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 supplier of products 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 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
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.
At
December 31, 2016
, 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.
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, as a result of the acquisition of ATS, certain of our contracts involve multiple elements (such as equipment and service). Service revenues were not material for the years ended December 31,
2016
,
2015
and
2014
. 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
$20.7 million
,
$17.2 million
and
$2.7 million
for the years ended December 31,
2016
,
2015
and
2014
, 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
$90.2 million
in
2016
,
$90.1 million
in
2015
and
$76.7 million
in
2014
. Selling, general and administrative (“SG&A”) expenses include costs primarily related to our sales, marketing and administrative departments.
Shipping and Handling
Shipping and handling costs are expensed as incurred and are included in costs of products sold.
Stock Distribution
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.
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.
Inventories
Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method or standard 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.
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 in income. Replacements and improvements are capitalized.
Depreciation expense was approximately
$14.3 million
,
$13.3 million
and
$10.6 million
in
2016
,
2015
and
2014
, respectively.
Buildings acquired under capital leases amounted to
$10.5 million
(
$14.3 million
, net of
$3.8 million
of accumulated amortization) and
$12.3 million
(
$14.8 million
, net of
$2.5 million
accumulated amortization) at
December 31, 2016
and
2015
, respectively. Future minimum lease payments associated with these capital leases are expected to be
$2.6 million
in
2017
,
$2.6 million
in
2018
,
$2.0 million
in
2019
,
$2.1 million
in
2020
and
$2.2 million
in
2021
.
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
ten
reporting units, however only
eight
reporting units have goodwill and were subject to the goodwill impairment test. The annual testing date for the impairment test is 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 considered impaired and any loss must be measured. To determine the amount of the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
There were
no
impairment charges in
2016
,
2015
or
2014
.
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
2016
,
2015
or
2014
.
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.
Derivatives
The accounting for changes in the fair value of derivatives depends on the intended use and resulting designation. The Company’s use of derivative instruments was limited to cash flow hedges for interest rate risk associated with long-term debt. All such instruments were terminated in 2014. Interest rate swaps were used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps were designated as hedges of the amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, converted a portion of the variable-rate debt to fixed-rate debt. The Company recorded all derivatives on the balance sheet at fair value. The related gains or losses, to the extent the derivatives were effective as a hedge, were deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”) and reclassified into earnings at the time interest expense was recognized on the associated long-term debt. Any ineffectiveness was recorded in the Consolidated Statements of Operations.
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
2016
,
$1.0 million
in
2015
and insignificant in
2014
.
Dividends
The Company has not paid any cash dividends in the three-year period ended December 31,
2016
.
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.
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
2015
and
2014
.
Newly Adopted and Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-9,
Revenue from Contracts with Customers
. This new standard is effective for reporting periods beginning after December 15, 2017, pursuant to the issuance of ASU 2015-14,
Revenue from Contracts with Customers: Deferral of Effective Date
issued in August 2015. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company will adopt the new standard on January 1, 2018, using the modified retrospective transition method.
The adoption of this amendment may 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. The Company has identified its revenue streams, reviewed the initial impacts of adopting the new standard on those revenue streams, and appointed a project management leader. The Company continues to evaluate the quantitative and qualitative impacts of the standard.
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 adoption of the standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. With respect to income taxes, under current guidance, when a share-based payment award such as a stock option is granted to an employee, the fair value of the award is generally recognized over the vesting period. However, the related deduction from taxes payable is based on the award’s intrinsic value at the time of exercise, which can 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 are currently recognized in additional paid-in capital (“APIC”) within equity, deficiencies are first recorded to APIC to the extent previously recognized excess tax benefits exist, after which time deficiencies are recorded to income tax expense. Under the new guidance, all excess tax benefits/deficiencies would be recognized as income tax benefit/expense in the statement of income. The new ASU’s income tax aspects also impact the calculation of diluted earnings per share by excluding excess tax benefits/deficiencies from the calculation of assumed proceeds available to repurchase shares under the treasury stock method. Relative to forfeitures, the new standard provides an accounting policy election to account for forfeitures as they occur. Additionally, cash flows related to excess tax benefits will be included in Net cash provided by operating activities and will no longer be separately classified as a financing activity. Finally, the new ASU also allows a company to repurchase more of an employee’s shares for tax withholding purposes. The Company will adopt the new standard on January 1, 2017, and will account for forfeitures as they occur.
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 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. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The standard requires application using a retrospective transition method. This ASU is not expected to have a material impact on the Company’s consolidated results of operations and financial condition.
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 plans to early adopt on January 1, 2017.
NOTE 2 — ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Trade Accounts Receivable
|
$
|
93,823
|
|
|
$
|
87,282
|
|
Unbilled Recoverable Costs and Accrued Profits
|
16,194
|
|
|
8,307
|
|
Total Receivables
|
110,017
|
|
|
95,589
|
|
Less Allowance for Doubtful Accounts
|
(602
|
)
|
|
(312
|
)
|
|
$
|
109,415
|
|
|
$
|
95,277
|
|
NOTE 3 — INVENTORIES
Inventories at December 31 are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Finished Goods
|
$
|
28,792
|
|
|
$
|
27,770
|
|
Work in Progress
|
20,790
|
|
|
23,977
|
|
Raw Material
|
67,015
|
|
|
63,720
|
|
|
$
|
116,597
|
|
|
$
|
115,467
|
|
At
December 31, 2016
, the Company’s reserve for inventory valuation was
$15.4 million
, or
11.7%
of gross inventory. At
December 31, 2015
, the Company’s reserve for inventory valuation was
$14.6 million
, or
11.2%
of gross inventory.
NOTE 4 — INTANGIBLE ASSETS
The following table summarizes acquired intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(In thousands)
|
Weighted
Average Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
4 Years
|
|
$
|
2,146
|
|
|
$
|
1,450
|
|
|
$
|
2,146
|
|
|
$
|
1,264
|
|
Noncompete Agreement
|
3 Years
|
|
2,500
|
|
|
979
|
|
|
2,500
|
|
|
479
|
|
Trade Names
|
7 Years
|
|
10,189
|
|
|
3,153
|
|
|
10,217
|
|
|
2,216
|
|
Completed and Unpatented Technology
|
6 Years
|
|
24,118
|
|
|
9,221
|
|
|
24,056
|
|
|
6,795
|
|
Backlog
|
-
|
|
11,224
|
|
|
11,224
|
|
|
11,202
|
|
|
10,793
|
|
Customer Relationships
|
12 Years
|
|
97,046
|
|
|
23,093
|
|
|
96,472
|
|
|
16,770
|
|
Total Intangible Assets
|
6 Years
|
|
$
|
147,223
|
|
|
$
|
49,120
|
|
|
$
|
146,593
|
|
|
$
|
38,317
|
|
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
$10.8 million
,
$11.3 million
and
$15.8 million
for
2016
,
2015
and
2014
, respectively.
Based upon acquired intangible assets at
December 31, 2016
, amortization expense for each of the next five years is estimated to be:
|
|
|
|
|
(In thousands)
|
|
2017
|
$
|
10,445
|
|
2018
|
10,133
|
|
2019
|
9,754
|
|
2020
|
9,198
|
|
2021
|
9,152
|
|
NOTE 5 — GOODWILL
The following table summarizes the changes in the carrying amount of goodwill for
2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Balance at Beginning of the Year
|
$
|
115,369
|
|
|
$
|
100,153
|
|
Acquisition
|
—
|
|
|
16,237
|
|
Foreign Currency Translations and Other
|
(162
|
)
|
|
(1,021
|
)
|
Balance at End of the Year
|
$
|
115,207
|
|
|
$
|
115,369
|
|
|
|
|
|
Goodwill - Gross
|
$
|
131,749
|
|
|
$
|
131,911
|
|
Accumulated Impairment Losses
|
(16,542
|
)
|
|
(16,542
|
)
|
Goodwill - Net
|
$
|
115,207
|
|
|
$
|
115,369
|
|
As discussed in Note 1, goodwill is not amortized but is periodically tested for impairment. For the
eight
reporting units with goodwill on the first day of our fourth quarter, the Company performed a quantitative assessment of the goodwill’s carrying value. The assessment indicated no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charge was recognized. There was no impairment to the carrying value of goodwill in 2015 or 2014. All goodwill relates to the Aerospace segment.
NOTE 6 — LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2016
|
|
2015
|
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% (2.27% at December 31, 2016).
|
$
|
136,000
|
|
|
$
|
155,000
|
|
Other Bank Debt
|
1,270
|
|
|
1,963
|
|
Capital Lease Obligations
|
10,850
|
|
|
12,826
|
|
|
148,120
|
|
|
169,789
|
|
Less Current Maturities
|
2,636
|
|
|
2,579
|
|
|
$
|
145,484
|
|
|
$
|
167,210
|
|
Principal maturities of long-term debt are approximately:
|
|
|
|
|
(In thousands)
|
|
2017
|
$
|
2,636
|
|
2018
|
2,610
|
|
2019
|
1,835
|
|
2020
|
2,096
|
|
2021
|
138,049
|
|
Thereafter
|
894
|
|
|
$
|
148,120
|
|
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.
The Company's Third Amended and Restated Credit Agreement provided for a
$75 million
five
-year revolving credit facility and a
$190 million
five
-year term loan, both expiring on
June 30, 2018
. The facilities carried an interest rate of LIBOR plus between
2.25%
and
3.50%
, depending on the Company’s leverage ratio as defined in the Credit Agreement. In addition, the Company was required to pay a commitment fee of between
0.25%
and
0.50%
on the unused portion of the total credit commitment for the preceding quarter, based on the Company’s leverage ratio under the credit agreement.
On February 28, 2014, in connection with the funding of the acquisition of ATS, the Company amended its existing credit facility to exercise its option to increase the revolving credit commitment. The credit agreement provided for a
$125 million
,
five
-year revolving credit facility maturing on June 30, 2018, of which
$58.0 million
was drawn to finance the acquisition. In addition, the Company was required to pay a commitment fee quarterly at a rate of between
0.25%
and
0.50%
per annum on the unused portion of the total revolving credit commitment, based on the Company’s leverage ratio.
On September 26, 2014, the Company modified and extended its existing credit facility (the “Original Facility”) by entering into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”). On the closing date, there were
$180.5 million
of term loans outstanding and
$6 million
of revolving loans outstanding under the Original Facility. Pursuant to the Agreement, the Original Facility was replaced with a
$350 million
revolving credit line with the option to increase the line by up to
$150 million
. The outstanding balances in the Original Facility were rolled into the Agreement on the date of entry. In addition, the maturity date of the loans under the Agreement was extended to
September 26, 2019
. The credit facility allocates up to
$20 million
of the
$350 million
revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At
December 31, 2016
, outstanding letters of credit totaled
$1.1 million
.
On January 13, 2016, the Company amended the Agreement to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021.
Covenants in the Agreement were modified to where the maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is
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 will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between
1.375%
and
2.25%
based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between
0.175%
and
0.35%
on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The Company is required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of
3.0
to 1 for the term of the Agreement. The Company’s interest coverage ratio was
29.5
to 1 at
December 31, 2016
. The Company’s leverage ratio was
1.38
to 1 at
December 31, 2016
. The Company is in compliance with all financial and other covenants at December 31,
2016
.
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)
|
2016
|
|
2015
|
|
2014
|
Balance at Beginning of the Year
|
$
|
5,741
|
|
|
$
|
4,884
|
|
|
$
|
2,796
|
|
Warranty Liabilities Acquired
|
—
|
|
|
500
|
|
|
564
|
|
Warranties Issued
|
2,281
|
|
|
4,039
|
|
|
3,431
|
|
Reassessed Warranty Exposure
|
(966
|
)
|
|
(485
|
)
|
|
(34
|
)
|
Warranties Settled
|
(2,381
|
)
|
|
(3,197
|
)
|
|
(1,873
|
)
|
Balance at End of the Year
|
$
|
4,675
|
|
|
$
|
5,741
|
|
|
$
|
4,884
|
|
NOTE 8 — INCOME TAXES
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.
The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Current
|
|
|
|
|
|
U.S. Federal
|
$
|
21,667
|
|
|
$
|
24,809
|
|
|
$
|
22,705
|
|
State
|
2,899
|
|
|
2,382
|
|
|
3,797
|
|
Foreign
|
551
|
|
|
137
|
|
|
1,112
|
|
Deferred
|
|
|
|
|
|
U.S. Federal
|
(2,871
|
)
|
|
703
|
|
|
(3,035
|
)
|
State
|
(1,140
|
)
|
|
(1,019
|
)
|
|
(655
|
)
|
Foreign
|
(745
|
)
|
|
64
|
|
|
(987
|
)
|
|
$
|
20,361
|
|
|
$
|
27,076
|
|
|
$
|
22,937
|
|
The effective tax rates differ from the statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory Federal Income Tax Rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Permanent Items
|
|
|
|
|
|
Non-deductible Stock Compensation Expense
|
1.1
|
%
|
|
0.6
|
%
|
|
0.6
|
%
|
Domestic Production Activity Deduction
|
(3.3
|
)%
|
|
(2.9
|
)%
|
|
(2.6
|
)%
|
Other
|
0.2
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
Foreign Tax Benefits
|
(1.1
|
)%
|
|
(1.1
|
)%
|
|
(1.7
|
)%
|
State Income Tax, Net of Federal Income Tax Effect
|
1.8
|
%
|
|
0.9
|
%
|
|
2.6
|
%
|
Research and Development Tax Credits
|
(3.7
|
)%
|
|
(2.7
|
)%
|
|
(4.3
|
)%
|
Other
|
(0.4
|
)%
|
|
(1.2
|
)%
|
|
(0.7
|
)%
|
Effective Tax Rate
|
29.6
|
%
|
|
28.8
|
%
|
|
29.0
|
%
|
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.
No provision has been made for U.S. federal or foreign taxes on that portion of certain foreign subsidiaries’ undistributed earnings (
$13.1 million
at December 31,
2016
) considered to be permanently reinvested. It is not practicable to determine the amount of tax that would be payable if these amounts were repatriated to the U.S.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Deferred Tax Assets:
|
|
|
|
Asset Reserves
|
$
|
9,208
|
|
|
$
|
8,709
|
|
Deferred Compensation
|
8,378
|
|
|
7,986
|
|
Capital Lease Basis Difference
|
1,690
|
|
|
1,753
|
|
State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax
|
665
|
|
|
533
|
|
Customer Advanced Payments and Deferred Revenue
|
3,750
|
|
|
1,722
|
|
State Net Operating Loss Carryforwards and Other
|
4,282
|
|
|
2,401
|
|
Total Gross Deferred Tax Assets
|
27,973
|
|
|
23,104
|
|
Valuation Allowance for State Deferred Tax Assets and Tax Credit Carryforwards, Net of Federal Tax
|
(3,816
|
)
|
|
(2,640
|
)
|
Deferred Tax Assets
|
24,157
|
|
|
20,464
|
|
Deferred Tax Liabilities:
|
|
|
|
Depreciation
|
12,972
|
|
|
12,561
|
|
Goodwill and Intangible Assets
|
18,558
|
|
|
20,113
|
|
Other
|
1,280
|
|
|
1,199
|
|
Deferred Tax Liabilities
|
32,810
|
|
|
33,873
|
|
Net Deferred Tax Liabilities
|
$
|
(8,653
|
)
|
|
$
|
(13,409
|
)
|
The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Other Assets — Long-term
|
$
|
2,644
|
|
|
$
|
1,558
|
|
Deferred Tax Liabilities — Long-term
|
(11,297
|
)
|
|
(14,967
|
)
|
Net Deferred Tax Liabilities
|
$
|
(8,653
|
)
|
|
$
|
(13,409
|
)
|
At
December 31, 2016
, state tax credit carryforwards amounted to approximately
$1.0 million
, of which
$0.8 million
will expire from
2017
through
2030
and
$0.2 million
will carryforward until utilized. At
December 31, 2016
, state net operating loss carryforwards which the Company expects to utilize amounted to approximately
$8.2 million
and expire at various dates between 2032 and 2034.
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
$52.9 million
and expire at various dates from
2021
through
2035
. The excess tax benefits associated with stock option exercises are recorded directly to shareholders’ equity only when realized and amounted to approximately
$0.8 million
,
$3.0 million
and
$5.3 million
for the years ended
December 31, 2016
,
2015
, and
2014
respectively.
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, 2016
, 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 year ended December 31, 2016. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties which are insignificant, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
Balance at Beginning of the Year
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
1,940
|
|
Decreases as a Result of Tax Positions Taken in Prior Years
|
—
|
|
|
(181
|
)
|
|
(1,901
|
)
|
Increases as a Result of Tax Positions Taken in the Current Year
|
—
|
|
|
—
|
|
|
142
|
|
Balance at End of the Year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181
|
|
There are no penalties or interest liabilities accrued as of
December 31, 2016
or
2015
, nor are any material penalties or interest costs included in expense for each of the years ended
December 31, 2016
,
2015
and
2014
. 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 2013 through 2016 for federal purposes and 2012 through 2016 for state purposes.
Pretax income from the Company’s foreign subsidiaries amounted to
$1.6 million
,
$3.6 million
and
$4.3 million
for
2016
,
2015
and
2014
, respectively. The balance of pretax earnings for each of those years were domestic.
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
$6.7 million
,
$6.3 million
and
$5.1 million
in
2016
,
2015
and
2014
, 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, 2016
and
2015
amounts to
$18.6 million
and
$16.7 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, 2016
or
2015
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
$2.5 million
(
$3.9 million
net of
$1.4 million
in taxes) and unrecognized actuarial losses of
$4.0 million
(
$6.1 million
net of
$2.1 million
in taxes) are included in AOCI at
December 31, 2016
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,
2017
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, 2016 is
$0.3 million
(
$0.4 million
net of
$0.1 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)
|
2016
|
|
2015
|
Funded Status
|
|
|
|
Projected Benefit Obligation
|
|
|
|
Beginning of the Year — January 1
|
$
|
20,418
|
|
|
$
|
20,990
|
|
Service Cost
|
173
|
|
|
194
|
|
Interest Cost
|
901
|
|
|
843
|
|
Actuarial (Gain) Loss
|
389
|
|
|
(1,261
|
)
|
Benefits Paid
|
(348
|
)
|
|
(348
|
)
|
End of the Year — December 31
|
$
|
21,533
|
|
|
$
|
20,418
|
|
The assumptions used to calculate the projected benefit obligation as of December 31 are as follows:
|
|
|
|
|
|
2016
|
|
2015
|
Discount Rate
|
4.20%
|
|
4.45%
|
Future Average Compensation Increases
|
3.00% – 5.00%
|
|
3.00% – 5.00%
|
The plans are unfunded at
December 31, 2016
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
$21.2 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)
|
2016
|
|
2015
|
|
2014
|
Net Periodic Cost
|
|
|
|
|
|
Service Cost — Benefits Earned During Period
|
$
|
173
|
|
|
$
|
194
|
|
|
$
|
247
|
|
Interest Cost
|
901
|
|
|
843
|
|
|
721
|
|
Amortization of Prior Service Cost
|
413
|
|
|
495
|
|
|
495
|
|
Amortization of Losses
|
343
|
|
|
449
|
|
|
108
|
|
Net Periodic Cost
|
$
|
1,830
|
|
|
$
|
1,981
|
|
|
$
|
1,571
|
|
The assumptions used to determine the net periodic cost are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Discount Rate
|
4.45%
|
|
4.05%
|
|
5.10%
|
Future Average Compensation Increases
|
3.00% – 5.00%
|
|
5.00%
|
|
5.00%
|
The Company expects the benefits to be paid in each of the next five years to be $0.3 million and
$2.3 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)
|
2016
|
|
2015
|
Funded Status
|
|
|
|
Accumulated Postretirement Benefit Obligation
|
|
|
|
Beginning of the Year — January 1
|
$
|
925
|
|
|
$
|
990
|
|
Service Cost
|
5
|
|
|
6
|
|
Interest Cost
|
40
|
|
|
39
|
|
Actuarial (Gain) Loss
|
112
|
|
|
(54
|
)
|
Benefits Paid
|
(61
|
)
|
|
(56
|
)
|
End of the Year — December 31
|
$
|
1,021
|
|
|
$
|
925
|
|
The assumptions used to calculate the accumulated post-retirement benefit obligation as of December 31 are as follows:
|
|
|
|
|
|
2016
|
|
2015
|
Discount Rate
|
4.20%
|
|
4.45%
|
The following table summarizes the components of the net periodic cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Net Periodic Cost
|
|
|
|
|
|
Service Cost — Benefits Earned During Period
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
3
|
|
Interest Cost
|
40
|
|
|
39
|
|
|
31
|
|
Amortization of Prior Service Cost
|
24
|
|
|
26
|
|
|
25
|
|
Amortization of Losses
|
22
|
|
|
26
|
|
|
—
|
|
Net Periodic Cost
|
$
|
91
|
|
|
$
|
97
|
|
|
$
|
59
|
|
The assumptions used to determine the net periodic cost are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Discount Rate
|
4.45%
|
|
4.05%
|
|
5.10%
|
Future Average Healthcare Benefit Increases
|
5.72%
|
|
5.32%
|
|
5.48%
|
Unrecognized prior service costs of
$0.1 million
and unrecognized actuarial losses of
$0.3 million
for medical, dental and long-term care insurance benefits (net of taxes of
$0.2 million
) are included in AOCI at
December 31, 2016
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, 2016
that will be recognized as components of net periodic benefit cost during the year ended December 31,
2017
for the Plan will be insignificant. For measurement purposes, a
5.3%
and
6.2%
increase in the cost of health care benefits was assumed for
2017
and
2018
, respectively, and a range between
4.6%
and
6.3%
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
$0.9 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
91.7%
funded as of January 1,
2016
. The Company’s contributions to the plan were
$1.1 million
in
2016
,
$1.0 million
in
2015
and
$0.9 million
in
2014
. 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 Buyback Program may be suspended or discontinued at any time. Under this program the Company has repurchased approximately
523,000
shares for
$17.6 million
.
Reserved Common Stock
At
December 31, 2016
, approximately
11.4 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 currency translation adjustments, mark to market adjustments for derivatives and retirement liability adjustments. Income taxes related to derivatives and retirement liability adjustments within other comprehensive income are generally recorded based on an effective tax rate of approximately
35%
.
No
income tax effect is recorded for currency translation adjustments.
The components of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
Foreign Currency Translation Adjustments
|
$
|
(8,597
|
)
|
|
$
|
(7,971
|
)
|
Retirement Liability Adjustment – Before Tax
|
(10,611
|
)
|
|
(10,912
|
)
|
Tax Benefit
|
3,714
|
|
|
3,819
|
|
Retirement Liability Adjustment – After Tax
|
(6,897
|
)
|
|
(7,093
|
)
|
Accumulated Other Comprehensive Loss
|
$
|
(15,494
|
)
|
|
$
|
(15,064
|
)
|
The components of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Foreign Currency Translation Adjustments
|
$
|
(626
|
)
|
|
$
|
(4,617
|
)
|
|
$
|
(4,638
|
)
|
Reclassification to Interest Expense
|
—
|
|
|
—
|
|
|
103
|
|
Mark to Market Adjustments for Derivatives
|
—
|
|
|
—
|
|
|
4
|
|
Tax Expense
|
—
|
|
|
—
|
|
|
(38
|
)
|
Mark to Market Adjustments for Derivatives
|
—
|
|
|
—
|
|
|
69
|
|
Retirement Liability Adjustment
|
301
|
|
|
2,311
|
|
|
(5,800
|
)
|
Tax Benefit (Expense)
|
(105
|
)
|
|
(809
|
)
|
|
2,031
|
|
Retirement Liability Adjustment
|
196
|
|
|
1,502
|
|
|
(3,769
|
)
|
Other Comprehensive (Loss) Income
|
$
|
(430
|
)
|
|
$
|
(3,115
|
)
|
|
$
|
(8,338
|
)
|
NOTE 12 — EARNINGS PER SHARE
Earnings per share computations are based upon the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
(In thousands, except per share data)
|
|
|
|
|
|
Net Income
|
$
|
48,424
|
|
|
$
|
66,974
|
|
|
$
|
56,170
|
|
Basic Earnings Weighted Average Shares
|
29,163
|
|
|
29,245
|
|
|
28,716
|
|
Net Effect of Dilutive Stock Options
|
869
|
|
|
934
|
|
|
1,254
|
|
Diluted Earnings Weighted Average Shares
|
30,032
|
|
|
30,179
|
|
|
29,970
|
|
Basic Earnings Per Share
|
$
|
1.66
|
|
|
$
|
2.29
|
|
|
$
|
1.96
|
|
Diluted Earnings Per Share
|
$
|
1.61
|
|
|
$
|
2.22
|
|
|
$
|
1.87
|
|
The above information has been adjusted to reflect the impact of the
three-for-twenty
distribution of Class B Stock for shareholders of record on October 11, 2016.
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
0.2 million
at
December 31, 2016
,
0.1 million
at December 31,
2015
and were insignificant at December 31,
2014
.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted Average Fair Value of the Options Granted
|
$
|
16.85
|
|
|
$
|
18.00
|
|
|
$
|
19.35
|
|
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:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free Interest Rate
|
1.08% – 2.34%
|
|
1.36% – 2.10%
|
|
0.12% – 2.30%
|
Dividend Yield
|
—%
|
|
—%
|
|
—%
|
Volatility Factor
|
0.40 – 0.45
|
|
0.40 – 0.51
|
|
0.42 – 0.52
|
Expected Life in Years
|
4.0 – 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, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Stock Compensation Expense
|
$
|
2,281
|
|
|
$
|
2,274
|
|
|
$
|
1,730
|
|
Tax Benefit
|
(145
|
)
|
|
(177
|
)
|
|
(122
|
)
|
Stock Compensation Expense, Net of Tax
|
$
|
2,136
|
|
|
$
|
2,097
|
|
|
$
|
1,608
|
|
A summary of the Company’s stock option activity and related information for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
(Aggregate intrinsic value in
thousands)
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
Outstanding at January 1
|
1,444,954
|
|
|
$
|
12.61
|
|
|
$
|
30,675
|
|
|
1,686,178
|
|
|
$
|
9.43
|
|
|
$
|
43,778
|
|
|
2,237,325
|
|
|
$
|
6.58
|
|
|
$
|
78,846
|
|
Options Granted
|
104,900
|
|
|
$
|
34.29
|
|
|
$
|
(48
|
)
|
|
105,742
|
|
|
$
|
35.80
|
|
|
$
|
(42
|
)
|
|
97,641
|
|
|
$
|
36.63
|
|
|
$
|
506
|
|
Options Exercised
|
(188,768
|
)
|
|
$
|
7.20
|
|
|
$
|
(5,029
|
)
|
|
(346,966
|
)
|
|
$
|
4.25
|
|
|
$
|
(10,808
|
)
|
|
(644,058
|
)
|
|
$
|
3.63
|
|
|
$
|
(24,599
|
)
|
Options Forfeited
|
(22,813
|
)
|
|
$
|
25.96
|
|
|
$
|
(180
|
)
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(4,730
|
)
|
|
$
|
11.44
|
|
|
$
|
(144
|
)
|
Outstanding at December 31
|
1,338,273
|
|
|
$
|
14.85
|
|
|
$
|
25,418
|
|
|
1,444,954
|
|
|
$
|
12.61
|
|
|
$
|
32,928
|
|
|
1,686,178
|
|
|
$
|
9.43
|
|
|
$
|
54,609
|
|
Exercisable at December 31
|
1,091,561
|
|
|
$
|
11.03
|
|
|
$
|
24,898
|
|
|
1,167,040
|
|
|
$
|
9.20
|
|
|
$
|
30,576
|
|
|
1,371,614
|
|
|
$
|
6.58
|
|
|
$
|
48,331
|
|
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
$33.84
,
$35.40
and
$41.83
as of
December 31, 2016
,
2015
and
2014
, respectively.
The weighted average fair value of options vested during
2016
,
2015
and
2014
was
$12.05
,
$10.85
and
$6.13
, respectively. The total fair value of options that vested during the year amounted to
$1.4 million
,
$1.5 million
and
$1.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. At
December 31, 2016
, total compensation costs related to non-vested awards not yet recognized amounts to
$5.2 million
and will be recognized over a weighted average period of
2.4
years.
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Exercise Price Range
|
Shares
|
|
Weighted Average
Remaining Life
in Years
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted Average
Remaining Life
in Years
|
|
Weighted
Average
Exercise Price
|
$ 3.04 - $ 4.45
|
471,841
|
|
|
2.5
|
|
$
|
3.29
|
|
|
471,841
|
|
|
2.5
|
|
$
|
3.29
|
|
$ 5.77 - $ 6.35
|
45,166
|
|
|
0.5
|
|
6.01
|
|
|
45,166
|
|
|
0.5
|
|
6.01
|
|
$ 8.83 - $15.68
|
459,138
|
|
|
4.6
|
|
11.73
|
|
|
431,370
|
|
|
4.5
|
|
11.81
|
|
$ 26.09 - $41.19
|
342,288
|
|
|
8.5
|
|
33.93
|
|
|
123,344
|
|
|
7.9
|
|
33.05
|
|
$ 52.77 - $52.77
|
19,840
|
|
|
8.2
|
|
52.77
|
|
|
19,840
|
|
|
8.2
|
|
52.77
|
|
|
1,338,273
|
|
|
4.8
|
|
14.85
|
|
|
1,091,561
|
|
|
3.9
|
|
11.03
|
|
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, 2016
, the Company had options outstanding for
1,117,799
shares under the plans. At
December 31, 2016
, there were
616,752
options available for future grant under the plan established in 2011.
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, 2016
, the Company had options outstanding for
220,474
shares under the plans. At
December 31, 2016
, there were
172,288
options available for future grant under the plan established in 2005.
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, 2016
, employees had subscribed to purchase
108,995
shares at
$33.09
per share. The weighted average fair value of the options was approximately
$9.88
,
$6.93
and
$8.40
for options granted during the year ended
December 31, 2016
,
2015
and
2014
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free Interest Rate
|
0.63
|
%
|
|
|
0.31
|
%
|
|
|
0.10
|
%
|
|
Dividend Yield
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
Volatility Factor
|
0.45
|
|
|
0.40
|
|
|
0.42
|
|
Expected Life in Years
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
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
and
2015
, recorded within Other Liabilities. The values were determined using Level 3 inputs. There were no financial assets carried at fair value measured on a recurring basis at
December 31, 2016
or
2015
. 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 have 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. There was a similar adjustment of
$5.0 million
in fiscal 2014. These adjustments were 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. There were
no
impairment charges to goodwill in any of the Company’s reporting units in
2016
,
2015
or
2014
.
Intangible assets that are amortized 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 intangible assets in either of the Company’s segments in
2016
,
2015
or
2014
.
The Armstrong intangible assets acquired on January 14, 2015 were valued using a discounted cash flow methodology and are classified as Level 3 inputs.
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
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
(Unaudited)
|
Dec. 31,
|
|
October 1,
|
|
July 2,
|
|
April 2,
|
|
Dec. 31,
|
|
October 3,
|
|
July 4,
|
|
April 4,
|
(In thousands, except for per share data)
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2015
|
|
2015
|
|
2015
|
|
2015
|
Sales
|
$
|
154,068
|
|
|
$
|
155,099
|
|
|
$
|
164,426
|
|
|
$
|
159,530
|
|
|
$
|
157,340
|
|
|
$
|
200,145
|
|
|
$
|
173,156
|
|
|
$
|
161,638
|
|
Gross Profit (sales less cost of products sold)
|
$
|
36,486
|
|
|
$
|
38,663
|
|
|
$
|
44,835
|
|
|
$
|
39,483
|
|
|
$
|
38,901
|
|
|
$
|
59,427
|
|
|
$
|
49,452
|
|
|
$
|
40,162
|
|
Income Before Income Taxes
|
$
|
14,296
|
|
|
$
|
16,422
|
|
|
$
|
21,555
|
|
|
$
|
16,512
|
|
|
$
|
14,822
|
|
|
$
|
35,887
|
|
|
$
|
27,044
|
|
|
$
|
16,297
|
|
Net Income
|
$
|
9,885
|
|
|
$
|
12,074
|
|
|
$
|
14,980
|
|
|
$
|
11,485
|
|
|
$
|
13,907
|
|
|
$
|
24,694
|
|
|
$
|
17,690
|
|
|
$
|
10,683
|
|
Basic Earnings Per Share
|
$
|
0.34
|
|
|
$
|
0.42
|
|
|
$
|
0.51
|
|
|
$
|
0.39
|
|
|
$
|
0.47
|
|
|
$
|
0.84
|
|
|
$
|
0.61
|
|
|
$
|
0.37
|
|
Diluted Earnings Per Share
|
$
|
0.33
|
|
|
$
|
0.41
|
|
|
$
|
0.50
|
|
|
$
|
0.38
|
|
|
$
|
0.46
|
|
|
$
|
0.82
|
|
|
$
|
0.59
|
|
|
$
|
0.35
|
|
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, 2016
,
2015
and
2014
was
$3.9 million
,
$2.9 million
and
$3.0 million
, respectively. The following table represents future minimum lease payment commitments as of
December 31, 2016
:
|
|
|
|
|
(In thousands)
|
|
2017
|
$
|
2,380
|
|
2018
|
1,872
|
|
2019
|
1,496
|
|
2020
|
137
|
|
2021
|
—
|
|
|
$
|
5,885
|
|
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, 2016
were
$98.5 million
. These commitments are not reflected as liabilities in the Company’s Consolidated Balance Sheets.