DocumentASTRONICS CORPATROLarge Accelerated Filer10-QSeptember 29, 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| | | | | |
ý | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 29, 2018
or
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¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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 (IRS Employer Identification Number) |
| |
130 Commerce Way, East Aurora, New York (Address of principal executive offices) | 14052 (Zip code) |
(716) 805-1599
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ý | Accelerated filer | ¨ | Emerging growth company | ¨ |
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Non-accelerated filer | ¨ | Smaller Reporting Company | ¨ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of September 29, 2018, 32,314,884 shares of common stock were outstanding consisting of 21,654,081 shares of common stock ($.01 par value) and 10,660,803 shares of Class B common stock ($.01 par value).
TABLE OF CONTENTS
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PART I | | | | | | | |
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| | Item 1 | | | | | |
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| | Item 2 | | | | | |
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| | Item 3 | | | | | |
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| | Item 4 | | | | | |
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PART II | | | | | | | |
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| | Item 1 | | | | | |
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| | Item 1a | | | | | |
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| | Item 2 | | | | | |
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| | Item 3 | | | | | |
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| | Item 4 | | | | | |
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| | Item 5 | | | | | |
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| | Item 6 | | | | | |
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Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
September 29, 2018 with Comparative Figures for December 31, 2017
(In thousands)
| | | | | | | | | | | |
| September 29, 2018 | | December 31, 2017 |
| (Unaudited) | | |
Current Assets: | | | |
Cash and Cash Equivalents | $ | 4,893 | | $ | 17,914 |
Accounts Receivable, Net of Allowance for Doubtful Accounts | 189,110 | | 132,633 |
Inventories | 154,870 | | 150,196 |
Prepaid Expenses and Other Current Assets | 17,155 | | 14,586 |
Total Current Assets | 366,028 | | 315,329 |
Property, Plant and Equipment, Net of Accumulated Depreciation | 124,652 | | 125,830 |
Other Assets | 21,893 | | 15,659 |
Intangible Assets, Net of Accumulated Amortization | 138,347 | | 153,493 |
Goodwill | 125,136 | | 125,645 |
Total Assets | $ | 776,056 | | $ | 735,956 |
Current Liabilities: | | | |
Current Maturities of Long-term Debt | $ | 1,965 | | $ | 2,689 |
Accounts Payable | 42,184 | | 41,846 |
Accrued Expenses and Other Current Liabilities | 43,338 | | 38,749 |
Customer Advance Payments and Deferred Revenue | 30,186 | | 19,607 |
Total Current Liabilities | 117,673 | | 102,891 |
Long-term Debt | 257,680 | | 269,078 |
Other Liabilities | 31,258 | | 34,060 |
| Total Liabilities | 406,611 | | 406,029 |
Shareholders’ Equity: | | | |
Common Stock | 341 | | 340 |
Accumulated Other Comprehensive Loss | (15,425) | | (13,352) |
Other Shareholders’ Equity | 384,529 | | 342,939 |
Total Shareholders’ Equity | 369,445 | | 329,927 |
Total Liabilities and Shareholders’ Equity | $ | 776,056 | | $ | 735,956 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and Nine Months Ended September 29, 2018 With Comparative Figures for 2017
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | Three Months Ended | | |
| September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Sales | $ | 600,339 | | $ | 453,146 | | $ | 212,674 | | $ | 149,636 |
Cost of Products Sold | 467,315 | | 348,186 | | 166,354 | | 117,143 |
Gross Profit | 133,024 | | 104,960 | | 46,320 | | 32,493 |
Selling, General and Administrative Expenses | 87,919 | | 65,573 | | 27,976 | | 22,099 |
Income from Operations | 45,105 | | 39,387 | | 18,344 | | 10,394 |
Other Expense, Net of Other Income | 1,091 | | 931 | | 253 | | 311 |
Interest Expense, Net of Interest Income | 7,326 | | 3,750 | | 2,511 | | 1,437 |
Income Before Income Taxes | 36,688 | | 34,706 | | 15,580 | | 8,646 |
| Provision for (Benefit from) Income Taxes | 2,370 | | 9,374 | | (1,419) | | 2,586 |
Net Income | $ | 34,318 | | $ | 25,332 | | $ | 16,999 | | $ | 6,060 |
Earnings Per Share: | | | | | | | |
Basic | $ | 1.06 | | $ | 0.77 | | $ | 0.53 | | $ | 0.19 |
Diluted | $ | 1.04 | | $ | 0.74 | | $ | 0.52 | | $ | 0.18 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income
Three and Nine Months Ended September 29, 2018 With Comparative Figures for 2017
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | Three Months Ended | | |
| September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Net Income | $ | 34,318 | | $ | 25,332 | | $ | 16,999 | | $ | 6,060 |
Other Comprehensive (Loss) Income: | | | | | | | |
Foreign Currency Translation Adjustments | (1,346) | | 3,987 | | 226 | | 1,496 |
Retirement Liability Adjustment – Net of Tax | 646 | | 392 | | 216 | | 130 |
Total Other Comprehensive (Loss) Income | (700) | | 4,379 | | 442 | | 1,626 |
Comprehensive Income | $ | 33,618 | | $ | 29,711 | | $ | 17,441 | | $ | 7,686 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 29, 2018
With Comparative Figures for 2017
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 29, 2018 | | September 30, 2017 |
| Cash Flows From Operating Activities: | | | |
| Net Income | $ | 34,318 | | $ | 25,332 |
| Adjustments to Reconcile Net Income to Cash Provided By Operating Activities: | | | |
| Depreciation and Amortization | 26,756 | | 19,269 |
| Provisions for Non-Cash Losses on Inventory and Receivables | 2,432 | | 943 |
| Stock Compensation Expense | 2,349 | | 2,203 |
| Deferred Tax Benefit | (1,536) | | (920) |
| | | |
| | | |
| Other | (507) | | (657) |
| Cash Flows from Changes in Operating Assets and Liabilities: | | | |
| Accounts Receivable | (52,890) | | (1,515) |
| Inventories | (15,768) | | (18,480) |
| Accounts Payable | 571 | | 8,267 |
| Accrued Expenses | 4,977 | | (5,483) |
| Other Current Assets and Liabilities | (1,620) | | (4,556) |
| Customer Advanced Payments and Deferred Revenue | 19,241 | | (2,336) |
| Income Taxes | (4,315) | | (883) |
| Supplemental Retirement and Other Liabilities | 1,351 | | 1,129 |
| Cash Provided By Operating Activities | 15,359 | | 22,313 |
| Cash Flows From Investing Activities: | | | |
| Acquisition of Business, Net of Cash Acquired | — | | (10,199) |
| Capital Expenditures | (12,416) | | (9,715) |
| Other Investing Activities | (3,376) | | (2,070) |
| Cash Used For Investing Activities | (15,792) | | (21,984) |
| Cash Flows From Financing Activities: | | | |
| Proceeds from Long-term Debt | 35,015 | | 42,000 |
| Payments for Long-term Debt | (47,116) | | (13,031) |
| Purchase of Outstanding Shares for Treasury | — | | (32,382) |
| Debt Acquisition Costs | (516) | | — |
| Proceeds from Exercise of Stock Options | 283 | | 349 |
| | | |
| | | |
| Cash Used For Financing Activities | (12,334) | | (3,064) |
| Effect of Exchange Rates on Cash | (254) | | 211 |
| Decrease in Cash and Cash Equivalents | (13,021) | | (2,524) |
| Cash and Cash Equivalents at Beginning of Period | 17,914 | | 17,901 |
| Cash and Cash Equivalents at End of Period | $ | 4,893 | | $ | 15,377 |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
September 29, 2018
(Unaudited)
1) Basis of Presentation
The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.
All share quantities and per share data reported have been restated to reflect the impact of the three-for-twenty Class B stock distribution to shareholders of record on October 12, 2018.
Operating Results
The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the nine months ended September 29, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s 2017 annual report on Form 10-K.
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 and 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”).
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. 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. CSC is included in our Aerospace Segment.
For additional information regarding these acquisitions see Note 18.
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 development 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 $31.2 million and $23.7 million for the three months ended and $89.0 million and $69.5 million for the nine months ended September 29, 2018 and September 30, 2017, respectively. Selling, general and administrative expenses include costs primarily related to our sales and marketing departments and administrative
departments. Interest expense is shown net of interest income. Interest income was insignificant for the three and nine months ended September 29, 2018 and September 30, 2017.
Foreign Currency Translation
The aggregate transaction gain or loss included in operations was insignificant for the three and nine months ended September 29, 2018 and September 30, 2017.
Newly Adopted and Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), 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. ASU 2014-09 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. ASU 2014-09 also provides for enhanced disclosure requirements surrounding revenue recognition.
Prior to the adoption of ASU 2014-09, revenue on a significant portion of our contracts had been 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 retained much of the same accounting treatment used to recognize revenue under the prior standard. However, the adoption of ASU 2014-09 required us to accelerate the recognition of revenue as compared to the prior standard for certain customers, in cases where we produce products unique to those customers, and for which we would have an enforceable right of payment, inclusive of profit, for production completed to date.
We adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings. The Company elected to apply the standard only to open contracts as of January 1, 2018. Based on the application of the changes described above, we recognized a transition adjustment of $3.3 million, net of tax effects, which increased our January 1, 2018 retained earnings. Based on our existing operations, ASU 2014-09 is not expected to have a material impact to net earnings for the year ended December 31, 2018. Refer to Note 2 for additional information.
During the first quarter of 2018, the Company early-adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company applied the guidance as of the beginning of the period of adoption and reclassified approximately $1.4 million from accumulated other comprehensive loss to retained earnings due to the change in federal corporate tax rate.
In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 required entities to adopt the new standard using a modified retrospective method and initially apply the related guidance at the beginning of the earliest period presented in the financial statements. During July 2018, the FASB issued ASU 2018-11, which allows for an additional and optional transition method under which an entity would record a cumulative-effect adjustment at the beginning of the period of adoption (“cumulative-effect method”). We will adopt this guidance as of January 1, 2019 using the cumulative-effect method. We anticipate an increase in our assets and liabilities due to the recognition of the required right-of-use asset and corresponding lease obligations for leases that are currently classified as operating leases. While the adoption will result in an increase to assets and liabilities on the balance sheet, we do not expect that the impact will be material to our consolidated balance sheet. In addition, we do not expect that the adoption will result in a material impact to our consolidated statement of operations.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory, which requires entities to recognize income tax consequences of intra-entity transfers of assets, other than inventory, when the transfer occurs rather than when the asset is sold to a third party as is the case under current GAAP. The Company adopted ASU 2016-16 effective January 1, 2018, and such adoption did not have a material impact on the consolidated financial statements.
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. The Company adopted ASU 2017-01 effective January 1, 2018. The Company will apply this guidance to applicable transactions after the adoption date on a prospective basis. No applicable transactions have occurred as of September 29, 2018.
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. This ASU was adopted as of January 1, 2018 on a retrospective basis. 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. These include components totaling $0.5 million and $0.4 million for the three months ended and $1.5 million and $1.3 million for the nine months ended September 29, 2018 and September 30, 2017, respectively, that no longer are included within Selling, General and Administrative Expenses and instead are reported outside of income from operations, within Other Expense, Net of Other Income in our Consolidated Statements of Operations.
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 was adopted as of January 1, 2018. As the Company has not made changes to the terms or conditions of its issued share-based payment awards, this ASU had no impact on our consolidated results of operations and financial condition.
2) Revenue
As discussed in Note 1, ASU 2014-09 was adopted on January 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings.
Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or service.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales.
The Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. As of September 29, 2018, the Company does not have such incremental, material costs on any open contracts with an original expected duration of greater than one year, and therefore such costs are expensed as incurred. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer.
The Company recognizes an asset for certain costs to fulfill a contract if it is determined that the costs relate directly to a contract or anticipated contracts that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Balance Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. Included in Inventories at September 29, 2018 are capitalized fulfillment costs of $9.6 million. As of September 29, 2018, the Company estimates that the amortization period of these costs is approximately 4 years. Amortization of fulfillment costs recognized within Cost of Products Sold was insignificant in the three months ended and approximately $0.7 million in the nine months ended September 29, 2018.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations.
Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which expected costs are forecast to satisfy a performance obligation and then an appropriate margin is added for that distinct good or service. Shipping and handling activities that occur after the customer has obtained control of the good are considered fulfillment activities, not performance obligations.
Some of our contracts offer price discounts or free units after a specified volume has been purchased. The Company evaluates these options to determine whether they provide a material right to the customer, representing a separate performance obligation. If the option provides a material right to the customer, revenue is allocated to these rights and recognized when those future goods or services are transferred, or when the option expires.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The aggregate effect of all modifications as of the period beginning January 1, 2018 has been reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. Contracts modified prior to January 1, 2018 have not been retrospectively restated.
The vast majority of the Company’s revenue from contracts with customers is recognized at a point in time, when the customer obtains control of the promised product, which is generally upon delivery and acceptance by the customer. These contracts may provide credits or incentives, which may be accounted for as variable consideration. Variable consideration is estimated at the most likely amount to predict the consideration to which the Company will be entitled, and only to the extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal when estimating the amount of revenue to recognize. Variable consideration is treated as a change to the sales transaction price and based on an assessment of all information (i.e., historical, current and forecasted) that is reasonably available to the Company, and estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Most of our contracts do not contain rights to return product; where this right does exist, it is evaluated as possible variable consideration.
For contracts with customers in which the Company satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead.
The Company also recognizes revenue from service contracts (including service-type warranties) over time. The Company recognizes revenue over time during the term of the agreement as the customer is simultaneously receiving and consuming the benefits provided throughout the Company’s performance. Therefore, due to control transferring over time, the Company typically recognizes revenue on a straight-line basis throughout the contract period.
On September 29, 2018, we had $398.1 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $187.5 million of our remaining performance obligations as revenue in 2018.
We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Balance Sheet | | Balance at December 31, 2017 | | Adjustments Due to ASU 2014-09 | | Balance at January 1, 2018 | | | | |
| Assets | | | | | | | | | | |
| Accounts Receivable, Net of Allowance for Doubtful Accounts | | $ | 132,633 | | $ | 4,005 | | $ | 136,638 | | | | |
| Inventories | | $ | 150,196 | | $ | (7,957) | | $ | 142,239 | | | | |
| Liabilities | | | | | | | | | | |
| Accrued Income Taxes | | $ | 261 | | $ | 1,028 | | $ | 1,289 | | | | |
| Customer Advance Payments and Deferred Revenue | | $ | 19,607 | | $ | (8,176) | | $ | 11,431 | | | | |
| Deferred Income Taxes | | $ | 5,121 | | $ | (72) | | $ | 5,049 | | | | |
| Equity | | | | | | | | | | |
| Retained Earnings | | $ | 325,191 | | $ | 3,268 | | $ | 328,459 | | | | |
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 29, 2018 | | | | For the Three Months Ended September 29, 2018 | | | | | | |
Income Statement | As Reported | Effect of Change Higher/(Lower) | Balances Without Adoption of ASU 2014-09 | | As Reported | Effect of Change Higher/(Lower) | Balances Without Adoption of ASU 2014-09 | | | | |
Revenues | | | | | | | | | | | |
Aerospace | $ | 500,383 | $ | 424 | $ | 499,959 | | $ | 169,579 | $ | 1,195 | $ | 168,384 | | | | |
Test Systems | $ | 99,956 | $ | 1,344 | $ | 98,612 | | $ | 43,095 | $ | 1,919 | $ | 41,176 | | | | |
Costs and Expenses | | | | | | | | | | | |
Cost of Products Sold | $ | 467,315 | $ | 1,272 | $ | 466,043 | | $ | 166,354 | $ | 2,739 | $ | 163,615 | | | | |
| Provision for (Benefit from) Income Taxes | $ | 2,370 | $ | 152 | $ | 2,218 | | $ | (1,419) | $ | 130 | $ | (1,549) | | | | |
Net Income | $ | 34,318 | $ | 344 | $ | 33,974 | | $ | 16,999 | $ | 245 | $ | 16,754 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | September 29, 2018 | | | | | | | | |
Balance Sheet | | As Reported | | Effect of Change Higher/(Lower) | | Balances Without Adoption of ASU 2014-09 | | | | |
Assets | | | | | | | | | | |
Accounts Receivable, Net of Allowance for Doubtful Accounts | | $ | 189,110 | | $ | 10,114 | | $ | 178,996 | | | | |
Inventories | | $ | 154,870 | | $ | (9,230) | | $ | 164,100 | | | | |
Liabilities | | | | | | | | | | |
Accrued Expenses and Other Current Liabilities | | $ | 43,338 | | $ | 1,895 | | $ | 41,443 | | | | |
Customer Advance Payments and Deferred Revenue | | $ | 30,186 | | $ | (3,836) | | $ | 34,022 | | | | |
Other Liabilities | | $ | 31,258 | | $ | (787) | | $ | 32,045 | | | | |
Equity | | | | | | | | | | |
Other Shareholders' Equity | | $ | 384,529 | | $ | 3,612 | | $ | 380,917 | | | | |
Costs in excess of billings includes unbilled amounts resulting from revenues under contracts with customers that are satisfied over time and when the cost-to-cost measurement method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs in excess of billings are classified as current assets, within Accounts Receivable, Net of Allowance for Doubtful Accounts on our Consolidated Balance Sheet.
Billings in excess of cost includes billings in excess of revenue recognized as well as deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are classified as current liabilities, reported in our Consolidated Balance Sheet within Customer Advance Payments and Deferred Revenue. To determine the revenue recognized in the period from the beginning balance of billings in excess of cost, the contract liability as of the beginning of the period is recognized as revenue on a contract-by-contract basis when the Company incurs costs to satisfy the performance obligation related to the individual contract. Once the beginning contract liability balance for an individual contract has been fully recognized as revenue, any additional payments received in the period are recognized as revenue once the related costs have been incurred.
We recognized $6.3 million during the three and nine months ended September 29, 2018 in revenues that were included in the contract liability balance at July 1, 2018 and January 1, 2018.
The Company's contract assets and contract liabilities consist of costs in excess of billings and billings in excess of cost, respectively. The following table presents the beginning and ending balances of contract assets and contract liabilities during the nine months ended September 29, 2018 (in thousands):
| | | | | | | | | | | |
| | Contract Assets | Contract Liabilities |
Beginning Balance, January 1, 2018 (1) | | $ | 24,423 | $ | 11,431 |
| Ending Balance, September 29, 2018 | | $ | 29,927 | $ | 30,912 |
(1) Due to the adoption of ASU 2014-09 effective January 1, 2018, the Company recorded a transition adjustment to the opening balance of Contract Assets and Contract Liabilities at January 1, 2018. Refer to the cumulative effect of the changes table above for further explanation of the changes made to our consolidated January 1, 2018 balance sheet. | | | |
The following table presents our revenue disaggregated by Market Segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Three Months Ended | | |
| | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Aerospace Segment | | | | | | | | |
Commercial Transport | | $ | 402,539 | | $ | 306,898 | | $ | 136,692 | | $ | 98,821 |
Military | | 46,410 | | 46,297 | | 16,125 | | 15,365 |
Business Jet | | 30,291 | | 28,844 | | 9,289 | | 10,592 |
Other | | 21,143 | | 12,998 | | 7,473 | | 3,885 |
Aerospace Total | | 500,383 | | 395,037 | | 169,579 | | 128,663 |
| | | | | | | | |
Test Systems Segment | | | | | | | | |
Semiconductor | | 72,061 | | 18,343 | | 33,596 | | 6,632 |
Aerospace & Defense | | 27,895 | | 39,766 | | 9,499 | | 14,341 |
Test Systems Total | | 99,956 | | 58,109 | | 43,095 | | 20,973 |
| | | | | | | | |
Total | | $ | 600,339 | | $ | 453,146 | | $ | 212,674 | | $ | 149,636 |
The following table presents our revenue disaggregated by Product Lines (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Three Months Ended | | |
| | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Aerospace Segment | | | | | | | | |
Electrical Power & Motion | | $ | 218,931 | | $ | 199,014 | | $ | 78,610 | | $ | 63,972 |
Lighting & Safety | | 129,244 | | 122,317 | | 43,481 | | 37,001 |
Avionics | | 100,354 | | 31,424 | | 31,059 | | 11,348 |
Systems Certification | | 12,028 | | 9,405 | | 2,373 | | 4,454 |
Structures | | 18,683 | | 19,879 | | 6,583 | | 8,003 |
Other | | 21,143 | | 12,998 | | 7,473 | | 3,885 |
Aerospace Total | | 500,383 | | 395,037 | | 169,579 | | 128,663 |
| | | | | | | | |
Test Systems | | 99,956 | | 58,109 | | 43,095 | | 20,973 |
| | | | | | | | |
Total | | $ | 600,339 | | $ | 453,146 | | $ | 212,674 | | $ | 149,636 |
3) Inventories
Inventories are as follows:
| | | | | | | | | | | |
(In thousands) | September 29, 2018 | | December 31, 2017 |
Finished Goods | $ | 31,951 | | $ | 35,193 |
Work in Progress | 39,319 | | 33,219 |
Raw Material | 83,600 | | 81,784 |
| $ | 154,870 | | $ | 150,196 |
4) Property, Plant and Equipment
The following table summarizes Property, Plant and Equipment as follows:
| | | | | | | | | | | |
(In thousands) | September 29, 2018 | | December 31, 2017 |
Land | $ | 11,205 | | $ | 11,237 |
Buildings and Improvements | 82,666 | | 81,872 |
Machinery and Equipment | 109,871 | | 105,827 |
Construction in Progress | 6,643 | | 9,761 |
| 210,385 | | 208,697 |
Less Accumulated Depreciation | 85,733 | | 82,867 |
| $ | 124,652 | | $ | 125,830 |
5) Intangible Assets
The following table summarizes acquired intangible assets as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 29, 2018 | | | | December 31, 2017 | | |
(In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Patents | 11 years | | $ | 2,146 | | $ | 1,694 | | $ | 2,146 | | $ | 1,629 |
Non-compete Agreement | 4 years | | 10,900 | | 3,932 | | 10,900 | | 1,687 |
Trade Names | 10 years | | 11,465 | | 4,915 | | 11,492 | | 4,114 |
Completed and Unpatented Technology | 10 years | | 38,069 | | 14,951 | | 38,114 | | 11,931 |
Backlog | 2 years | | 14,424 | | 14,424 | | 14,424 | | 12,184 |
Customer Relationships | 15 years | | 137,984 | | 36,725 | | 137,967 | | 30,005 |
Total Intangible Assets | 12 years | | $ | 214,988 | | $ | 76,641 | | $ | 215,043 | | $ | 61,550 |
All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Three Months Ended | | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Amortization Expense | | $ | 15,144 | | $ | 8,269 | | $ | 4,276 | | $ | 2,929 |
Amortization expense for acquired intangible assets expected for 2018 and for each of the next five years is summarized as follows:
| | | | | |
(In thousands) | |
| 2018 | $ | 19,403 |
| 2019 | 16,707 |
| 2020 | 15,981 |
| 2021 | 14,072 |
| 2022 | 13,637 |
| 2023 | 12,470 |
6) Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 29, 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | December 31, 2017 | | Acquisition/Adjustments | | Foreign Currency Translation | | September 29, 2018 |
Aerospace | $ | 125,645 | | $ | (241) | | $ | (268) | | $ | 125,136 |
Test Systems | — | | — | | — | | — |
| $ | 125,645 | | $ | (241) | | $ | (268) | | $ | 125,136 |
7) Long-term Debt and Notes Payable
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 Original Facility was January 13, 2021. 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 balance of the Original Facility was rolled into the Agreement on the date of closing. The maturity date of the loans under the Agreement is February 16, 2023. At September 29, 2018, there was $252.0 million outstanding on the revolving credit facility and there remains $246.9 million available, net of outstanding letters of credit. 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 September 29, 2018, outstanding letters of credit totaled $1.1 million.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is 3.75 to 1, increasing to 4.50 to 1 for up to four fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations. The Company’s leverage ratio was 2.59 to 1 at September 29, 2018. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the lenders in an amount equal to between 0.10% and 0.20% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio.
The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the 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.
8) Product Warranties
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from 12 to 60 months. The Company determines warranty reserves needed by product line based on experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Three Months Ended | | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Balance at Beginning of Period | | $ | 5,136 | | $ | 4,675 | | $ | 5,180 | | $ | 4,637 |
Acquisitions | | — | | 359 | | — | | — |
Warranties Issued | | 2,102 | | 1,315 | | 801 | | 483 |
Warranties Settled | | (2,219) | | (1,832) | | (934) | | (608) |
Reassessed Warranty Exposure | | (77) | | 101 | | (105) | | 106 |
Balance at End of Period | | $ | 4,942 | | $ | 4,618 | | $ | 4,942 | | $ | 4,618 |
9) Income Taxes
During the three and nine months ended September 29, 2018, the Company determined that a revised state filing position could be taken which would reduce the taxable income apportioned for certain state income tax purposes. The Company concluded that amended state income tax returns would be filed for the open tax years of 2014 through 2017 to reflect this revised tax position and claim the associated tax benefits. Due to the revised filing position, the associated deferred tax liabilities have been revalued as well. Accordingly, the Company has recorded a discrete tax benefit of $4.0 million (net of a $1.7 million uncertain tax position reserve) related to these items in three and nine month periods ended September 29, 2018. The Company has also reflected this filing position in calculating its 2018 tax provision.
The effective tax rates were approximately (9.1)% and 29.9% for the three months ended and 6.5% and 27.0% for the nine months ended September 29, 2018 and September 30, 2017, respectively. In addition to the adjustments described above, the 2018 tax rate was favorably impacted by a reduction to the provisional income tax on the deemed repatriation of foreign earnings and profits of approximately $0.4 million which was recognized as a discrete item during the period. Absent these discrete adjustments, the tax rate for the three and nine months ended September 29, 2018 would have been 18.5% and 19.3% respectively. Finally, the 2018 tax rate was favorably impacted by the federal research and development tax credit, the impact of which was partially offset by state tax expense.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The legislation significantly changed 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 Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018.
While the Tax Cuts and Jobs Act provides for a territorial tax system, beginning in 2018, it includes the foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”) provisions. The Company elected to account for GILTI tax in the period in which it is incurred. 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 GILTI tax expense resulted from required allocations of interest expense to the GILTI income, which created a U.S. foreign tax credit limitation. The FDII provisions allow for a deduction equal to a percentage of the foreign-derived intangible income of a domestic corporation. As a result of these provisions, net, the Company’s effective tax rate decreased approximately 0.3% and increased approximately 0.2% for the six months and three months ended September 29, 2018, respectively.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of 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 Act. The Company recognized provisional tax impacts related to the deemed repatriated earnings and the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. During the six months and three months ended September 29, 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended December 31, 2017. During the three and nine months ended September 29, 2018, the Company made an adjustment to its provisional amounts included in its consolidated financial statements for the year ended December 31, 2017 resulting in a benefit of approximately $0.4 million. The Company expects that there could be more changes in interpretations and assumptions made by the Company or additional regulatory guidance issued that would further adjust the provisional tax amounts. As such, the accounting for the income tax effects of the Act are provisional as of September 29, 2018. The accounting will be completed in the fourth quarter of 2018.
10) Shareholders’ Equity
The changes in shareholders’ equity for the nine months ended September 29, 2018 are summarized as follows as adjusted to reflect the impact of the three-for-twenty distribution of Class B Stock as discussed in Note 11:
| | | | | | | | | | | | | | | | | |
| | | Number of Shares | | |
| (Dollars and Shares in thousands) | Amount | | Common Stock | | Convertible Class B Stock |
| Shares Authorized | | | 40,000 | | 15,000 |
| Share Par Value | | | $ | 0.01 | | $ | 0.01 |
| COMMON STOCK | | | | | |
| Beginning of Period | $ | 340 | | 22,861 | | 11,082 |
| Conversion of Class B Shares to Common Shares | | | 443 | | (443) |
| Exercise of Stock Options | 1 | | 25 | | 22 |
| End of Period | $ | 341 | | 23,329 | | 10,661 |
| ADDITIONAL PAID IN CAPITAL | | | | | |
| Beginning of Period | $ | 67,748 | | | | |
| Stock Compensation Expense | 2,349 | | | | |
| Exercise of Stock Options | 282 | | | | |
| End of Period | $ | 70,379 | | | | |
| ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | |
| Beginning of Period | $ | (13,352) | | | | |
| Adoption of ASU 2018-02 | (1,373) | | | | |
| Foreign Currency Translation Adjustment | (1,346) | | | | |
| Retirement Liability Adjustment – Net of Tax | 646 | | | | |
| End of Period | $ | (15,425) | | | | |
| RETAINED EARNINGS | | | | | |
| Beginning of Period | $ | 325,191 | | | | |
| Adoption of ASU 2014-09 | 3,268 | | | | |
| Adoption of ASU 2018-02 | 1,373 | | | | |
| Net Income | 34,318 | | | | |
| End of Period | $ | 364,150 | | | | |
| TREASURY STOCK | | | | | |
| Beginning of Period | $ | (50,000) | | (1,675) | | |
| Purchase | — | | — | | |
| End of Period | $ | (50,000) | | (1,675) | | |
| TOTAL SHAREHOLDERS’ EQUITY | | | | | |
| Beginning of Period | $ | 329,927 | | | | |
| | | | | |
| End of Period | $ | 369,445 | | 21,654 | | 10,661 |
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. No amounts have been repurchased under the new program as of September 29, 2018.
11) Earnings Per Share
Basic and diluted weighted-average shares outstanding are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Three Months Ended | | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 |
Weighted Average Shares - Basic | | 32,304 | | 33,096 | | 32,317 | | 32,570 |
Net Effect of Dilutive Stock Options | | 731 | | 1,124 | | 652 | | 780 |
Weighted Average Shares - Diluted | | 33,035 | | 34,220 | | 32,969 | | 33,350 |
The above information has been adjusted to reflect the impact of the three-for-twenty Class B stock distribution to shareholders of record on October 12, 2018.
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 covered by out-of-the-money stock options was approximately 19,000 shares as of September 29, 2018.
12) Accumulated Other Comprehensive Loss and Other Comprehensive Income
The components of accumulated other comprehensive loss are as follows:
| | | | | | | | | | | |
(In thousands) | September 29, 2018 | |