the purchase price, the most subjective estimates involve valuations of contingent
consideration. Significant judgment is necessary to determine the fair value of the purchase price when the transaction includes
an earn-out provision. We engage valuation specialists to assist in the determination of the fair value of contingent
consideration. Key assumptions used to value the contingent consideration include future projections and discount rates.
During 2017, acquisitions added approximately $4.0 million in property, plant and equipment and $66.5 million in purchased
intangible assets. See Note 18 in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and
Supplementary Data, regarding the acquisitions in 2017.
22
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
(Dollars in thousands)
Sales
Gross Margin
Impairment Loss
SG&A Expenses as a Percentage of Sales
Interest Expense
Effective Tax Rate
$
$
$
2017 (2)
2016
2015 (1)
624,464
$
633,123
$
692,279
22.0 %
16,237
$
14.5 %
5,369
21.3 %
$
25.2 %
—
13.6 %
4,354
29.6 %
$
$
27.1 %
—
12.9 %
4,751
28.8 %
Net Income
48,424
Our results of operations for 2015 include the operations of Armstrong, beginning January 14, 2015.
Our results of operations for 2017 include the operations of CCC, beginning April 3, 2017, and the operations of CSC,
beginning December 1, 2017 ("collectively, the Acquired Businesses").
19,679
66,974
$
$
$
(1)
(2)
A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.
CONSOLIDATED OVERVIEW OF OPERATIONS
2017 Compared With 2016
Consolidated sales for 2017 decreased by $8.7 million, or 1.4%, to $624.5 million. Aerospace segment sales of $534.6 million
were consistent with 2016 sales of $534.0 million, while Test Systems segment sales were down 9.3% to $89.9 million. Sales
from the Acquired Businesses contributed $15.5 million in 2017.
Consolidated cost of products sold increased $13.7 million to $487.4 million in 2017 from $473.7 million in the prior year. The
increase was due primarily to the incremental cost of products sold associated with the Acquired Businesses of $19.8 million,
and increased Engineering & Development ("E&D") costs offset by lower organic sales volume. E&D costs increased 6.8% to
$95.0 million in 2017 primarily due to the Acquired Businesses, compared with $88.9 million in 2016. The incremental E&D
costs of the Acquired Businesses totaled $5.7 million. As a percent of sales, E&D was 15.2% and 14.0% in 2017 and 2016,
respectively.
SG&A expenses increased $4.2 million in 2017 compared with 2016. As a percent of sales, SG&A expenses were 14.5% and
13.6% for 2017 and 2016, respectively. The increase was due primarily to the incremental SG&A costs of the Acquired
Businesses of $4.6 million, which included $1.8 million of intangible asset amortization expense.
Interest expense increased in 2017 compared to 2016 due primarily to increased debt levels.
2016 Compared With 2015
Consolidated sales for 2016 decreased by $59.2 million, or 8.5%, to $633.1 million, from $692.3 million in 2015. Aerospace
segment sales were down 2.9% year-over-year to $534.0 million, while Test Systems segment sales were down 30.5% to $99.1
million.
Consolidated cost of products sold decreased $30.6 million to $473.7 million in 2016 from $504.3 million in the prior year.
Lower costs of products sold was the result of lower sales volume and lower warranty expenses. E&D costs were $88.9 million
in 2016, consistent with $90.3 million in 2015. As a percent of sales, E&D was 14.0% and 13.0% in 2016 and 2015,
respectively.
SG&A expenses were $86.3 million, or 13.6% of sales, in 2016 compared with $89.1 million, or 12.9% of sales, in the same
period last year. The decline in SG&A expenses was due primarily to reduced commissions resulting from lower sales
volumes. SG&A expenses in 2015 benefited from a $1.8 million write-down of a contingent consideration liability related to
an acquisition earn-out obligation.
Interest expense decreased in 2016 compared to 2015 due to decreased debt levels.
Income Taxes
Our effective tax rates for 2017, 2016 and 2015 were 21.3%, 29.6% and 28.8%, respectively. Our tax rate is affected by
recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions,
which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year,
23
but are not consistent from year to year. 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 of 35% and our effective tax rate:
2017:
2016:
2015:
1.
2.
3.
1.
2.
1.
2.
Recognition of approximately $2.9 million of 2017 U.S. R&D tax credits.
Permanent differences, primarily the impact of the Domestic Production Activities Deduction.
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.
Recognition of approximately $2.6 million of 2016 U.S. R&D tax credits.
Permanent differences, primarily the impact of the Domestic Production Activities Deduction.
Recognition of approximately $2.6 million of 2015 U.S. R&D tax credits.
Permanent differences, primarily the impact of the Domestic Production Activities Deduction.
2018 Outlook
We expect consolidated sales in 2018 to be between $745.0 million and $815.0 million. Our consolidated backlog at
December 31, 2017 was $393.7 million of which approximately $346.7 million is expected to ship in 2018.
We expect our capital equipment spending in 2018 to be in the range of $24.0 million to $28.0 million. E&D spending in 2018
is expected to be in the range of $110.0 million to $115.0 million including the Acquired Businesses, which represents
approximately 14.4% of sales at the mid-point of the expected sales range.
SEGMENT RESULTS OF OPERATIONS AND OUTLOOK
Operating profit, as presented below, is sales less cost of products sold and other operating expenses excluding interest expense,
corporate expenses and other non-operating revenue and expenses. Cost of products sold and operating expenses are directly
attributable to the respective segment. Operating profit is reconciled to earnings before income taxes in Note 17 of Item 8,
Financial Statements and Supplementary Data, of this report.
AEROSPACE SEGMENT
(in thousands, except percentages)
Sales
Operating Profit
Operating Margin
Total Assets
Backlog
2017
534,603
38,888
$
$
2016
534,041
77,966
$
$
2015
549,738
85,103
7.3 %
14.6 %
15.5 %
2017
621,047 $
298,604 $
2016
500,892
219,146
$
$
$
$
24
Sales by Market
Commercial Transport
Military
Business Jet
Other
Sales by Product Line
Electrical Power & Motion
Lighting & Safety
Avionics
Systems Certification
Structures
Other
2017 Compared With 2016
2017
414,523 $
61,270
41,298
17,512
534,603 $
2017
264,286 $
158,663
53,960
14,333
25,849
17,512
534,603 $
2016
435,552 $
54,556
25,407
18,526
534,041 $
2016
288,465 $
156,871
32,761
16,531
20,887
18,526
534,041 $
2015
455,569
43,295
32,796
18,078
549,738
2015
279,752
157,143
56,150
21,317
16,372
19,004
549,738
$
$
$
$
Aerospace segment sales increased by $0.6 million, or 0.1%, to $534.6 million, when compared with the prior year, primarily
due to the addition of the Acquired Businesses which added $15.5 million.
Electrical Power & Motion sales decreased $24.2 million, or 8.4%, due to lower sales of cabin power products due to a
combination of lower volume and pricing. Systems Certifications sales decreased $2.2 million and other products decreased
$1.0 million from lower project activity. These declines were offset by increased Avionics sales, up $21.2 million of which
$15.0 million was from the Acquired Businesses and $5.3 million was from increased sales of databus and in-flight
entertainment systems. Structures sales increased by $5.0 million.
Aerospace operating profit for 2017 was $38.9 million, or 7.3% of sales, compared with $78.0 million, or 14.6% of sales, in the
same period last year. Aerospace operating profit was negatively impacted by lower sales volume and market pricing pressures
primarily related to cabin power products, coupled with the $16.2 million goodwill impairment at Armstrong and an operating
loss of $8.4 million from CCC. E&D costs for Aerospace were $85.3 million (inclusive of $5.6 million related to the Acquired
Businesses) and $78.5 million in 2017 and 2016, respectively.
2016 Compared With 2015
Aerospace segment sales decreased by $15.7 million, or 2.9%, when compared with the prior year to $534.0 million.
Electrical Power & Motion sales increased $8.7 million, or 3.1%, largely driven by higher sales of in-seat power products and
seat motion products, which were up $7.0 million and $4.3 million, respectively. Sales of Structures products were up $4.5
million. These increases were offset by a $23.4 million decline in Avionics products, which was largely due to lower sales of
satellite antenna systems and lower VVIP in-flight entertainment/cabin management systems, and a $4.8 million decrease in
System Certification sales.
Aerospace operating profit for 2016 was $78.0 million, or 14.6% of sales, compared with $85.1 million, or 15.5% of sales, in
the same period last year. The decrease in operating profit was the result of lower sales volume, coupled with slightly higher
E&D costs and a general increase in operating costs. E&D costs for Aerospace were $78.5 million and $77.9 million in 2016
and 2015, respectively. Aerospace SG&A expense decreased slightly to $60.0 million in 2016, compared with $60.1 million in
2015.
2018 Outlook for Aerospace – We expect 2018 Aerospace segment sales to be in the range of $630.0 million to $680.0
million. The Aerospace segment’s backlog at December 31, 2017 was $298.6 million, compared to $219.1 million at
December 31, 2016. Approximately $271.4 million of the backlog at December 31, 2017 is expected to be shipped over the
next 12 months.
25
TEST SYSTEMS SEGMENT
(in thousands, except percentages)
Sales
Operating Profit
Operating Margin
Total Assets
Backlog
Sales by Market
Semiconductor
Aerospace & Defense
2017 Compared With 2016
2017
89,861
7,359
$
$
2016
99,082
8,507
$
$
2015
142,541
25,529
8.2 %
8.6 %
17.9 %
2017
2016
90,859 $
95,086 $
76,575
38,887
2017
2016
2015
31,999 $
57,862
89,861 $
37,939 $
61,143
99,082 $
92,136
50,405
142,541
$
$
$
$
$
$
Sales in 2017 decreased 9.3% to $89.9 million compared with sales of $99.1 million for 2016, due to lower shipments to both
the Semiconductor and Aerospace & Defense markets. Sales to the Semiconductor market decreased $5.9 million and sales to
the Aerospace & Defense market decreased $3.3 million compared with 2016.
Operating profit was $7.4 million, or 8.2% of sales, compared with $8.5 million, or 8.6% of sales, in 2016. This is primarily
due to decreased sales volume. E&D costs were $9.7 million in 2017, compared with $10.4 million in 2016.
2016 Compared With 2015
Sales in 2016 decreased 30.5% to $99.1 million compared with sales of $142.5 million for 2015, due to lower shipments to the
Semiconductor market. Sales to the Semiconductor market decreased $54.2 million compared with the same period in 2015,
which was partially offset by increased sales of $10.7 million to the Aerospace & Defense market.
Operating profit was $8.5 million, or 8.6% of sales, compared with $25.5 million, or 17.9% of sales, in 2015. E&D costs were
$10.4 million in 2016 compared with $12.4 million in the prior year.
2018 Outlook for Test Systems – We expect 2018 Test System segment sales to be in the range of $115.0 million to $135.0
million. The Test System segment’s backlog at December 31, 2017 was $95.1 million, compared with $38.9 million at
December 31, 2016. Approximately $75.3 million is expected to be shipped over the next 12 months.
OFF BALANCE SHEET ARRANGEMENTS
We do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on
our results of operations or financial condition.
26
CONTRACTUAL OBLIGATIONS
The following table represents contractual obligations as of December 31, 2017:
(In thousands)
Long-term Debt
Purchase Obligations
Interest on Long-term Debt
Supplemental Retirement Plan and Post
Retirement Obligations
Operating Leases
Other Long-term Liabilities
Total Contractual Obligations
Notes to Contractual Obligations Table
Total
271,767 $
178,149
45,170
26,448
6,980
199
528,713 $
$
$
Payments Due by Period
2018
2019-2020
2021-2022
After 2022
2,689 $
173,478
9,244
419
4,141
83
190,054 $
4,099 $
4,671
18,153
833
2,724
25
30,505 $
2,979 $
—
17,440
812
115
32
21,378 $
262,000
—
333
24,384
—
59
286,776
Long-term Debt — See Item 8, Financial Statements and Supplementary Data, Note 6, 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 6.
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, 2017. Actual future borrowings and rates may differ from these
estimates.
Purchase Obligations — Purchase obligations are comprised of the Company’s commitments for goods and services in the
normal course of business.
Operating Leases — Operating lease obligations are primarily related to facility leases for AES, AeroSat, Armstrong, ATS,
Ballard, CCC, CSC, and LSI Canada.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands)
Net cash provided (used) by:
Operating Activities
Investing Activities
Financing Activities
2017
2016
2015
$
$
$
37,783 $
(129,561 ) $
91,425 $
48,854 $
(14,622 ) $
(34,806 ) $
78,501
(73,586 )
(6,725 )
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.
Operating Activities
Cash provided by operating activities was $37.8 million in 2017 compared with $48.9 million in 2016. The decrease of $11.1
million in 2017 was primarily a result of decreased net income and change in net operating assets in 2017 when compared with
2016, coupled with an increased deferred income tax benefit in 2017.
Cash provided by operating activities was $48.9 million in 2016 compared with $78.5 million in 2015. The decrease of $29.6
million in 2016 was primarily a result of decreased net income and net operating assets in 2016 when compared with 2015,
partially offset by an increase deferred income tax benefit in 2016.
Cash provided by operating activities was $78.5 million in 2015 compared with $99.9 million in 2014. The decrease of $21.4
million in 2015 was primarily a result of the impact of increases in net operating assets in 2015 when compared with 2014 net
of the effects from acquisitions of businesses.
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. Our Test Systems segment depends on capital
27
expenditures of the semiconductor 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.
Investing Activities
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 property, plant, and equipment (“PP&E”) of $13.5 million.
Cash used for investing activities in 2016 was $14.6 million, primarily related to purchases of PP&E of $13.0 million.
Cash used for investing activities in 2015 was $73.6 million. The acquisition of Armstrong used approximately $52.3 million of
cash in 2015 and purchases of PP&E used $18.6 million.
Our expectation for 2018 is that we will invest between $24.0 million and $28.0 million for PP&E. Future requirements for
PP&E depend on numerous factors, including expansion of existing product lines and introduction of new products.
Management believes that our cash flow from operations and current borrowing arrangements will provide for these capital
expenditures. We expect to continue to evaluate acquisition opportunities in the future.
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 Fourth Amended and Restated Credit Agreement (the “Original Facility”) provided for a $350 million
revolving credit line with the option to increase the line by up to $150 million. The maturity date of the loans under the Original
Facility was September 26, 2019. The credit facility allocates up to $20 million of the $500 million revolving credit line for the
issuance of letters of credit, including certain existing letters of credit. At December 31, 2017, outstanding letters of credit
totaled $1.1 million.
On January 13, 2016, the Company amended the Original Facility to add a new lender and extend the maturity date of the
credit facility from September 26, 2019 to January 13, 2021.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.5 to 1,
increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. 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 1.375% and 2.25% based upon the Company’s leverage ratio. The Company paid a commitment fee to the Lenders in
an amount equal to between 0.175% and 0.35% on the undrawn portion of the credit facility, based upon the Company’s
leverage ratio. The Company was required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest
expense) of 3.0 to 1 for the term of the Agreement.
On February 16, 2018, the Company modified and extended the Original Facility by entering into the Fifth Amended and
Restated Credit Agreement (the "Agreement"), which provides for a $500 million revolving credit line with the option to
increase the line by up to $150 million. A new lender was added to the facility as well. The outstanding balances in the Original
Facility were rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February
16, 2023.
Covenants in the Agreement have been modified to where the maximum permitted leverage ratio is 3.75 to 1 beginning with
quarters ended on or after December 31, 2017. However, the Company may elect to exercise its right to increase this ratio to
4.50 to 1 or up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to
limitations. 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% of the undrawn portion of the credit facility,
based upon the Company's leverage ratio. The Company’s leverage ratio was 2.91 to 1 at December 31, 2017. The Company is
in compliance with all financial and other covenants at December 31, 2017. The requirement to maintain a minimum interest
coverage ratio has been eliminated.
28
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic
subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on
substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts
owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make
payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount,
and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
The primary financing activities in 2017 related to net borrowings from our senior facility of $126.0 million and $32.4 million
in share repurchases under our original Buyback Program, as further described below, using cash generated from operations.
The primary financing activities in 2016 related to net repayments on our senior facility of $19.0 million and $17.6 million in
share repurchases under our original Buyback Program, using cash generated from operations.The primary financing activities
in 2015 relate to borrowings on our senior credit facility to fund the acquisition of Armstrong and voluntary principal payments
against our outstanding balance on the senior facility. We borrowed $50.0 million to fund the acquisition of Armstrong. During
2015, we made principal payments of $65.0 million on the senior credit facility, primarily using cash generated by operations.
The Company’s cash needs for working capital, debt service and capital equipment during 2018 is expected to be met by cash
flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the
“Buyback Program”). The Buyback Program allowed the Company to purchase shares of its common stock in accordance with
applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased
approximately 1,675,000 shares and has completed that program. On December 12, 2017, the Company’s Board of Directors
authorized an additional repurchase of up to $50 million of common stock. No amounts have been repurchased under the new
program as of December 31, 2017.
DIVIDENDS
Management believes that it should retain the capital generated from operating activities for investment in advancing
technologies, acquisitions and debt retirement. Accordingly, there are no plans to institute a cash dividend program.
BACKLOG
At December 31, 2017, the Company’s backlog was approximately $393.7 million compared with approximately $258.0
million at December 31, 2016.
RELATED-PARTY TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated herein by reference to the information
included in the Company’s 2018 Proxy Statement which will be filed with the Commission within 120 days after the end of the
Company’s 2017 fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Financial Statements at Item 8 of this report.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to fluctuation in Canadian and Euro currency exchange rates to the U.S. dollar. Over 90%
of the Company’s consolidated sales are transacted in U.S. dollars. Net assets held in or measured in Canadian dollars
amounted to $14.6 million at December 31, 2017. Annual disbursements transacted in Canadian dollars were approximately
$8.4 million in 2017. A 10% change in the value of the U.S. dollar versus the Canadian dollar would have had a $0.2 million
impact to 2017 net income; however it could be significant in the future. Net assets held in or measured in Euros amounted to
$32.8 million at December 31, 2017. Disbursements transacted in Euros in 2017 were approximately $33.7 million. A 10%
change in the value of the U.S. dollar versus the Euros would have had a $0.8 million impact to 2017 net income; however it
could be significant in the future. Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt
obligations, which total approximately $262.0 million at December 31, 2017. A change of 1% in interest rates of all variable
rate debt would impact annual net income by approximately $2.6 million, before income taxes.
29
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Astronics Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Astronics Corporation (the Company) as of December 31, 2017
and 2016, the related consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity for each of
the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at
Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with US generally
accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1992.
Buffalo, New York
February 28, 2018
30
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2017 based upon the framework in Internal
Control – Integrated Framework originally issued in 2013 by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is
effective as of December 31, 2017.
We completed acquisitions in 2017, which were excluded from our management’s report on internal control over financial
reporting as of December 31, 2017. We acquired Astronics Custom Control Concepts, Inc. on April 3, 2017 and Astronics
Connectivity Systems and Certification Corporation on December 1, 2017. These acquisitions were included in our 2017
consolidated financial statements and constituted $127.9 million and $114.4 million of total and net assets, respectively, as of
December 31, 2017 and $15.5 million and ($6.9) million of sales and net loss, respectively, for the year then ended.
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements included
in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of
our internal control over financial reporting.
By:
/s/ Peter J. Gundermann
February 28, 2018
Peter J. Gundermann
President & Chief Executive Officer
(Principal Executive Officer)
/s/ David C. Burney
David C. Burney
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
February 28, 2018
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Astronics Corporation
Opinion on Internal Control over Financial Reporting
We have audited Astronics Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, Astronics Corporation (the Company) maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Astronics Custom Control
Concepts Inc. and Astronics Connectivity Systems and Certification Corporation, which are included in the 2017 consolidated financial
statements of the Company and constituted $127.9 million and $114.4 million of total and net assets, respectively, as of December 31, 2017
and $15.5 million and ($6.9) million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Astronics Custom
Control Concepts Inc. and Astronics Connectivity Systems and Certification Corporation.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statement of operations,
comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2017, and the
related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 28, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Buffalo, New York
February 28, 2018
32
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Sales
Cost of Products Sold
Gross Profit
Impairment Loss
Selling, General and Administrative Expenses
Income from Operations
Interest Expense, Net of Interest Income
Income Before Income Taxes
Provision for Income Taxes
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Year Ended December 31,
2017
624,464 $
487,351
137,113
16,237
90,516
30,360
5,369
24,991
5,312
19,679 $
0.69 $
0.67 $
2016
633,123 $
473,656
159,467
—
86,328
73,139
4,354
68,785
20,361
48,424 $
1.66 $
1.61 $
2015
692,279
504,337
187,942
—
89,141
98,801
4,751
94,050
27,076
66,974
2.29
2.22
$
$
$
$
See notes to consolidated financial statements.
33
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net Income
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments
Retirement Liability Adjustment – Net of Tax
Other Comprehensive Income (Loss)
Comprehensive Income
Year Ended December 31,
2017
2016
2015
$
19,679 $
48,424 $
66,974
4,132
(1,990 )
2,142
21,821 $
(626 )
196
(430 )
47,994 $
(4,617 )
1,502
(3,115 )
63,859
$
See notes to consolidated financial statements.
34
ASTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Current Assets:
Cash and Cash Equivalents
Accounts Receivable, Net of Allowance for Doubtful Accounts
Inventories
Prepaid Expenses and Other Current Assets
Total Current Assets
Property, Plant and Equipment, at Cost:
Land
Buildings and Improvements
Machinery and Equipment
Construction in Progress
Less Accumulated Depreciation
Net Property, Plant and Equipment
Other Assets
Intangible Assets, Net of Accumulated Amortization
Goodwill
Total Assets
Current Liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Maturities of Long-term Debt
Accounts Payable
Accrued Payroll and Employee Benefits
Accrued Income Taxes
Other Accrued Expenses
Customer Advanced Payments and Deferred Revenue
Total Current Liabilities
Long-term Debt
Supplemental Retirement Plan and Other Liabilities for Pension Benefits
Other Liabilities
Deferred Income Taxes
Total Liabilities
Shareholders’ Equity:
Common Stock, $.01 par value, Authorized 40,000,000 Shares
22,860,742 Shares Issued and 21,186,028 Outstanding at December 31, 2017
21,955,414 Shares Issued and 21,432,282 Outstanding at December 31, 2016
Convertible Class B Stock, $.01 par value, Authorized 15,000,000 Shares
6,852,309 Shares Issued and Outstanding at December 31, 2017
7,665,437 Shares Issued and Outstanding at December 31, 2016
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Treasury Stock; 1,674,714 Shares at December 31, 2017, 532,132 Shares at December 31,
2016
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
35
$
$
$
December 31,
2017
2016
17,914 $
132,633
150,196
14,586
315,329
11,237
81,872
105,827
9,761
208,697
82,867
125,830
15,659
153,493
125,645
735,956 $
2,689 $
41,846
24,890
261
13,598
19,607
102,891
269,078
26,030
2,909
5,121
406,029
17,901
109,415
116,597
11,160
255,073
11,112
79,191
93,683
8,182
192,168
69,356
122,812
13,149
98,103
115,207
604,344
2,636
25,070
24,743
62
10,881
23,168
86,560
145,484
22,140
1,414
11,297
266,895
229
220
68
67,791
(13,352 )
325,191
(50,000 )
329,927
735,956 $
$
77
64,752
(15,494 )
305,512
(17,618 )
337,449
604,344
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Cash Provided By Operating
Activities, Excluding the Effects of Acquisitions:
Impairment Loss
Depreciation and Amortization
Provision for Non-Cash Losses on Inventory and Receivables
Stock Compensation Expense
Deferred Tax Benefit
Non-cash Adjustment to Contingent Consideration
Other
Cash Flows from Changes in Operating Assets and Liabilities, net
of the Effects from Acquisitions of Businesses:
Accounts Receivable
Inventories
Prepaid Expenses and Other Current Assets
Accounts Payable
Accrued Expenses
Income Taxes Payable
Customer Advanced Payments and Deferred Revenue
Supplemental Retirement Plan and Other Liabilities
Cash Provided By Operating Activities
Cash Flows from Investing Activities
Acquisitions of Business, Net of Cash Acquired
Capital Expenditures
Other
Cash Used For Investing Activities
Cash Flows from Financing Activities
Proceeds From Long-term Debt
Principal Payments on Long-term Debt
Purchase of Outstanding Shares for Treasury
Proceeds from Exercise of Stock Options
Excess Tax Benefit from Exercise of Stock Options
Cash Provided by (Used for) Financing Activities
Effect of Exchange Rates on Cash
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information:
Interest Paid
Income Taxes Paid, Net of Refunds
Year Ended December 31,
2017
2016
2015
$
19,679 $
48,424 $
66,974
16,237
27,063
2,973
2,598
(5,494 )
—
(937 )
(9,844 )
(18,116 )
(2,132 )
10,439
(702 )
(376 )
(4,918 )
1,313
37,783
(114,039 )
(13,478 )
(2,044 )
(129,561 )
147,086
(23,720 )
(32,382 )
441
—
91,425
366
13
17,901
17,914 $
—
25,790
2,404
2,281
(4,756 )
—
165
(14,622 )
(2,671 )
108
(2,000 )
(174 )
7,926
(15,539 )
1,518
48,854
—
(13,037 )
(1,585 )
(14,622 )
20,000
(41,835 )
(17,618 )
3,813
834
(34,806 )
(86 )
(660 )
18,561
17,901 $
—
25,309
3,187
2,274
(252 )
(1,751 )
(294 )
(729 )
(2,537 )
(799 )
(2,168 )
3,738
(9,266 )
(7,485 )
2,300
78,501
(52,276 )
(18,641 )
(2,669 )
(73,586 )
55,000
(67,694 )
—
2,996
2,973
(6,725 )
(826 )
(2,636 )
21,197
18,561
4,775 $
10,777 $
4,536 $
15,898 $
4,734
32,990
$
$
$
See notes to consolidated financial statements.
36
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Common Stock
Beginning of Year
Exercise of Stock Options and Stock Compensation Expense – Net of
Taxes
Class B Stock Converted to Common Stock
End of Year
Convertible Class B Stock
Beginning of Year
Exercise of Stock Options and Stock Compensation Expense – Net of
Taxes
Class B Stock Converted to Common Stock
End of Year
Additional Paid in Capital
Beginning of Year
Exercise of Stock Options and Stock Compensation Expense - Net of
Taxes
End of Year
Accumulated Other Comprehensive Loss
Beginning of Year
Foreign Currency Translation Adjustments
Retirement Liability Adjustment – Net of Taxes
End of Year
Retained Earnings
Beginning of Year
Net income
Cash Paid in Lieu of Fractional Shares from Stock Distribution
End of Year
Treasury Stock
Beginning of Year
Purchase of Shares
End of Year
Total Shareholders’ Equity
Year Ended December 31,
2017
2016
2015
220 $
—
9
229 $
77 $
—
(9 )
68 $
194 $
1
25
220 $
100 $
2
(25 )
77 $
166
2
26
194
124
2
(26 )
100
64,752 $
57,827 $
49,588
3,039
67,791 $
6,925
64,752 $
8,239
57,827
(15,494 ) $
4,132
(1,990 )
(13,352 ) $
305,512 $
19,679
—
325,191 $
(15,064 ) $
(626 )
196
(15,494 ) $
257,168 $
48,424
(80 )
305,512 $
(17,618 ) $
— $
(32,382 )
(17,618 )
(50,000 ) $
329,927 $
(17,618 ) $
337,449 $
(11,949 )
(4,617 )
1,502
(15,064 )
190,248
66,974
(54 )
257,168
—
—
—
300,225
$
$
$
$
$
$
$
$
$
$
$
$
$
See notes to consolidated financial statements
37
ASTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, COUNTINUED
(Share data, in thousands)
Common Stock
Beginning of Year
Exercise of Stock Options
Class B Stock Converted to Common Stock
End of Year
Convertible Class B Stock
Beginning of Year
Exercise of Stock Options
Class B Stock Converted to Common Stock
End of Year
Treasury Stock
Beginning of Year
Purchase of Shares
End of Year
Year Ended December 31,
2017
2016
2015
21,955
26
880
22,861
7,665
67
(880 )
6,852
523
1,152
1,675
19,349
151
2,455
21,955
10,055
65
(2,455 )
7,665
—
523
523
16,608
168
2,573
19,349
12,447
181
(2,573 )
10,055
—
—
—
See notes to consolidated financial statements
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
Description of the Business
Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace,
defense, electronics and semiconductor industries. Our products and services include advanced, high-performance electrical
power generation, distribution and motion systems, lighting and safety systems, avionics products, systems certification,
aircraft structures and automated test systems.
We have operations in the United States (“U.S.”), Canada and France. We design and build our products through our wholly
owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”);
Armstrong Aerospace, Inc. (“Armstrong”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”);
Astronics Connectivity Systems and Certification Corp. ("CSC"); Astronics Custom Control Concepts Inc. ("CCC"); Astronics
DME LLC (“DME”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc.
(“Max-Viz”); Peco, Inc. (“Peco”); and PGA Electronic s.a. (“PGA”).
At December 31, 2017, the Company has two reportable segments, Aerospace and Test Systems. The Aerospace segment
designs and manufactures products for the global aerospace industry. Our Test Systems segment designs, develops,
manufactures and maintains automated test systems that support the semiconductor, aerospace, communications and weapons
test systems as well as training and simulation devices for both commercial and military applications.
On January 14, 2015, the Company acquired 100% of the equity of Armstrong for approximately $52.3 million in cash.
Armstrong, located in Itasca, Illinois, is a leading provider of engineering, design and certification solutions for commercial
aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrong is included in our
Aerospace segment.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially
all the assets and certain liabilities of Custom Control Concepts LLC, located in Kent, Washington. CCC is a provider of cabin
management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was
approximately $10.2 million, net of $0.5 million in cash acquired. CCC is included in our Aerospace segment.
On December 1, 2017, Astronics acquired substantially all of the assets of Telefonix Inc. and a related company Product
Development Technologies, LLC and its subsidiaries, to become CSC, located in Waukegan and Lake Zurich, Illinois. CSC
designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design
consultancy services for the global aerospace industry. Under the terms of the Agreement, the total consideration for the
transaction was approximately $103.8 million, net of $0.2 million in cash acquired. CSC is included in our Aerospace Segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated.
Acquisitions are accounted for under the acquisition method and, accordingly, the operating results for the acquired companies
are included in the consolidated statements of operations from the respective dates of acquisition.
For additional information on the acquired businesses, see Note 18.
Revenue Recognition
The vast majority of our sales agreements are for standard products and services, with revenue recognized on the accrual basis
at the time of shipment of goods, transfer of title and customer acceptance, where required. There are no significant contracts
allowing for right of return. To a limited extent at ATS, certain contracts involve multiple elements (such as equipment and
service). Service revenues were not material for the years ended December 31, 2017, 2016 and 2015. The Company recognizes
revenue for delivered elements when they have stand-alone value to the customer, they have been accepted by the customer,
and for which there are only customary refund or return rights. Arrangement consideration is allocated to the deliverables by
use of the relative selling price method. The selling price used for each deliverable is based on vendor-specific objective
evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated selling price if neither
39
VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used to establish the price to
sell the deliverable on a standalone basis.
For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical
evidence indicates the costs are incurred on other than a straight-line basis.
Revenue of approximately $21.0 million, $20.7 million and $17.2 million for the years ended December 31, 2017, 2016 and
2015, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of
accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to
the estimated total contract costs. The Company makes significant estimates involving its usage of percentage-of-completion
accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion,
and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is
reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause
the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross
profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods.
For contracts with anticipated losses at completion, a charge is taken against income for the amount of the entire loss in the
period in which it is estimated.
Cost of Products Sold, Engineering and Development and Selling, General and Administrative Expenses
Cost of products sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead
as well as all engineering and developmental costs. The Company is engaged in a variety of engineering and design activities as
well as basic research and development activities directed to the substantial improvement or new application of the Company’s
existing technologies. These costs are expensed when incurred and included in cost of products sold. Research and
development, design and related engineering amounted to $95.0 million in 2017, $88.9 million in 2016 and $90.3 million in
2015. Selling, general and administrative (“SG&A”) expenses include costs primarily related to our sales, marketing and
administrative departments. Interest expense is shown net of interest income. Interest income was insignificant for the years
ended December 31, 2017, 2016 and 2015.
Shipping and Handling
Shipping and handling costs are expensed as incurred and are included in costs of products sold.
Equity-Based Compensation
The Company accounts for its stock options following Accounting Standards Codification (“ASC”) Topic 718, Compensation –
Stock Compensation (“ASC Topic 718”). This Topic requires all equity-based payments to employees, including grants of
employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award. For
awards with graded vesting, the Company uses a straight-line method of attributing the value of stock-based compensation
expense, subject to minimum levels of expense, based on vesting.
Under ASC Topic 718, stock compensation expense recognized during the period is based on the value of the portion of share-
based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers
and key employees. In general, options granted to outside directors vest six months from the date of grant and options granted
to officers and key employees vest with graded vesting over a five-year period, 20% each year, from the date of grant.
Cash and Cash Equivalents
All highly liquid instruments with a maturity of three months or less at the time of purchase are considered cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are composed of trade and contract receivables recorded at either the invoiced amount or costs in excess of
billings, are expected to be collected within one year, and do not bear interest. The Company will record a valuation allowance
to account for potentially uncollectible accounts receivable. The allowance is determined based on our knowledge of the
business, specific customers, review of the receivables’ aging and a specific identification of accounts where collection is at
risk. Account balances are charged against the allowance after all means of collections have been exhausted and recovery is
considered remote. The Company typically does not require collateral.
40
Inventories
We record our inventories at the lower of cost or net realizable value. We determine the cost basis of our inventory on a first-in,
first-out or weighted average basis using a standard cost methodology that approximates actual cost. The Company records
valuation reserves to provide for excess, slow moving or obsolete inventory. In determining the appropriate reserve, the
Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as
reserving for specifically identified inventory that the Company believes is no longer salable.
Precontract Costs
The Company may, from time to time, incur costs in excess of the amounts required for existing contracts. If it is determined
the costs are probable of recovery from future orders, the precontract costs incurred are capitalized, excluding start-up costs
which are expensed as incurred. Capitalized precontract 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. Included in inventories at December 31, 2017 are capitalized precontract costs of $7.0 million.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed using the straight-line method for financial reporting purposes and
using accelerated methods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 25-40 years;
machinery and equipment, 4-10 years. Leased buildings and associated leasehold improvements are amortized over the shorter
of the terms of the lease or the estimated useful lives of the assets, with the amortization of such assets included within
depreciation expense.
The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts
and the resulting gain or loss, as well as maintenance and repair expenses, is reflected within operating income. Replacements
and improvements are capitalized.
Depreciation expense was approximately $14.1 million, $14.3 million and $13.3 million in 2017, 2016 and 2015, respectively.
Buildings acquired under capital leases amounted to $10.3 million ($15.5 million, net of $5.2 million of accumulated
amortization) and $10.5 million ($14.3 million, net of $3.8 million accumulated amortization) at December 31, 2017 and 2016,
respectively. Future minimum lease payments associated with these capital leases are expected to be $2.7 million in 2018, $2.0
million in 2019, $2.1 million in 2020, $2.2 million in 2021 and $0.9 million in 2022.
Long-Lived Assets
Long-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for
recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable.
Impairments are recognized if future undiscounted cash flows from operations are not expected to be sufficient to recover long-
lived assets. The carrying amounts are then reduced to fair value, which is typically determined by using a discounted cash flow
model.
Goodwill
The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The
Company has twelve reporting units, however only nine reporting units have goodwill and were subject to the goodwill
impairment test as of the first day of our fourth quarter.
We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or
selected reporting units. If, after completing the assessment, it is determined that it is more likely than not that the fair value of
a reporting unit is less than its carrying value, we proceed to a quantitative test. We may also elect to perform a quantitative test
instead of a qualitative test for any or all of our reporting units.
Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We use the discounted
cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various
assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth
rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is
41
considered impaired and any loss must be measured. We adopted ASU No. 2017-04 on January 1, 2017. Accordingly, 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 this assessment, the Company recorded an impairment charge of approximately $16.2 million in the December
31, 2017 consolidated statement of operations associated to the Armstrong reporting unit. The impairment loss was incurred in
the Aerospace segment and is reported on the Impairment Loss line of the Consolidated Statements of Operations. There were
no impairment charges in 2016 or 2015. None of this loss related to goodwill is immediately deductible for tax purposes. The
majority of goodwill is expensed over 15 years for tax purposes.
Intangible Assets
Acquired intangibles are generally valued based upon future economic benefits such as earnings and cash flows. Acquired
identifiable intangible assets are recorded at fair value and are amortized over their estimated useful lives. Acquired intangible
assets with an indefinite life are not amortized, but are reviewed for impairment at least annually or more frequently whenever
events or changes in circumstances indicate that the carrying amounts of those assets are below their estimated fair values.
Impairment is tested under ASC Topic 350, Intangibles - Goodwill and Other, as amended by Accounting Standards Update
(“ASU”) 2012-2, by first performing a qualitative analysis in a manner similar to the testing methodology of goodwill
discussed previously. The qualitative factors applied under this new provision indicated no impairment to the Company’s
indefinite lived intangible assets in 2017, 2016 or 2015.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable,
notes payable and long-term debt. The Company performs periodic credit evaluations of its customers’ financial condition and
generally does not require collateral. The Company does not hold or issue financial instruments for trading purposes. Due to
their short-term nature, the carrying values of cash and equivalents, accounts receivable, accounts payable, and notes payable
approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair
value due to the variable rate feature of these instruments.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent liabilities and the reported amounts of revenues and expenses during the reporting periods in the financial
statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
The Company accounts for its foreign currency translation in accordance with ASC Topic 830, Foreign Currency Translation.
The aggregate transaction gain included in operations was insignificant in 2017 and 2016, and $1.0 million in 2015.
Dividends
The Company has not paid any cash dividends in the three-year period ended December 31, 2017.
Loss Contingencies
Loss contingencies may from time to time arise from situations such as claims and other legal actions. Loss contingencies are
recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable.
Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time periods. In recording liabilities for probable losses, management is
required to make estimates and judgments regarding the amount or range of the probable loss. Management continually
assesses the adequacy of estimated loss contingencies and, if necessary, adjusts the amounts recorded as better information
becomes known.
42
Acquisitions
The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations ("ASC Topic
805"). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred,
identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination.
ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations. See
Note 18 regarding the acquisitions in 2017 and 2015.
Newly Adopted and Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606"), that, together with
several subsequent updates, outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance. Topic 606 is based on the principle that an
entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also provides for
enhanced disclosure requirements surrounding revenue recognition beginning with the reporting period ending March 31, 2018
and we are currently preparing our responsive disclosures.
Revenue on a significant portion of our contracts is currently recognized at the time of shipment of goods, transfer of title and
customer acceptance, as required. Our revenue transactions generally consist of a single performance obligation to transfer
promised goods and are not accounted for under industry-specific guidance. We have obtained an understanding of the new
standard and currently believe that we will retain much of the same accounting treatment used to recognize revenue under
current standards. However, the adoption of this guidance will require us to accelerate the recognition of revenue as compared
to current standards, for certain customers, in cases where we produce products unique to those customers; and for which we
would have an enforceable right of payment for production completed to date.
We have evaluated the impact of ASU No. 2014-09 on our financial results and will adopt this standard using the modified
retrospective method, which requires the recognition of the cumulative effect of the transition as an adjustment to retained earnings
for open contracts as of January 1, 2018. Based on the application of the changes described above, we expect to recognize a
transition adjustment of no more than $10 million, net of tax effects, which will increase our January 1, 2018 retained earnings.
Based on our existing operations, ASU No. 2014-09 is not expected to have a material impact to net earnings for the year ended
December 31, 2018.
In February 2016, the FASB issued ASU No. 2016 - 02, Leases. The new standard is effective for reporting periods beginning
after December 15, 2018. Early adoption is permitted. The standard will require lessees to report most leases as assets and
liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified
retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. The
Company is currently evaluating the impact of ASU 2016-02 on our financial statements.
On January 1, 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.
Prospectively, beginning January 1, 2017, excess tax benefits/deficiencies are reflected as income tax benefit/expense in the
statement of income, resulting in a $0.5 million tax benefit for the year ended December 31, 2017. The extent of excess tax
benefits/deficiencies is subject to variation in the Company’s stock price and timing/extent of employee stock option exercises.
Under previous accounting guidance, when a share-based payment award such as a stock option was granted to an employee,
the fair value of the award was generally recognized over the vesting period. However, the related deduction from taxes
payable was based on the award’s intrinsic value at the time of exercise, which could be either greater (creating an excess tax
benefit) or less (creating a tax deficiency) than the compensation cost recognized in the financial statements. Excess tax
benefits were recognized in additional paid-in capital (“APIC”) within equity, while deficiencies were first recorded to APIC to
the extent previously recognized excess tax benefits existed, after which time deficiencies were recorded to income tax
expense. The Company’s adoption of this ASU also resulted in associated excess tax benefits being classified as an operating
activity in the same manner as other cash flows related to income taxes in the statement of cash flows prospectively beginning
January 1, 2017. Based on the adoption methodology applied, the statement of cash flows classification of prior periods has not
changed. As permitted by the ASU, the Company has elected to account for forfeitures as they occur. None of the other
provisions in this amended guidance had a significant impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is
intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement
of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon
bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance
43
claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts
and payments that have aspects of more than one class of cash flows. The Company early adopted ASU No. 2016-15 as of
January 1, 2017. There were no changes in classification to prior periods presented, and thus no impact was reflected in the
Company’s consolidated results of operations and financial condition presented.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing
definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an
acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of
the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of
transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to
include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard
also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals
and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. This ASU is effective for
fiscal years beginning after December 15, 2017 on a prospective basis with early adoption permitted. The Company would
apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard,
goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to
exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill
impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all
of its assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective
prospectively to annual and interim impairment tests beginning after December 15, 2019, with early adoption permitted. The
Company early adopted ASU 2017-04 on January 1, 2017. Accordingly, any goodwill impairment losses from that date forward
are measured under the provisions of ASU 2017-04.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other
postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only the
service cost component of net periodic benefit cost would be included in operating expenses. All other net periodic benefit
costs components (such as interest cost, prior service cost amortization and actuarial gain/loss amortization) would be reported
outside of operating income. This ASU is effective January 1, 2018 on a retrospective basis. The components of the Company’s
net periodic defined benefit pension and postretirement benefit costs are presented in Note 10. These include components
totaling $1.7 million, $1.7 million and $1.9 million, for the years ended December 31, 2017, 2016, and 2015, respectively, that
would no longer be included within operating expenses and instead would be reported outside of income from operations under
the new standard.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms
or conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for
modifications of share-based payment awards is to record the incremental value arising from the changes as additional
compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this
modification model. This ASU is effective January 1, 2018, with early adoption permitted. Because the Company does not
typically make changes to the terms or conditions of its issued share-based payment awards, this ASU is not expected to have a
material impact on its consolidated results of operations and financial condition.
NOTE 2 — ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of:
(In thousands)
Trade Accounts Receivable
Unbilled Recoverable Costs and Accrued Profits
Total Receivables
Less Allowance for Doubtful Accounts
2017
114,461 $
19,132
133,593
(960 )
132,633 $
2016
93,823
16,194
110,017
(602 )
109,415
$
$
44
NOTE 3 — INVENTORIES
Inventories at December 31 are as follows:
(In thousands)
Finished Goods
Work in Progress
Raw Material
2017
2016
$
$
35,193 $
33,219
81,784
150,196 $
28,792
20,790
67,015
116,597
At December 31, 2017, the Company’s reserve for inventory valuation was $18.0 million, or 10.7% of gross inventory. At
December 31, 2016, the Company’s reserve for inventory valuation was $15.4 million, or 11.7% of gross inventory.
NOTE 4 — INTANGIBLE ASSETS
The following table summarizes acquired intangible assets as follows:
December 31, 2017
December 31, 2016
(In thousands)
Patents
Non-compete Agreement
Trade Names
Completed and Unpatented Technology
Backlog
Customer Relationships
Total Intangible Assets
Weighted
Average Life
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
11 Years $
4 Years
10 Years
10 Years
2 Years
16 Years
13 Years $
2,146 $
10,900
11,492
38,114
14,424
137,967
215,043 $
1,629 $
1,687
4,114
11,931
12,184
30,005
61,550 $
Accumulated
Amortization
1,450
979
3,153
9,221
11,224
23,093
49,120
2,146 $
2,500
10,189
24,118
11,224
97,046
147,223 $
Amortization is computed on the straight-line method for financial reporting purposes, with the exception of backlog, which is
amortized based on the expected realization period of the acquired backlog. Amortization expense for intangibles was $12.3
million, $10.8 million and $11.3 million for 2017, 2016 and 2015, respectively.
Based upon acquired intangible assets at December 31, 2017, amortization expense for each of the next five years is estimated
to be:
(In thousands)
2018
2019
2020
2021
2022
$
$
$
$
$
19,354
16,700
15,975
14,065
13,631
45
NOTE 5 — GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for 2017 and 2016:
(In thousands)
Balance at Beginning of the Year
Acquisition
Impairment Charge
Foreign Currency Translations and Other
Balance at End of the Year
Goodwill - Gross
Accumulated Impairment Losses
Goodwill - Net
2017
115,207 $
25,740
(16,237 )
935
125,645 $
158,424 $
(32,779 )
125,645 $
2016
115,369
—
—
(162 )
115,207
131,749
(16,542 )
115,207
$
$
$
$
As discussed in Note 1, goodwill is not amortized but is periodically tested for impairment. For the nine reporting units with
goodwill on the first day of our fourth quarter, the Company performed a quantitative assessment of the goodwill’s carrying
value. As a result of this assessment, the Company recorded an impairment charge of approximately $16.2 million in the
December 31, 2017 consolidated statement of operations associated to the Armstrong reporting unit, which represented all of
Armstrong's goodwill. The impairment loss was incurred in the Aerospace segment and is reported on the Impairment Loss line
of the Consolidated Statements of Operations. There was no impairment to the carrying value of goodwill in 2016 or 2015. All
goodwill relates to the Aerospace segment.
NOTE 6 — LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
(In thousands)
Revolving Credit Line issued under the Fourth Amended and Restated Credit Agreement
dated September 26, 2014. Interest is at LIBOR plus between 1.375% and 2.25% (3.30% at
December 31, 2017).
Other Bank Debt
Capital Lease Obligations
Less Current Maturities
2017
2016
$
262,000
$
136,000
807
8,960
271,767
2,689
269,078 $
1,270
10,850
148,120
2,636
145,484
$
Principal maturities of long-term debt are approximately:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
$
$
2,689
1,957
2,142
2,066
913
262,000
271,767
The Company's Fourth Amended and Restated Credit Agreement (the “Original Facility”) provided for a $350 million
revolving credit line with the option to increase the line by up to $150 million. The maturity date of the loans under the Original
Facility was September 26, 2019.
On January 13, 2016, the Company amended the Original Facility to add a new lender and extend the maturity date of the
credit facility from September 26, 2019 to January 13, 2021.
46
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.5 to 1,
increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. 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 1.375% and 2.25% based upon the Company’s leverage ratio. The Company paid a commitment fee to the Lenders in
an amount equal to between 0.175% and 0.35% on the undrawn portion of the credit facility, based upon the Company’s
leverage ratio. The Company was required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest
expense) of 3.0 to 1 for the term of the Agreement.
On February 16, 2018, the Company modified and extended the Original Facility by entering into the Fifth Amended and
Restated Credit Agreement (the "Agreement"), which provides for a $500 million revolving credit line with the option to
increase the line by up to $150 million. A new lender was added to the facility as well. The outstanding balances in the original
Facility were rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February
16, 2023. The credit facility allocates up to $20 million of the $500 million revolving credit line for the issuance of letters of
credit, including certain existing letters of credit. At December 31, 2017, outstanding letters of credit totaled $1.1 million. At
December 31, 2017, there was $262.0 million outstanding on the revolving credit facility and there remains $236.9 million
available, net of outstanding letters of credit.
Covenants in the Agreement have been modified to where the maximum permitted leverage ratio is 3.75 to 1 beginning with
quarters ended on or after December 31, 2017. However, the Company may elect to exercise its right to increase this ratio to
4.50 to 1 or up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to
limitations. 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% of the undrawn portion of the credit facility,
based upon the Company's leverage ratio. The Company’s leverage ratio was 2.91 to 1 at December 31, 2017. The Company is
in compliance with all financial and other covenants at December 31, 2017. The requirement to maintain a minimum interest
coverage ratio has been eliminated.
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic
subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on
substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts
owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make
payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount,
and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
NOTE 7 — WARRANTY
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship
typically over periods ranging from twelve to sixty months. The Company determines warranty reserves needed by product line
based on experience and current facts and circumstances. Activity in the warranty accrual, which is included in other accrued
expenses on the Consolidated Balance Sheets, is summarized as follows:
(In thousands)
Balance at Beginning of the Year
Warranty Liabilities Acquired
Warranties Issued
Reassessed Warranty Exposure
Warranties Settled
Balance at End of the Year
NOTE 8 — INCOME TAXES
2017
2016
2015
4,675 $
511
1,782
540
(2,372 )
5,136 $
5,741 $
—
2,281
(966 )
(2,381 )
4,675 $
4,884
500
4,039
(485 )
(3,197 )
5,741
$
$
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a
valuation allowance for the amount of tax benefits which are not expected to be realized. Investment tax credits are recognized
on the flow through method.
47
The provision (benefit) for income taxes consists of the following:
(In thousands)
Current
U.S. Federal
State
Foreign
Deferred
U.S. Federal
State
Foreign
2017
2016
2015
$
$
8,436 $
2,054
316
(3,850 )
(326 )
(1,318 )
5,312 $
21,667 $
2,899
551
(2,871 )
(1,140 )
(745 )
20,361 $
24,809
2,382
137
703
(1,019 )
64
27,076
The effective tax rates differ from the statutory federal income tax rate as follows:
Statutory Federal Income Tax Rate
Permanent Items
Non-deductible Stock Compensation Expense
Domestic Production Activity Deduction
Other
Foreign Tax Benefits
State Income Tax, Net of Federal Income Tax Effect
Research and Development Tax Credits
Tax Expense on Deemed Repatriation of Foreign Earnings
Revaluation of Deferred Taxes for Federal Tax Rate Change
Other
Effective Tax Rate
2017
2016
2015
35.0 %
35.0 %
35.0 %
1.1 %
(4.7 )%
0.5 %
(5.6 )%
4.5 %
(11.5 )%
5.6 %
(3.5 )%
(0.1 )%
21.3 %
1.1 %
(3.3 )%
0.2 %
(1.1 )%
1.8 %
(3.7 )%
— %
— %
(0.4 )%
29.6 %
0.6 %
(2.9 )%
0.2 %
(1.1 )%
0.9 %
(2.7 )%
— %
— %
(1.2 )%
28.8 %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
48
Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows:
(In thousands)
Deferred Tax Assets:
Asset Reserves
Deferred Compensation
Capital Lease Basis Difference
State Investment and Research and Development Tax Credit Carryforwards, Net of
Federal Tax
Customer Advanced Payments and Deferred Revenue
State Net Operating Loss Carryforwards and Other
Total Gross Deferred Tax Assets
Valuation Allowance for Foreign Tax Credit, State Deferred Tax Assets and Tax Credit
Carryforwards, Net of Federal Tax
Deferred Tax Assets
Deferred Tax Liabilities:
Depreciation
Goodwill and Intangible Assets
Other
Deferred Tax Liabilities
Net Deferred Tax Liabilities
2017
2016
$
5,615 $
6,091
1,002
1,379
1,007
8,115
23,209
(7,823 )
15,386
9,267
7,275
1,149
17,691
(2,305 ) $
$
9,208
8,378
1,690
665
3,750
4,282
27,973
(3,816 )
24,157
12,972
18,558
1,280
32,810
(8,653 )
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
(In thousands)
Other Assets — Long-term
Deferred Tax Liabilities — Long-term
Net Deferred Tax Liabilities
2017
2016
2,816 $
(5,121 )
(2,305 ) $
2,644
(11,297 )
(8,653 )
$
$
At December 31, 2017, state tax credit carryforwards amounted to approximately $1.8 million, of which $0.9 million will
expire from 2017 through 2031 and $0.9 million will carryforward until utilized. At December 31, 2017, state net operating loss
carryforwards which the Company expects to utilize amounted to approximately $13.6 million and expire at various dates
between 2032 and 2037.
Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future and utilize
certain of the Company’s state operating loss carryforwards before they expire, the Company has recorded a valuation
allowance accordingly. These state net operating loss carryforwards amount to approximately $79.9 million and expire at
various dates from 2021 through 2037. The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based
Payment Accounting during 2017 and beginning with 2017 the excess tax benefits associated with stock option exercises are no
longer recorded directly to shareholders’ equity, but rather, are recorded in the provision for income taxes, when realized. A
$0.5 million benefit was recorded in the provision for incomes taxes for the year ended December 31, 2017. Amounts recorded
directly to shareholders’ equity amounted to approximately $0.8 million and $3.0 million for the years ended December 31,
2016, and 2015 respectively.
At December 31, 2017, estimated foreign tax credit carryforwards, which the Company expects not to utilize, amounted to
approximately $0.3 million. Due to the uncertainty as to the Company’s ability to generate any general limitation foreign
source income in the future and utilize these foreign tax credits, the Company has recorded a valuation allowance accordingly.
The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax
returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax
benefits, any interest associated with that liability would be recorded as interest expense. Penalties, if any, would be recorded as
operating expenses. As of December 31, 2017, we no longer have any unrecognized tax benefits. Reserves for uncertain tax
positions that had been recorded pursuant to ASC Topic 740-10 as of December 31, 2014 were reversed during the year-ended
December 31, 2015. No additional reserves for uncertain income tax positions were deemed necessary for the years ended
49
December 31, 2017 or 2016. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties
which are insignificant, is as follows:
(in thousands)
Balance at Beginning of the Year
Decreases as a Result of Tax Positions Taken in Prior Years
Increases as a Result of Tax Positions Taken in the Current Year
Balance at End of the Year
2017
2016
2015
— $
—
—
— $
— $
—
—
— $
181
(181 )
—
—
$
$
There are no penalties or interest liabilities accrued as of December 31, 2017 or 2016, nor are any material penalties or interest
costs included in expense for each of the years ended December 31, 2017, 2016 and 2015. The years under which we conducted
our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions,
those being 2014 through 2017 for federal purposes and 2013 through 2017 for state purposes.
Pretax income from the Company’s foreign subsidiaries amounted to $1.1 million, $1.6 million and $3.6 million for 2017, 2016
and 2015, respectively. The balance of pretax earnings for each of those years were domestic.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation
significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax
system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Cuts and Jobs Act
permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act, the
Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $0.9 million tax
benefit in the Company’s consolidated statement of income for the year ended December 31, 2017.
The Tax Cuts and Jobs Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign
subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had an estimated $10.3
million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $1.4 million of
income tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. After the
utilization of existing tax credits, the Company expects to pay additional U.S. federal cash taxes of approximately $1.3 million
on the deemed mandatory repatriation, payable over eight years. In addition, the Company expects to pay additional State cash
taxes of approximately $0.1 million on the deemed mandatory repatriation. No additional provision for U.S. federal or foreign
taxes has been made as the foreign subsidiaries’ undistributed earnings are considered to be permanently reinvested. It is not
practicable to determine the amount of other taxes that would be payable if these amounts were repatriated to the U.S.
While the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base
erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax
(“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an
allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax
on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has
elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of
GILTI in its consolidated financial statements for the year ended December 31, 2017.
The BEAT provisions in the Tax Cuts and Jobs Act eliminates the deduction of certain base-erosion payments made to related
foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to
this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended
December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The
50
Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax
assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017.
The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional
analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued,
and actions the Company may take as a result of the Tax Cuts and Jobs Act. The accounting is expected to be complete when
the 2017 U.S. corporate income tax return is filed in 2018.
NOTE 9 — PROFIT SHARING/401(k) PLAN
The Company offers eligible domestic full-time employees participation in certain profit sharing/401(k) plans. The plans
provide for a discretionary annual company contribution. In addition, employees may contribute a portion of their salary to the
plans which is partially matched by the Company. The plans may be amended or terminated at any time.
Total charges to income before income taxes for these plans were approximately $7.4 million, $6.7 million and $6.3 million in
2017, 2016 and 2015, respectively.
NOTE 10 — RETIREMENT PLANS AND RELATED POST RETIREMENT BENEFITS
The Company has two non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain current
and retired executive officers. The accumulated benefit obligation of the plans as of December 31, 2017 and 2016 amounts to
$22.7 million and $18.6 million, respectively.
The Plans provide for benefits based upon average annual compensation and years of service and in the case of SERP, there are
offsets for social security and profit sharing benefits. It is the Company’s intent to fund the plans as plan benefits become
payable, since no assets exist at December 31, 2017 or 2016 for either of the plans.
The Company accounts for the funded status (i.e., the difference between the fair value of plan assets and the projected benefit
obligations) of its pension plans in accordance with the recognition and disclosure provisions of ASC Topic 715,
Compensation, Retirement Benefits, which requires the Company to recognize the funded status in its balance sheet, with a
corresponding adjustment to AOCI, net of tax. These amounts will be subsequently recognized as net periodic pension cost
pursuant to the Company’s historical policy for amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component
of AOCI. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the
amounts recognized in AOCI.
Unrecognized prior service costs of $2.3 million ($3.5 million net of $1.2 million in taxes) and unrecognized actuarial losses of
$6.0 million ($8.6 million net of $2.6 million in taxes) are included in AOCI at December 31, 2017 and have not yet been
recognized in net periodic pension cost. The prior service cost included in AOCI that is expected to be recognized in net
periodic pension cost during the fiscal year-ended December 31, 2018 is $0.3 million ($0.4 million net of $0.1 million in taxes).
The actuarial loss included in AOCI expected to be recognized in net periodic pension cost during the fiscal year-ended
December 31, 2017 is $0.4 million ($0.6 million net of $0.2 million in taxes).
The reconciliation of the beginning and ending balances of the projected benefit obligation of the plans for the years ended
December 31 is as follows:
(In thousands)
Funded Status
Projected Benefit Obligation
Beginning of the Year — January 1
Service Cost
Interest Cost
Actuarial Loss
Benefits Paid
End of the Year — December 31
2017
2016
$
$
21,533 $
186
897
2,873
(348 )
25,141 $
20,418
173
901
389
(348 )
21,533
51
The assumptions used to calculate the projected benefit obligation as of December 31 are as follows:
Discount Rate
Future Average Compensation Increases
2017
3.60%
2016
4.20%
2.00% – 3.00%
3.00% – 5.00%
The plans are unfunded at December 31, 2017 and are recognized in the accompanying Consolidated Balance Sheets as a
current accrued pension liability of $0.3 million and a long-term accrued pension liability of $24.8 million. This also is the
expected future contribution to the plan, since the plan is unfunded.
The following table summarizes the components of the net periodic cost for the years ended December 31:
(In thousands)
Net Periodic Cost
Service Cost — Benefits Earned During Period
Interest Cost
Amortization of Prior Service Cost
Amortization of Losses
Net Periodic Cost
2017
2016
2015
$
$
186 $
897
387
369
1,839 $
173 $
901
413
343
1,830 $
194
843
495
449
1,981
The assumptions used to determine the net periodic cost are as follows:
Discount Rate
Future Average Compensation Increases
2017
4.20%
2016
4.45%
3.00% – 5.00% 3.00% – 5.00%
2015
4.05%
5.00%
The Company expects the benefits to be paid in each of the next five years to be $0.3 million and $2.8 million in the aggregate
for the next five years after that. This also is the expected Company contribution to the plans.
Participants in SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan.
The measurement date for determining the plan obligation and cost is December 31.
The reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation for the years
ended December 31, is as follows:
(In thousands)
Funded Status
Accumulated Postretirement Benefit Obligation
Beginning of the Year — January 1
Service Cost
Interest Cost
Actuarial (Gain) Loss
Benefits Paid
End of the Year — December 31
2017
2016
$
$
1,021 $
7
41
307
(69 )
1,307 $
925
5
40
112
(61 )
1,021
The assumptions used to calculate the accumulated post-retirement benefit obligation as of December 31 are as follows:
Discount Rate
2017
3.60%
2016
4.20%
52
The following table summarizes the components of the net periodic cost for the years ended December 31:
(In thousands)
Net Periodic Cost
Service Cost — Benefits Earned During Period
Interest Cost
Amortization of Prior Service Cost
Amortization of Losses
Net Periodic Cost
2017
2016
2015
$
$
7 $
41
16
31
95 $
5 $
40
24
22
91 $
6
39
26
26
97
The assumptions used to determine the net periodic cost are as follows:
Discount Rate
Future Average Healthcare Benefit Increases
2017
4.20%
5.50%
2016
4.45%
5.72%
2015
4.05%
5.32%
Unrecognized prior service costs of $0.1 million and unrecognized actuarial losses of $0.5 million for medical, dental and long-
term care insurance benefits (net of taxes of $0.2 million) are included in AOCI at December 31, 2017 and have not been
recognized in net periodic cost. The Company estimates that the prior service costs and net losses in AOCI as of December 31,
2017 that will be recognized as components of net periodic benefit cost during the year ended December 31, 2018 for the Plan
will be insignificant. For measurement purposes, a 6.2% increase in the cost of health care benefits was assumed for 2018 and
2019, respectively, and a range between 4.2% and 6.2% from 2019 through 2070. A one percentage point increase or decrease
in this rate would change the post retirement benefit obligation by approximately $0.1 million. The plan is recognized in the
accompanying Consolidated Balance Sheets as a current accrued pension liability of less than $0.1 million and a long-term
accrued pension liability of $1.2 million. The Company expects the benefits to be paid in each of the next five years to be less
than $0.1 million per year and approximately $0.3 million in the aggregate for the next five years after that. This also is the
expected Company contribution to the plan, as it is unfunded.
The Company is a participating employer in a trustee-managed multiemployer defined benefit pension plan for employees who
participate in collective bargaining agreements. The plan generally provides retirement benefits to employees based on years of
service to the Company. Contributions are based on the hours worked and are expensed on a current basis. The Plan is 91.2%
funded as of January 1, 2017. The Company’s contributions to the plan were $1.1 million in 2017, $1.1 million in 2016 and
$1.0 million in 2015. These contributions represent less than 1% of total contributions to the plan.
NOTE 11 — SHAREHOLDERS’ EQUITY
Share Buyback Program
On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the
“Buyback Program”). The Buyback Program allows the Company to purchase shares of its common stock in accordance with
applicable securities laws on the open market or through privately negotiated transactions. The Company has repurchased
approximately 1,675,000 shares and has completed that program. On December 12, 2017, the Company’s Board of Directors
authorized an additional repurchase of up to $50 million of common stock. No amounts have been repurchased under the new
program as of December 31, 2017.
Reserved Common Stock
At December 31, 2017, approximately 10.5 million shares of common stock were reserved for issuance upon conversion of the
Class B stock, exercise of stock options and purchases under the Employee Stock Purchase Plan. Class B Stock is identical to
Common Stock, except Class B Stock has ten votes per share, is automatically converted to Common Stock on a one-for-one
basis when sold or transferred other than via gift, devise or bequest and cannot receive dividends unless an equal or greater
amount of dividends is declared on Common Stock.
Comprehensive Income and Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and the after-tax impact of retirement liability adjustments. No income tax effect
is recorded for currency translation adjustments.
53
The components of accumulated other comprehensive income (loss) are as follows:
(In thousands)
Foreign Currency Translation Adjustments
Retirement Liability Adjustment – Before Tax
Tax Benefit
Retirement Liability Adjustment – After Tax
Accumulated Other Comprehensive Loss
The components of other comprehensive income (loss) are as follows:
(In thousands)
Foreign Currency Translation Adjustments
Retirement Liability Adjustment
Tax Benefit (Expense)
Retirement Liability Adjustment
Other Comprehensive Income (Loss)
NOTE 12 — EARNINGS PER SHARE
Earnings per share computations are based upon the following table:
(In thousands, except per share data)
Net Income
Basic Earnings Weighted Average Shares
Net Effect of Dilutive Stock Options
Diluted Earnings Weighted Average Shares
Basic Earnings Per Share
Diluted Earnings Per Share
2017
2016
$
(4,465 ) $
(12,988 )
4,101
(8,887 )
$
(13,352 ) $
(8,597 )
(10,611 )
3,714
(6,897 )
(15,494 )
2017
2016
2015
4,132 $
(2,377 )
387
(1,990 )
2,142 $
(626 ) $
301
(105 )
196
(430 ) $
(4,617 )
2,311
(809 )
1,502
(3,115 )
2017
2016
2015
19,679 $
28,586
734
29,320
0.69 $
0.67 $
48,424 $
29,163
869
30,032
1.66 $
1.61 $
66,974
29,245
934
30,179
2.29
2.22
$
$
$
$
$
Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from
the computation of diluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-
dilutive. The number of common shares excluded from the computation was approximately 0.1 million for the year ended
December 31, 2017, 0.2 million for the year ended December 31, 2016, and 0.1 million for the year ended December 31, 2015.
NOTE 13 — STOCK OPTION AND PURCHASE PLANS
The Company has stock option plans that authorize the issuance of options for shares of Common Stock to directors, officers
and key employees. Stock option grants are designed to reward long-term contributions to the Company and provide incentives
for recipients to remain with the Company. The exercise price, determined by a committee of the Board of Directors, may not
be less than the fair market value of the Common Stock on the grant date. Options become exercisable over periods not
exceeding ten years. The Company’s practice has been to issue new shares upon the exercise of the options.
Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In
general, options granted to outside directors vest six months from the date of grant and options granted to officers and key
employees straight line vest over a five-year period from the date of grant.
Weighted Average Fair Value of the Options Granted
2017
2016
2015
$
17.60 $
16.85 $
18.00
54
The weighted average fair value for these options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Risk-free Interest Rate
Dividend Yield
Volatility Factor
Expected Life in Years
2017
2016
2.05% – 2.36% 1.08% – 2.34% 1.36% – 2.10%
2015
—%
—%
—%
0.40 – 0.41
0.40 – 0.45
0.40 – 0.51
5.0 – 8.0
4.0 – 8.0
4.0 – 8.0
To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock
and considers currently available information to determine if future volatility is expected to differ over the expected terms of
the options granted. The risk-free rate is based on the U.S. Treasury yield curve at the time of grant for the appropriate term of
the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected
term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.
The following table provides compensation expense information based on the fair value of stock options for the years ended
December 31, 2017, 2016 and 2015:
(In thousands)
Stock Compensation Expense
Tax Benefit
Stock Compensation Expense, Net of Tax
2017
2016
2015
2,598 $
(140 )
2,458 $
2,281 $
(145 )
2,136 $
2,274
(177 )
2,097
$
$
A summary of the Company’s stock option activity and related information for the years ended December 31 is as follows:
(Aggregate intrinsic value in
thousands)
Outstanding at January 1
Options Granted
Options Exercised
Options Forfeited
Outstanding at December 31
Exercisable at December 31
2017
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
35,630
315
(3,467 )
(225 )
32,253
31,177
14.85 $
38.41 $
11.24 $
27.91 $
16.85 $
12.84 $
Options
1,338,273 $
103,140 $
(114,699 ) $
(16,624 ) $
1,310,090 $
1,088,970 $
1,444,954 $
104,900 $
(188,768 ) $
(22,813 ) $
1,338,273 $
1,091,561 $
2016
Weighted
Average
Exercise
Price
Options
2015
Weighted
Average
Exercise
Price
Options
Aggregate
Intrinsic
Value
30,675
(48 )
(5,029 )
(180 )
25,418
24,898
12.61 $
34.29 $
7.20 $
25.96 $
14.85 $
11.03 $
1,686,178 $
105,742 $
(346,966 ) $
— $
1,444,954 $
1,167,040 $
Aggregate
Intrinsic
Value
43,778
(42 )
(10,808 )
—
32,928
30,576
9.43 $
35.80 $
4.25 $
— $
12.61 $
9.20 $
The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the
Company’s closing stock price of Common Stock which would have been received by the option holders had all option holders
exercised their options as of that date. The Company’s closing stock price of Common Stock was $41.47, $33.84 and $35.40 as
of December 31, 2017, 2016 and 2015, respectively.
The weighted average fair value of options vested during 2017, 2016 and 2015 was $14.25, $12.05 and $10.85, respectively.
The total fair value of options that vested during the year amounted to $1.6 million, $1.4 million and $1.5 million for the years
ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, total compensation costs related to non-vested
awards not yet recognized amounts to $4.8 million and will be recognized over a weighted average period of 2.3 years.
55
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock
options as of December 31, 2017:
Outstanding
Exercisable
Exercise Price Range
$ 3.07 - $ 3.67
$ 6.35 - $ 6.35
$ 8.83 - $15.68
$ 26.09 - $41.19
$ 52.77 - $52.77
Shares
470,757
15,055
374,619
429,819
19,840
1,310,090
Weighted Averag
e
Remaining Life
in Years
Weighted
Average
Exercise Price
Shares
3.29
470,757
6.35
15,055
11.52
374,619
35.06
208,699
19,840
52.77
16.85 1,088,970
Weighted Averag
e
Remaining Life
in Years
Weighted
Average
Exercise Price
3.29
6.35
11.52
33.41
52.77
12.84
1.5 $
0.2 $
4.0 $
7.4 $
7.2 $
3.6 $
1.5 $
0.2 $
4.0 $
8.0 $
7.2 $
4.4 $
The Company established Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key
employees, and to align management’s interest with those of the shareholders. Generally, the options must be exercised within
ten years from the grant date and vest ratably over a five-year period. The exercise price for the options is equal to the share
price at the date of grant. At December 31, 2017, the Company had options outstanding for 1,034,898 shares under the plans.
The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of
experienced and knowledgeable outside directors, and to align their interest with those of the shareholders. The options must be
exercised within ten years from the grant date. The exercise price for the option is equal to the share price at the date of grant
and vests six months from the grant date. At December 31, 2017, the Company had options outstanding for 204,052 shares
under the plans.
During 2017, the Company established the Long Term Incentive Plan for the purpose of attracting and retaining executive
officers and key employees, and to align management's interest with those of the shareholders. The Plan contemplates the use
of a mix of equity award types, and contains, with certain exceptions, a minimum three-year pro-rata vesting schedule for time-
based awards. For stock options, the exercise price is equal to the share price on the date of grant. Upon inception, the
remaining options available for future grant under the 2011 Incentive Stock Option Plan and the Directors Stock Option Plans
were rolled in the Long Term Incentive Plan, and no further grants may be made out of those plans. At December 31, 2017, the
Company had stock options outstanding of 71,140 shares under the Long Term Incentive Plan, and there were 1,685,899 shares
available for future grant under this plan.
In addition to the options discussed above, the Company has established the Employee Stock Purchase Plan to encourage
employees to invest in Astronics Corporation. The plan provides employees the opportunity to invest up to the IRS annual
maximum of approximately $21,250 in Astronics common stock at a price equal to 85% of the fair market value of the
Astronics common stock, determined each October 1. Employees are allowed to enroll annually. Employees indicate the
number of shares they wish to obtain through the program and their intention to pay for the shares through payroll deductions
over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annual cycle, and all
money withheld from the employees pay is returned with interest. If an employee remains enrolled in the program, enough
money will have been withheld from the employees’ pay during the year to pay for all the shares that the employee opted for
under the program. At December 31, 2017, employees had subscribed to purchase 129,798 shares at $25.63 per share. The
weighted average fair value of the options was approximately $5.92, $9.88 and $6.93 for options granted during the year ended
December 31, 2017, 2016 and 2015, respectively.
The fair value for the options granted under the Employee Stock Purchase Plan was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average assumptions:
Risk-free Interest Rate
Dividend Yield
Volatility Factor
Expected Life in Years
2017
2016
2015
1.31 %
0.63 %
0.31 %
— %
0.26
1.0
— %
0.45
1.0
— %
0.40
1.0
56
NOTE 14 — FAIR VALUE
ASC Topic 820, Fair value Measurements and Disclosures, (“ASC Topic 820”) defines fair value, establishes a framework for
measuring fair value and expands the related disclosure requirements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value
measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC Topic 820 defines
fair value based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or liability.
ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for
the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the
financial instrument.
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair
value.
On a Recurring Basis:
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant
to the fair value measurement. The financial liabilities carried at fair value measured on a recurring basis consisted of
contingent consideration related to certain prior acquisitions, valued at zero at December 31, 2016. The values were
determined using Level 3 inputs. There are no financial liabilities carried at fair value measured on a recurring basis at
December 31, 2017.
There were no financial assets carried at fair value measured on a recurring basis at December 31, 2017 or 2016. The amounts
recorded for the contingent considerations were calculated using an estimate of the probability of the future cash outflows. The
varying contingent payments were then discounted to the present value utilizing a discounted cash flow methodology. The
contingent consideration liabilities had no observable Level 1 or Level 2 inputs. The change in the balance of contingent
consideration during fiscal 2015 was primarily due to fair value adjustments of $1.8 million resulting from the re-evaluation of
the probability of the achievement of the contingent consideration targets. This adjustment was recorded within SG&A
expenses in the Consolidated Statements of Operations.
On a Non-recurring Basis:
In accordance with the provisions of ASC Topic 350, Intangibles – Goodwill and Other, the Company estimates the fair value
of reporting units, utilizing unobservable Level 3 inputs. Level 3 inputs require significant management judgment due to the
absence of quoted market prices or observable inputs for assets of a similar nature. The Company utilizes a discounted cash
flow method to estimate the fair value of reporting units utilizing unobservable inputs. The fair value measurement of the
reporting unit under the step-one and step-two analysis of the quantitative goodwill impairment test are classified as Level 3
inputs. As a result of the annual goodwill impairment test for 2017, the Company recorded an impairment charge of $16.2
million related to the Armstrong reporting unit. Due to the adoption of ASU No. 2017-04 on January 1, 2017, the goodwill
impairment was calculated as the amount by which the reporting unit's carrying value exceeded its fair value, not to exceed the
carrying value of goodwill. There were no impairment charges to goodwill in any of the Company’s reporting units in 2016 or
2015.
Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the
carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows
with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be
recognized to the extent the carrying amount exceeds fair value. There were no impairment charges to any of the Company’s
long-lived assets in either of the Company’s segments in 2017, 2016 or 2015.
The Armstrong, CCC, and CSC intangible assets were valued using a discounted cash flow methodology, as of their respective
acquisitions dates, and are classified as Level 3 inputs.
57
Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes
payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also
approximates fair value due to the variable rate feature of these instruments.
NOTE 15 — SELECTED QUARTERLY FINANCIAL INFORMATION
The following table summarizes selected quarterly financial information for 2017 and 2016:
Quarter Ended
(Unaudited)
Dec. 31, Sep. 30,
July 1, April 1, Dec. 31, Oct. 1,
July 2,
April 2,
(In thousands, except for per share data)
2017
2017
2017
2017
2016
2016
2016
2016
Sales
Gross Profit (sales less cost of products sold) $
Impairment Loss
(Loss) Income Before Income Taxes
Net (Loss) Income
Basic Earnings (Loss) Per Share
Diluted Earnings (Loss) Per Share
$
— $
$ 171,318 $ 149,636 $ 151,114 $ 152,396 $ 154,068 $ 155,099 $ 164,426 $ 159,530
44,835 $ 39,483
—
21,555 $ 16,512
11,485
14,980 $
0.39
0.51 $
0.38
0.50 $
32,153 $ 32,493 $ 34,150 $ 38,317 $ 36,486 $ 38,663 $
— $
16,237 $
8,646 $ 10,569 $ 15,491 $ 14,296 $ 16,422 $
(9,715 ) $
9,885 $ 12,074 $
6,060 $
0.42 $
0.34 $
0.21 $
0.41 $
0.33 $
0.21 $
7,685 $ 11,587 $
0.40 $
0.27 $
0.38 $
0.26 $
(5,653 ) $
(0.20 ) $
(0.20 ) $
— $
— $
— $
— $
$
$
$
$
NOTE 16 — COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under various lease contracts with terms that meet the accounting
definition of operating leases. These arrangements may include fair value renewal or purchase options. Rental expense for the
years ended December 31, 2017, 2016 and 2015 was $3.5 million, $3.9 million and $2.9 million, respectively. The following
table represents future minimum lease payment commitments as of December 31, 2017:
(In thousands)
2018
2019
2020
2021
2022
$
$
4,141
2,194
530
115
—
6,980
From time to time the Company may enter into purchase agreements with suppliers under which there is a commitment to buy
a minimum amount of product. Purchase commitments outstanding at December 31, 2017 were $178.1 million. These
commitments are not reflected as liabilities in the Company’s Consolidated Balance Sheets.
Legal Proceedings
On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of
Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES sold, marketed and brought into use in Germany a
power supply system that infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring
AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold
to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of
damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of
infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The
judgment does not require AES to recall products that are already installed in aircraft or have been sold to other end users. On
July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required
AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate
of requested damages. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company
may be required to offer a recall of products that are in the distribution channels in Germany. No such bank guarantee has been
issued to date. As of December 31, 2017 , there are no products in the distribution channels in Germany.
58
The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Court issued its ruling and
upheld the lower court’s decision. The Company has submitted a petition to grant AES leave for appeal to the Federal Supreme
Court. The Company believes it has valid defenses to refute the decision. Should the Federal Supreme Court decide to hear the
case, the appeal process is estimated to extend up to two years. We estimate AES’s potential exposure related to this matter to
be approximately $1 million to $3 million. As loss exposure is not probable at this time, the Company has not recorded any
liability with respect to this litigation as of December 31, 2017.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington.
Lufthansa’s complaint in this action alleges that AES manufactures, uses, sells and offers for sale a power supply system that
infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that
involved in the German action. On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole
independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a
motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and
unenforceable. On July 20, 2016, the U.S. District Court granted the motion for summary judgment and issued an order
dismissing all claims against AES with prejudice. Lufthansa appealed the District Court's decision to the United States Court of
Appeals for the Federal Circuit. On October 19, 2017, the Federal Circuit affirmed the District Court's decision, holding that
the sole independent claim of the patent is indefinite, rendering all claims on the patent indefinite. Lufthansa did not file a
petition for en banc rehearing or petition the U.S. Supreme Court for a writ of certiorari. Therefore, there is no longer a risk of
exposure from that lawsuit.
In December 2017, Lufthansa filed patent infringement cases in the United Kingdom and in France against AES. AES has been
served in the case in France, but not in the case in the United Kingdom. In those cases, Lufthansa accuses AES of
manufacturing, using, selling and offering for sale a power supply system that infringes upon a Lufthansa patent in those
respective countries. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability
with respect to this litigation as of December 31, 2017.
59
NOTE 17 — SEGMENTS
Segment information and reconciliations to consolidated amounts for the years ended December 31 are as follows:
(In thousands)
Sales:
Aerospace
Less Inter-segment Sales
Total Aerospace Sales
Test Systems
Less Inter-segment Sales
Test Systems
Total Consolidated Sales
Operating Profit and Margins:
Aerospace
Test Systems
Total Operating Profit
Deductions from Operating Profit:
Interest Expense, Net of Interest Income
Corporate and Other Expenses, Net
Income before Income Taxes
Depreciation and Amortization:
Aerospace
Test Systems
Corporate
Total Depreciation and Amortization
Assets:
Aerospace
Test Systems
Corporate
Total Assets
Capital Expenditures:
Aerospace
Test Systems
Corporate
Total Capital Expenditures
2017
2016
2015
$
534,724
$
534,408
$
(121 )
534,603
(367 )
534,041
89,861
—
89,861
624,464
$
99,082
—
99,082
633,123
$
549,738
—
549,738
142,596
(55 )
142,541
692,279
$
$
$
$
$
$
$
$
$
$
$
38,888
$
77,966
$
85,103
7.3 %
7,359
8.2 %
14.6 %
8,507
8.6 %
15.5 %
25,529
17.9 %
46,247
$
86,473
$
110,632
7.4 %
13.7 %
16.0 %
(5,369 ) $
(4,354 ) $
(4,751 )
(15,887 )
24,991
$
(13,334 )
68,785
$
(11,831 )
94,050
22,111
4,302
650
27,063
621,047
90,859
24,050
735,956
10,656
2,721
101
13,478
$
$
$
$
$
$
19,873
5,273
644
25,790
500,892
76,575
26,877
604,344
9,511
3,345
181
13,037
$
$
$
$
$
$
19,377
5,209
723
25,309
510,884
64,934
33,425
609,243
16,503
2,103
35
18,641
Operating profit is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate
expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment.
For the years ended December 31, 2017, there was a goodwill impairment loss of $16.2 million recorded in the Aerospace
segment. In 2016 and 2015, there was no goodwill or purchased intangible asset impairment losses in either the Aerospace or
Test System segment. In the Aerospace segment, goodwill amounted to $125.6 million and $115.2 million at December 31,
2017 and 2016, respectively. In the Test Systems segment, there was no goodwill as of December 31, 2017 and 2016.
60
The following table summarizes the Company’s sales into the following geographic regions for the years ended December 31:
(In thousands)
United States
North America (excluding United States)
Asia
Europe
South America
Other
2017
2016
2015
$
$
482,219 $
6,198
58,732
73,677
1,280
2,358
624,464 $
504,270 $
12,331
52,171
61,200
577
2,574
633,123 $
508,724
13,044
108,967
57,936
1,112
2,496
692,279
The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31:
(In thousands)
United States
France
Canada
2017
2016
2015
$
$
116,026 $
9,094
710
125,830 $
114,048 $
8,216
548
122,812 $
115,117
9,092
533
124,742
Sales recorded by the Company’s foreign operations were $53.9 million, $50.1 million and $50.8 million in 2017, 2016 and
2015, respectively. Net income from these locations was $2.2 million, $1.8 million and $3.4 million in 2017, 2016 and 2015,
respectively. Net assets held outside of the U.S. total $47.4 million and $36.8 million at December 31, 2017 and 2016,
respectively. The exchange gain included in determining net income was insignificant in 2017 and 2016. Cumulative translation
adjustments amounted to $(4.5) million and $(8.6) million at December 31, 2017 and 2016, respectively.
The Company has a significant concentration of business with two major customers; Panasonic Aviation Corporation
(“Panasonic”) and The Boeing Company (“Boeing”). The following is information relating to the activity with those customers:
Percent of Consolidated Revenue
Panasonic
Boeing
(In thousands)
Accounts Receivable at December 31,
Panasonic
Boeing
2017
2016
2015
19.1%
16.8%
21.6%
15.2%
21.0%
13.0%
2017
2016
$
$
10,200 $
12,969 $
17,126
11,737
Sales to Panasonic are in the Aerospace segment. Sales to Boeing occur in both segments.
NOTE 18 — ACQUISITIONS
Astronics Connectivity Systems and Certification Corp.
On December 1 2017, Astronics completed the acquisition of substantially all of the assets and liabilities of Telefonix Inc.,
including 100% of the stock of a related company, Product Development Technologies, LLC and its subsidiaries. The
combined group designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry
leading design consultancy services for the global aerospace industry. The company’s products include wireless access points,
file servers, content loaders, passenger control units and cord reels, as well as engineering services for its customers. We
purchased the assets of these companies for approximately $103.8 million, net of $0.2 million in cash acquired. The acquired
companies are included in our Aerospace reporting segment.
61
The allocation of the purchase price paid for CSC is based on fair values of the acquired assets and liabilities assumed of CSC
as of December 1, 2017.
The preliminary allocation of purchase price based on appraised fair values was as follows (in thousands):
Cash
Accounts Receivable
Inventory
Other Current Assets
Fixed Assets
Other Long Term Assets
Purchased Intangible Assets
Goodwill
Accounts Payable, Accrued Expenses, and Other Current Liabilities
Total Purchase Price
The preliminary amounts allocated to the purchased intangible assets consist of the following:
(In thousands)
Trademark
Technology
Backlog
Non-compete Agreements
Customer Relationships/Backlog
$
$
Weighted
Average Life
9 Years
9 Years
0.4 Years
3 - 5 years
15 Years
213
9,300
12,558
274
1,434
50
62,200
23,397
(5,372 )
104,054
Acquisition
Fair Value
1,000
12,000
2,800
8,400
38,000
62,200
$
$
Goodwill and other intangible assets reflected above were determined to meet the criterion for recognition apart from tangible
assets acquired and liabilities assumed. The goodwill is primarily attributable to expected synergies and the assembled
workforce. All of the goodwill and purchased intangible assets are expected to be deductible for tax purposes over 15 years.
The following is a summary of the sales and amounts included in income from operations for CSC included in the consolidated
financial statements of the Company from the date of acquisition to December 31, 2017 (in thousands):
Sales
Operating Loss
$
$
6,174
(499 )
The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with
those of CSC as if the acquisition took place on January 1, 2017. The pro forma consolidated results include the impact of
certain adjustments, including increased interest expense on acquisition debt, amortization of purchased intangible assets and
income taxes.
UNAUDITED
(in thousands, except earnings per share)
Sales
Net income
Basic earnings per share
Diluted earnings per share
$
$
$
$
2016
2017
683,541 $ 686,143
41,672
18,302
$
1.43
0.64
1.39
0.62
$
$
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect
for the year ended December 31, 2017 and 2016. In addition, they are not intended to be a projection of future results.
62
Astronics Custom Control Concepts, Inc.
On April 3, 2017, Astronics Custom Control Concepts Inc., a wholly owned subsidiary of the Company acquired substantially
all the assets and certain liabilities of Custom Control Concepts LLC (“CCC”), located in Kent, Washington. CCC is a provider
of cabin management and in-flight entertainment systems for a range of aircraft. The total consideration for the transaction was
approximately $10.2 million, net of $0.5 million in cash acquired. All of the goodwill and purchased intangible assets are
expected to be deductible for tax purposes over 15 years. CCC is included in our Aerospace segment. The purchase price
allocation for this acquisition has been finalized.
Armstrong Aerospace, Inc.
On January 14, 2015, the Company purchased 100% of the equity of Armstrong for $52.3 million in cash. Armstrong, located
in Itasca, Illinois, is a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in
connectivity, in-flight entertainment, and electrical power systems. Armstrong is included in our Aerospace segment. This
transaction was not considered material to the Company’s financial position or results of operations. All of the goodwill and
purchased intangible assets are expected to be deductible for tax purposes over 15 years. The purchase price allocation for this
acquisition has been finalized.
Acquisition costs are expensed as incurred. Acquisition related expenses were approximately $0.3 million in 2017, insignificant
in 2016, and $0.4 million in 2015.
63
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of Company Management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of
the end of the period covered by this report, to ensure that information required to be disclosed in reports filed or submitted
under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are
effective to ensure such information is recorded, processed, summarized and reported within the time periods specified in the
Commission’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
See the report appearing under Item 8, Financial Statements and Supplemental Data, Managements Report on Internal Control
Over Financial Reporting.
Remediation of Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness that we previously reported was identified as of December 31,
2016 related to the design of information technology change controls over a report writing application. Additionally,
management identified deficiencies in certain review controls over the financial statement consolidation process, which when
aggregated along with the information technology change controls matter described above, aggregated to a material weakness
over the financial statement close process as of December 31, 2016.
The Company has implemented changes to the design and application of new controls and has made significant changes to the
design of existing controls over information technology as well as controls related to the financial statement consolidation
process. During the fourth quarter of fiscal 2017, we successfully completed the testing necessary to conclude that the material
weaknesses have been remediated.
Changes in Internal Control over Financial Reporting
We have taken actions to remediate the material weaknesses related to our internal control over financial reporting, as described
in Remediation of Material Weaknesses above. Other than remediation of the material weaknesses referenced above, there have
been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None
64
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding directors is contained under the captions “Election of Directors” and “Security Ownership of Certain
Beneficial Owners and Management” and is incorporated herein by reference to the 2018 Proxy to be filed within 120 days of
the end of our fiscal year is incorporated herein by reference.
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, are as follows:
Name and Age of Executive Officer
Peter J. Gundermann
Age 55
David C. Burney
Age 55
Mark A. Peabody
Age 58
James S. Kramer
Age 54
Positions and Offices with Astronics
President, Chief Executive Officer and Director of
the Company
Executive Vice President, Secretary and Chief
Financial Officer of the Company
Astronics Advanced Electronic Systems President
and Executive Vice President of Astronics
Corporation
Luminescent Systems Inc. President and Executive
Vice President of Astronics Corporation
Year First
Elected Officer
2001
2003
2010
2010
The principal occupation and employment for all executives listed above for the past five years has been with the Company.
The Company has adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, Chief Financial
Officer as well as other directors, officers and employees of the Company. This Code of Business Conduct and Ethics is
available upon request without charge by contacting Astronics Corporation, Investor Relations at (716) 805-1599. The Code of
Business Conduct and Ethics is also available on the Investors section of the Company’s website at www.astronics.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information contained under the caption “Executive Compensation” and “Summary Compensation Table” in the
Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by
reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the captions “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” and “Executive Compensation” in the Company’s definitive Proxy Statement to be filed within 120 days
of the end of our fiscal year is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information contained under the captions “Certain Relationships and Related Transactions and Director Independence” and
“Proposal One: Election of Directors” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of
our fiscal year is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the caption “Audit and Non-Audit Fees” in the Company’s definitive Proxy Statement to be
filed within 120 days of the end of our fiscal year is incorporated herein by reference.
65
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The documents filed as a part of this report are as follows:
PART IV
1.
The following financial statements are included:
(i)
(ii)
(iii)
(iv)
(v)
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017,
2016 and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016
and 2015
(vi)
Notes to Consolidated Financial Statements
(vii)
Reports of Independent Registered Public Accounting Firm
(viii) Management’s Report on Internal Control Over Financial Reporting
2.
Financial Statement Schedule
Schedule II. Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted because they are inapplicable, not required, or the
information is included elsewhere in the consolidated financial statements or the notes thereto.
3.
Exhibits
66
Exhibit
No.
3 (a)
(b)
(c)
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15
Description
Restated Certificate of Incorporation, incorporated by reference to the registrant’s 2013 Annual Report on
Form 10-K, Exhibit 3(a), filed March 7, 2014 (File No. 000-07087).
By-Laws, as amended, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K,
Exhibit 3(b), filed March 11, 2009 (File No. 000-07087).
Certificate of Amendment of the Certificate of Incorporation of Astronics Corporation, incorporated by
reference to the registrant’s Form 8-K, Exhibit 3.1, filed July 1, 2016 (File No. 000-07087).
Restated Thrift and Profit Sharing Retirement Plan, incorporated by reference to the registrant’s 2010
Annual Report on Form 10-K, Exhibit 10.1, filed March 3, 2011 (File No. 000-07087).
2001 Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K,
Exhibit 10.4, filed March 3, 2011 (File No. 000-07087).
Non-Qualified Supplemental Retirement Plan, incorporated by reference to the registrant’s 2010 Annual
Report on Form 10-K, Exhibit 10.5, filed March 3, 2011 (File No. 000-07087).
Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation
and Peter J. Gundermann, President and Chief Executive Officer of Astronics Corporation, incorporated by
reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.6, filed March 3, 2011 (File No.
000-07087).
Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation
and David C. Burney, Vice President and Chief Financial Officer of Astronics Corporation, incorporated by
reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.7, filed March 3, 2011 (File No.
000-07087).
2005 Director Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on
Form 10-K, Exhibit 10.8, filed March 3, 2011 (File No. 000-07087).
Supplemental Retirement Plan, Amended and Restated, March 6, 2012, incorporated by reference to the
registrant’s 2012 Annual Report on Form 10-K, Exhibit 10.10, filed February 22, 2013 (File No. 000-
07087).
First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between
Astronics Corporation and Peter J. Gundermann, President and Chief Executive Officer of Astronics,
incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 10.11, filed March
11, 2009 (File No. 000-07087).
First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between
Astronics Corporation and David C. Burney, Vice President and Chief Financial Officer of Astronics
Corporation, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit
10.12, filed March 11, 2009 (File No. 000-07087).
Employment Termination Benefits Agreement Dated February 18, 2005 between Astronics Corporation
and Mark A. Peabody, Executive Vice President of Astronics Advanced Electronic Systems, Inc.,
incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.13, filed
March 3, 2011 (File No. 000-07087).
First Amendment of the Employment Termination Benefits Agreement dated December 31, 2008 between
Astronics Corporation and Mark A. Peabody, Executive Vice President of Astronics Advanced Electronic
Systems, Inc., incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit
10.14, filed March 3, 2011 (File No. 000-07087).
Form of Indemnification Agreement as executed by each of Astronics Corporation’s Directors and
Executive Officers, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K,
Exhibit 10.15, filed March 3, 2011 (File No. 000-07087).
2011 Employee Stock Option Plan, incorporated by reference to the registrant’s Form S-8, Exhibit 4.1 filed
on August 4, 2011 (File No. 000-07087).
Supplemental Retirement Plan II, incorporated by reference to the registrant’s 2012 Annual Report on
Form 10-K, Exhibit 10.18, filed February 22, 2013 (File No. 000-07087).
Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the
Company, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed May 29, 2013 (File
No. 000-07087).
67
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24*
10.25
10.26
10.27
21**
23**
31.1**
31.2**
32**
Amendment to the Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the
shareholders of the Company, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed
July 19, 2013 (File No. 000-07087).
Asset Purchase Agreement by and among Astronics AS Corporation, AeroSat Corporation, AeroSat
Airborne Internet LLC, AeroSat Avionics, LLC and AeroSat Tech Licensing, LLC, incorporated by
reference to the registrant’s Form 8-K, Exhibit 10.1, filed October 1, 2013 (File No. 000-07087).
Sale Agreement relating to PGA Electronic, incorporated by reference to the registrant’s Form 8-K, Exhibit
10.1, filed November 5, 2013 (File No. 000-07087).
Guarantee Agreement relating to PGA Electronic, incorporated by reference to the registrant’s Form 8-K,
Exhibit 10.2, filed November 5, 2013 (File No. 000-07087).
Purchase Agreement between EADS North America Inc. and Astronics Corporation dated as of January 20,
2014, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1 filed January 21, 2014 (File No.
000-07087).
Fourth Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC
Bank USA, National Association, Bank of America, N.A. and Manufacturers and Traders Trust Company,
incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed September 26, 2014 (File No.
000-07087).
Stock Purchase Agreement between Planesite Holdings Inc., the shareholders of Planesite, Robert
Abbinante and Astronics Corporation dated as of December 23, 2014, incorporated by reference to the
registrant’s Form 8-K, Exhibit 10.1 filed December 24, 2014 (File No. 000-07087).
Amendment No.1 to the Fourth Amended and Restated Credit Agreement entered into by and among
Astronics Corporation, HSBC Bank USA, National Association, Bank of America, N.A., Manufacturers
and Traders Trust Company and Wells Fargo Bank, incorporated by reference to the registrant's Form 8-K,
Exhibit 10.1, filed January 15, 2016 (File No. 000-07087).
Astronics Corporation 2017 Long Term Incentive Plan (incorporated by reference as Exhibit A to the
Registrant’s Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 17,
2017).
Asset Purchase Agreement dated as of March 16, 2017 by and between UJB Acquisition Corp. and Custom
Control Concepts LLC filed as Exhibit 10.1 on Form 8-K filed on April 6, 2017 (File No. 000-07087).
Asset Purchase Agreement entered as of October 26, 2017, by and among Talon Acquisition
Corp., Telefonix, Incorporated, Product Development Technologies, LLC, and Paul Burke filed as
Exhibit 10.1 on Form 8-K filed on October 27, 2017 (File No. 000-07087).
Fifth Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC
Bank USA, National Association, HSBC Securities (USA) Inc. and Merrill Lynch, Pierce, Fenner & Smith
Inc., and Suntrust Bank, filed as Exhibit 10.1 on Form 8-K filed on February 21, 2018 (File No. 000-
07087).
Subsidiaries of the Registrant; filed herewith.
Consent of Independent Registered Public Accounting Firm; filed herewith.
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002; filed herewith.
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002; filed herewith.
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002; filed herewith.
101.INS**
XBRL Instance Document
68
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
*
Identifies a management contract or compensatory plan or arrangement as required by Item 15(a) (3) of Form 10-K.
**
Submitted electronically herewith
69
SCHEDULE II
Valuation and Qualifying Accounts
Description
Balance at the
Beginning of
Period
Additions Charged to
Cost and Expense
Write-
Offs/Other
Balance at
End of
Period
Year
(In thousands)
2017
Allowance for Doubtful Accounts
Reserve for Inventory Valuation
Deferred Tax Valuation Allowance
2016
2015
Allowance for Doubtful Accounts
Reserve for Inventory Valuation
Deferred Tax Valuation Allowance
Allowance for Doubtful Accounts
Reserve for Inventory Valuation
Deferred Tax Valuation Allowance
$
$
$
602 $
15,410
3,816
312 $
14,594
2,640
293 $
12,276
3,134
87 $
2,885
4,007
388 $
2,015
1,176
68 $
3,120
—
271 $
(282 )
—
(98 ) $
(1,199 )
—
(49 ) $
(802 )
(494 )
960
18,013
7,823
602
15,410
3,816
312
14,594
2,640
70
ITEM 16.
FORM 10-K SUMMARY
None.
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned; thereunto duly authorized, on February 28, 2018.
SIGNATURES
Astronics Corporation
By
/s/ Peter J. Gundermann
By
/s/ David C. Burney
Peter J. Gundermann President and Chief Executive
Officer
David C. Burney, Executive Vice President, Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Peter J. Gundermann
Peter J. Gundermann
/s/ David C. Burney
David C. Burney
/s/ Nancy L. Hedges
Nancy L. Hedges
/s/ Raymond W. Boushie
Raymond W. Boushie
/s/ Robert T. Brady
Robert T. Brady
/s/ John B. Drenning
John B. Drenning
/s/ Peter J. Gundermann
Peter J. Gundermann
/s/ Kevin T. Keane
Kevin T. Keane
/s/ Robert J. McKenna
Robert J. McKenna
/s/ Jeffry D. Frisby
Jeffry D. Frisby
/s/ Warren C. Johnson
Warren C. Johnson
/s/ Neil Kim
Neil Kim
President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2018
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
February 28, 2018
Corporate Controller and Principal Accounting Officer
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
72
EXHIBIT 21
ASTRONICS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Subsidiary
Astronics Test Systems, Inc.
Astronics DME LLC
Astronics AeroSat Corporation
Luminescent Systems, Inc.
Astronics Air, LLC
Max-Viz, Inc.
Peco, Inc.
Ballard Technology, Inc.
Astronics Advanced Electronic Systems Corp.
LSI - Europe B.V.B.A.
Luminescent Systems Canada, Inc.
PGA Electronic s.a.
Astronics France
Astronics Air II LLC
Armstrong Aerospace, Inc.
Astronics Custom Controls Concepts Inc.
Astronics Connectivity Systems and Certification Corp.
Astronics Europe
Product Development Technologies (UK) Limited
PJSC PDT Ukraine
Huizhou Telefonix Co., Ltd.
Alliance Technology HK Limited
Ownership Percentage
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
State (Province), Country of Incorporation
Delaware, USA
Florida, USA
New Hampshire, USA
New York, USA
New York, USA
Oregon, USA
Oregon, USA
Washington, USA
Washington, USA
Belgium
Quebec, Canada
France
France
New Hampshire, USA
Illinois, USA
Washington, USA
Illinois, USA
France
United Kingdom
Ukraine
China
Hong Kong
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(a) Registration Statements (Form S-8 No. 333-139292, Form S-8 No. 333-87463) pertaining to the Astronics Corporation
Employee Stock Purchase Plan,
(b) Registration Statement (Form S-8 No. 333-127137) pertaining to the Astronics Corporation 2005 Director Stock Option Plan,
(c) Registration Statement (Form S-8 No. 33-65141) pertaining to the 1993 Director Stock Option Plan,
(d) Registration Statement (Form S-8 No. 333-143564) pertaining to the Astronics Corporation 2001 Stock Option Plan,
(e) Registration Statement (Form S-8 No. 333-176044) pertaining to the Astronics Corporation 2011 Employee Stock Option
Plan, and
(f) Registration Statement (Form S-8 No. 333-222010) pertaining to the Astronics Corporation 2017 Long Term Incentive Plan;
of our reports dated February 28, 2018 with respect to the consolidated financial statements and schedule of Astronics Corporation and
the effectiveness of internal control over financial reporting of Astronics Corporation included in this Annual Report (Form 10-K) of
Astronics Corporation for the year ended December 31, 2017.
/s/ Ernst & Young LLP
Buffalo, New York
February 28, 2018
Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2001
I, Peter J. Gundermann, President and Chief Executive Officer, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of the Astronics Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2018
/s/ Peter J. Gundermann
Peter J. Gundermann
Chief Executive Officer
Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2001
I, David C. Burney, Executive Vice President and Chief Financial Officer, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of the Astronics Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2018
/s/ David C. Burney
David C. Burney
Chief Financial Officer
Exhibit 32
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, the undersigned
officers of Astronics Corporation (the “Company”) hereby certify that:
The Company’s Annual Report on Form 10-K for the year ended December 31, 2017 fully complies with the requirements of
section 13(a) or 15(d) of the Securities and Exchange Act of 1934 and the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 28, 2018
Dated: February 28, 2018
/s/ Peter J. Gundermann
Peter J. Gundermann
Title: Chief Executive Officer
/s/ David C. Burney
David C. Burney
Title: Chief Financial Officer
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), or otherwise subject to the liability of that section. This certification shall not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent specifically incorporated by the Company into such filing.
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SHAREHOLDER INFORMATION
DIRECTORS AND OFFICERS
Corporate Headquarters
EXECUTIVE LEADERSHIP
Astronics Corporation
130 Commerce Way
East Aurora, New York 14052
716.805.1599
www.astronics.com
2018 Annual Meeting
Astronics Corporation’s Annual Meeting of Shareholders
will be held at 10:00 am CT on Thursday, May 31, 2018 at
Astronics Connectivity Systems and Certification Corp.
PDT Design Services
One Corporate Drive, Suite 110
Lake Zurich, IL 60047
Investor Relations
Peter J. Gundermann
President and Chief Executive Officer, Astronics Corporation
David C. Burney
Executive Vice President, Secretary and Chief Financial Officer,
Astronics Corporation
James S. Kramer
Executive Vice President, Astronics Corporation
President, Luminescent Systems, Inc.
Michael C. Kuehn
President, Astronics Connectivity Systems and Certification
Corporation
James F. Mulato
President, Astronics Test Systems, Inc.
Investors, stockbrokers, security analysts and others
seeking information about Astronics Corporation should
contact:
Mark A. Peabody
Executive Vice President, Astronics Corporation
President, Astronics Advanced Electronic Systems Corporation
David C. Burney
Chief Financial Officer
716.805.1599
invest@astronics.com
Deborah K. Pawlowski
Kei Advisors LLC
716.843.3908
dpawlowski@keiadvisors.com
Transfer Agent
For services, such as reporting a change of address,
replacement of lost stock certificates, conversion of
Class B shares, changes in registered ownership, or
for inquiries about your account, contact:
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Tel: 800.468.9716
651.450.4064
www.shareowneronline.com
Attorneys
Hodgson Russ LLP
Buffalo, New York
Independent Auditors
Ernst & Young LLP
Buffalo, New York
BOARD OF DIRECTORS
Kevin T. Keane
Chairman of the Board, Astronics Corporation
Raymond W. Boushie 1, 2*, 3
President and Chief Executive Officer, retired,
Crane Aerospace and Electronics
Robert T. Brady 1*, 2, 3
Chief Executive Officer and Executive Chairman of the Board,
retired, Moog Inc.
John B. Drenning 3
Partner, Hodgson Russ LLP
Jeffry D. Frisby 1, 2, 3
Former President and Chief Executive Officer
Triumph Group, Inc.
Peter J. Gundermann
President and Chief Executive Officer, Astronics Corporation
Warren C. Johnson 1, 2, 3
President, retired, Aircraft Group for Moog, Inc.
Neil Kim 1, 2, 3
Executive Vice President and Chief Technology Officer,
Marvell Technology Group Ltd.
Robert J. McKenna 1, 2, 3*
President and Chief Executive Officer, retired
Wenger Corporation
1 Audit Committee
2 Compensation Committee
3 Nominating/Governance Committee
* Committee Chairman
NASDAQ: ATRO
130 Commerce Way ● East Aurora, New York 14052 ● 716.805.1599
www.astronics.com