Astronics (ATRO) - 2019 Q4 - Annual Report

Part I Business Overview Astronics Corporation is a global supplier of advanced technologies for aerospace and defense, encompassing diverse products and strategic activities Company Profile and Operations Astronics Corporation is a leading global supplier of advanced aerospace and defense technologies, operating across North America, Europe, and Asia - Astronics Corporation is a leading global supplier of advanced technologies and products for the aerospace and defense industries[7] - Key products include power generation and distribution systems, seat motion solutions, lighting and safety systems, avionics, aircraft structures, system certification, and automated test systems[7] - The company operates primarily in the United States, Canada, France, and the United Kingdom, with engineering offices in Ukraine and India[8] Strategic Activities: Acquisitions & Divestitures In 2019, the company strategically acquired Freedom Communication Technologies and Diagnosys Test Systems while divesting non-core semiconductor test and airport lighting businesses - On July 1, 2019, the company acquired Freedom Communication Technologies, Inc., a leader in wireless communication testing, for $21.8 million (net of $0.6 million cash), integrating it into the Test Systems segment[9] - On October 4, 2019, the company acquired Diagnosys Test Systems Limited, specializing in automated test equipment for global public transit and defense markets, for $7.0 million cash and $2.5 million contingent consideration (up to $13.0 million based on new orders over three years)[10] - On February 13, 2019, the company divested its non-core semiconductor test business for $103.8 million in total proceeds, recording an $80.1 million pre-tax gain and $19.7 million in income tax expense[11] - On July 12, 2019, the company sold intellectual property and assets related to its airport lighting product line for $1.0 million cash, recording an approximate $1.3 million pre-tax loss[13] Products, Customers, and Markets Astronics' Aerospace segment serves global aerospace and defense, with 76% of 2019 sales from commercial transport, while the Test Systems segment provides automated test solutions, facing significant customer concentration with Boeing and Panasonic Avionics - The Aerospace segment's product lines include lighting and safety systems, power generation, distribution and motion systems, aircraft structures, avionics, and system certification[14] 2019 Aerospace Segment Sales Market Distribution | Market Type | Sales Percentage | | :----------------- | :--------------- | | Commercial Transport | 76% | | Military Aircraft | 11% | | Business Jet | 10% | | Other Markets | 3% | - The Test Systems segment provides automated test systems for aerospace, communication, and weapon test systems, as well as commercial and military applications[16] Key Customer Sales Percentage | Customer Name | 2019 Sales Percentage | | :----------------- | :-------------------- | | Boeing Company | 13.6% | | Panasonic Avionics | 13.0% | Business Strategy and Competitive Landscape The company's strategy is to enhance technology and capabilities through internal development or acquisitions, providing innovative solutions for aerospace, defense, and other markets, while navigating intense competition - The company's strategy is to enhance technology and capabilities through internal development or acquisitions, offering innovative solutions for aerospace, defense, and other markets[19] - The company faces intense competition, primarily in product performance and pricing, with many competitors being larger and more resourceful[21] - Success relies on product innovation, customer support, responsiveness, and cost management, with continuous investment in technology development and engineering support[21] Operational Details Approximately 13% of consolidated sales derive from military aviation and test systems, subject to government contract termination risks, with diversified raw material supply, no significant seasonality, and a year-end 2019 backlog of $359.6 million - Approximately 13% of consolidated sales come from military aviation and military test systems markets, with all US government contracts subject to termination by the government[22] - Raw material supply is diversified, ensuring that the loss of a single source would not significantly impact long-term operations; the business is not seasonal[23] Consolidated Backlog (million USD) | Date | Amount (million USD) | | :------------- | :------------------- | | Dec 31, 2019 | 359.6 | | Dec 31, 2018 | 415.5 | | Dec 31, 2018 (excluding divested business) | 403.3 | - The company holds multiple patents, with a high reliance on patent protection for cabin power distribution products[25] Research and Development and Engineering Expenses (million USD) | Year | Amount (million USD) | | :--- | :------------------- | | 2019 | 108.9 | | 2018 | 114.3 | | 2017 | 95.0 | - As of December 31, 2019, the company had approximately 2,800 employees[27] Available Information The company files financial information and other materials with the SEC, accessible via www.sec.gov and www.astronics.com - The company files financial information and other materials with the SEC, accessible via www.sec.gov and **www.astronics.com**[28](index=28&type=chunk) Risk Factors The company faces multiple risks including customer concentration, asset impairment, market cyclicality, competitive pressures, acquisition integration, legal and regulatory challenges, financial and debt-related issues, and external shocks Customer Concentration Risk The company faces significant customer concentration risk with Boeing and Panasonic Avionics, where losing either would severely impact sales and profitability Key Customer Sales Percentage | Customer Name | 2019 Sales Percentage | | :----------------- | :-------------------- | | Boeing Company | 13.6% | | Panasonic Avionics | 13.0% | - Losing Boeing or Panasonic Avionics as major customers, or a significant reduction in business with them, would substantially decrease the company's sales and earnings[29] Boeing 737 MAX Grounding Impact The ongoing grounding of the Boeing 737 MAX negatively impacted the company's 2019 fiscal year production rates, affecting OEM content and aftermarket business - The grounding of the Boeing 737 MAX aircraft led to lower-than-expected production rates in fiscal year 2019, impacting the company's OEM content and aftermarket business[30] - A prolonged or permanent grounding could significantly reduce Aerospace segment sales, materially adversely affecting business, financial condition, operating results, and cash flows[30] Asset Impairment Risks The company faces risks of goodwill and other intangible asset impairment, which could adversely affect operating results and net assets - As of December 31, 2019, goodwill and net intangible assets constituted 18.5% and 16.3% of total assets, respectively[31] - In 2019, the company recorded $1.6 million in goodwill impairment and $6.2 million in intangible asset impairment for the AeroSat antenna business[31] - Unsuccessful new aircraft programs or initiatives could lead to impairment of related inventory, accounts receivable, and capital equipment, significantly reducing earnings and potentially causing debt agreement defaults[34] Market Cyclicality and Economic Conditions The company's markets are cyclical and susceptible to economic conditions, leading to fluctuating operating results, as the commercial aviation industry is highly sensitive to various external factors - Demand for the company's products largely depends on the demand and success of customer products, with markets being cyclical and susceptible to domestic and international economic conditions and events[32] - The commercial aerospace industry is highly sensitive to factors such as fuel prices, labor disputes, global economic conditions, capital availability, and passenger demand[32] - Changes in these factors could lead to reduced air travel, decreased airline ability to invest in new aircraft or upgrades, and consequently, fewer product orders and sales for the company[32][33] Competitive and Operational Risks Operating in a highly competitive market, the company faces challenges from larger competitors, customer concentration in its Test Systems segment, reliance on key personnel, and various operational risks - The Test Systems segment market has high customer concentration, with sales growth dependent on securing orders from existing or new key customers[35] - Operating in a highly competitive market, competitors may develop superior, more price-competitive products or adapt faster to new technologies, negatively impacting the company's operations and financial performance[36] - The company's future success largely depends on the continued contributions of its management team and technical personnel, with talent loss potentially having a material adverse effect on the business[38] - New product development may be unsuccessful, leading to reduced sales and earnings; government contracts may be unfunded, terminated, or awarded to competitors, thereby reducing sales[59][60] - Failure of subcontractors or suppliers to fulfill contractual obligations could materially adversely affect the company's ability to perform on major contracts and secure future business[61] - Fixed-price contracts may result in cost overruns, leading to losses for the company; product failures could damage reputation, lead to product recalls, or result in claims exceeding insurance coverage[62][64] Acquisition and Integration Risks The company's growth strategy through acquisitions carries multiple risks, including management time diversion, unforeseen liabilities, and difficulties in integrating operations and personnel - Acquisition growth strategy involves risks such as management time diversion, unforeseen liabilities, failure to realize anticipated benefits or synergies, and increased operating costs[39] - Additional debt may restrict cash flow and flexibility, integrating operations and personnel may face difficulties, and key employees, suppliers, or customers of acquired businesses could be lost[39] - If acquisitions are not executed as planned, fail to increase earnings, or prove not to be beneficial to the company, financial performance could be negatively impacted[40] Legal and Regulatory Risks The company may be involved in legal proceedings such as product liability or patent infringement, potentially leading to significant losses, while defense contracts are strictly regulated, and foreign operations face political and currency risks - The company may be involved in legal proceedings, such as product liability, warranty claims, contract breaches, or patent infringement, potentially leading to significant losses and liabilities[41] - Subsidiary AES is currently involved in patent infringement litigation with Lufthansa Technik AG, which, if decided unfavorably, could have a material adverse effect on operating results or financial condition[42] - Defense industry contracts are subject to strict regulations, and non-compliance could result in fines, penalties, or disqualification from future government contracts[68] - Operating in foreign countries exposes the company to political, currency, and local legal/regulatory changes, as well as US export control restrictions, potentially affecting product sales and competitive position[70][71] Financial and Debt-Related Risks The company faces risks from its debt levels, which could adversely affect operations and financial flexibility, including debt covenant restrictions and interest rate volatility - As of December 31, 2019, the company had approximately $188.2 million in outstanding debt, with $188.0 million classified as long-term debt[44] - High debt levels may divert cash flow to principal and interest payments, reduce funds for acquisitions and capital expenditures, increase vulnerability to economic changes, and limit additional financing capacity[44] - The company faces debt covenant restrictions, where a significant decline in operating income could lead to default, requiring lender waivers or renegotiation of financing terms[45] - As of December 31, 2019, most of the company's debt carried floating interest rates, meaning rising rates could increase operating costs; the phase-out of LIBOR may also negatively impact debt agreements and financial condition[46][47] External Shocks: Epidemics & Cyber Attacks The company's business is susceptible to epidemics like COVID-19, impacting global travel and supply chains, and faces cybersecurity threats that could lead to data breaches and reputational damage - The company's business is susceptible to epidemics (e.g., COVID-19), which could significantly reduce global travel and commercial activity, impacting airline spending, demand, and supply chains[51] - The company relies on information technology infrastructure and faces cybersecurity threats and attacks; failure to protect sensitive information could lead to data breaches and reputational damage[52][53] Stock Price Volatility The company's stock price is highly volatile, influenced by various factors including operating results, analyst expectations, and market trends 2019 Stock Price Fluctuation Range (USD) | Metric | Amount (USD) | | :-------- | :----------- | | Low Price | 26.08 | | High Price | 44.20 | - Stock price volatility is influenced by quarterly operating results, analyst expectations, technological innovations, new product releases, market trend news, and major contract or project cancellations[72] - Market fluctuations in the aerospace and defense industries may also affect the stock price independently of the company's operating performance[73] Unresolved Staff Comments This section confirms the absence of any unresolved staff comments within the report No Unresolved Staff Comments There are no unresolved staff comments in this report[74] Properties The company owns or leases 1.4 million sq ft of property space across its Aerospace and Test Systems segments, primarily in North America and Europe Property Ownership and Leases As of December 31, 2019, the company owned or leased 1.4 million sq ft of property space, with the Aerospace segment accounting for 1.194 million sq ft and the Test Systems segment leasing 158,000 sq ft Property Space Distribution as of December 31, 2019 (square feet) | Segment | Owned (sq ft) | Leased (sq ft) | Total (sq ft) | | :--------- | :------------ | :------------- | :------------ | | Aerospace | 749,000 | 445,000 | 1,194,000 | | Test Systems | — | 158,000 | 158,000 | | Total | 749,000 | 603,000 | 1,352,000 | - The company's primary operations are in the United States, Canada, France, and the United Kingdom, with engineering offices in Ukraine and India[74] - The company believes its properties are well-maintained and expects to renew leases or find alternative locations on market terms upon expiration[75] Legal Proceedings The company is involved in patent infringement litigation, with probable losses identified, as detailed in Note 19 to the consolidated financial statements Patent Infringement Litigation The company is currently involved in legal proceedings related to patent infringement allegations, with probable losses identified - The company is currently involved in legal proceedings related to patent infringement allegations, and based on existing rulings, has determined that losses associated with these lawsuits are probable[76] - For discussions on legal contingencies, refer to Note 19 to the consolidated financial statements[76] Mine Safety Disclosures This section is not applicable to the company's operations Not Applicable This section is not applicable[77] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides information on the company's common stock market, shareholder matters, and share repurchase programs Stock Market Information The company's common stock trades on the Nasdaq National Market System, with no cash dividends paid in the past three years as capital is retained for growth 2019 Common Stock Quarterly Price Range (USD) | Quarter | High Price (USD) | Low Price (USD) | | :------ | :--------------- | :-------------- | | First | 36.01 | 28.55 | | Second | 44.20 | 31.69 | | Third | 41.86 | 26.08 | | Fourth | 31.50 | 27.95 | 2018 Common Stock Quarterly Price Range (USD) | Quarter | High Price (USD) | Low Price (USD) | | :------ | :--------------- | :-------------- | | First | 41.18 | 30.94 | | Second | 34.23 | 29.40 | | Third | 40.10 | 31.60 | | Fourth | 37.80 | 28.46 | - As of February 24, 2020, there were approximately 726 record holders of common stock and 2,003 record holders of Class B stock[78] - The company has not paid cash dividends for the three years ended December 31, 2019, and plans to retain all operating cash for working capital and business growth[80] [Share