Astronics (ATRO) 10-Q2020 Q3 Quarterly report

ASTRONICS CORPORATION

(Exact name of registrant as specified in its charter)

(716) 805-1599

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Part I – Financial Information

Consolidated Condensed Balance Sheets

Consolidated Condensed Statements of Operations

Consolidated Condensed Statements of Comprehensive (Loss) Income

Consolidated Condensed Statements of Cash Flows

Consolidated Condensed Statements of Shareholders' Equity

Consolidated Condensed Statements of Shareholders' Equity, Continued

Notes to Consolidated Condensed Financial Statements

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.

Operating Results

The results of operations for any interim period are not necessarily indicative of results for the full year. In addition, the COVID-19 pandemic has increased the volatility we experience in our financial results in recent periods and this could continue in future interim and annual periods. Operating results for the nine months ended September 26, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The balance sheet at December 31, 2019 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 2019 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 and electronics 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 principal operations in the United States (“U.S.”), Canada, France and England, as well as engineering offices in the Ukraine and India.

On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The business was not core to the future of the Test Systems segment. The total proceeds of the divestiture amounted to $103.8 million plus certain contingent purchase consideration (“earn-out”) as described in Note 18. The Company recorded a pre-tax gain on the sale of $80.1 million in the first quarter of 2019. The Company recorded income tax expense relating to the gain of $19.7 million.

On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom Communication Technologies, Inc. (“Freedom”). Freedom, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market. Freedom is included in our Test Systems segment. The total consideration for the transaction was $21.8 million, net of $0.6 million in cash acquired.

On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. The Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million in the third quarter of 2019.

On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus earn-outs estimated at a fair value of $2.5 million. Diagnosys Inc. and its affiliates (“Diagnosys”) is included in our Test Systems segment. Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets. The terms of the acquisition allow for a potential earn-out of up to an additional $13.0 million over the three years post-acquisition based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India.

For additional information regarding these acquisitions and divestitures see Note 18.

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has had a sudden and significant impact on the global economy, and particularly in the aerospace industry, resulting in the grounding of the majority of the global commercial transportation fleet and significant cost cutting and cash preservation actions by the global airlines. This in turn has resulted in a significant reduction in airlines spending for both new aircraft and on upgrading their existing fleet with the Company’s products. We expect this low level of investment by the airlines will continue at least into 2021, however, the ultimate impact of COVID-19 on our business results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy and the aerospace industry, which are uncertain and cannot be predicted at this time.

In response to the global COVID-19 pandemic, we have implemented actions to maintain our financial health and liquidity, as discussed in detail in our Form 8-K’s filed on March 31, 2020, May 6, 2020 and July 31, 2020. In addition to these measures, we amended our revolving credit facility on May 4, 2020, as further described in Note 7. We are also monitoring the impacts of COVID-19 on the fair value of assets. Refer to Note 6 for a discussion of goodwill impairment charges. Should future changes in sales, earnings and cash flows differ significantly from our expectations, long-lived assets to be held and used and goodwill could become impaired in the future.

Trade Accounts Receivable and Contract Assets

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as the age of the receivable balances, historical experience, credit quality, current economic conditions, and reasonable and supportable forecasts of future economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts balance was $3.9 million and $3.6 million at September 26, 2020 and December 31, 2019, respectively. The Company’s bad debt expense was insignificant and $1.7 million in the three and nine months ended September 26, 2020, respectively, and insignificant in the three and nine months ended September 28, 2019. Total writeoffs charged against the allowance were $1.1 million and $1.2 million in the three month and nine months ended September 26, 2020, and insignificant in the three and nine months ended September 28, 2019. Total recoveries collected were insignificant in both the three and nine months ended September 26, 2020 and September 28, 2019.

The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the current COVID-19 pandemic, industry conditions, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables and contract assets as airlines and other aerospace company’s cash flows are impacted by the COVID-19 pandemic.

Cost of Products Sold, Engineering and Development, Interest, 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 $16.4 million and $25.6 million for the three months ended and $65.0 million and $80.0 million for the nine months ended September 26, 2020 and September 28, 2019, 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 26, 2020 and September 28, 2019.

Goodwill Impairment

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.

As a result of the qualitative factors related to the COVID-19 pandemic, as discussed above, we performed interim quantitative assessments for the reporting units which had goodwill as of March 28, 2020, and an additional quantitative assessment for our PECO reporting unit as of June 27, 2020. Based on our quantitative assessments, the Company recorded goodwill impairment charges associated with 4 Aerospace reporting units, totaling $86.3 million within the Impairment Loss line in the Consolidated Condensed Statement of Operations in the nine months ended September 26, 2020. As of September 26, 2020, the

Company concluded that no indicators of additional impairment relating to intangible assets or goodwill existed and an interim test was not performed in the three months then ended.

For additional information regarding the quantitative test and the related goodwill impairment see Note 6.

Valuation of Long-Lived Assets

Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value. In conjunction with the deteriorating economic conditions associated with the COVID-19 pandemic, we recorded an impairment charge to right-of-use (“ROU”) assets of approximately $0.7 million incurred in one reporting unit in the Aerospace segment within the Impairment Loss line in the Consolidated Condensed Statement of Operations in the nine months ended September 26, 2020. No other long-lived asset impairments were warranted based on the quantitative analysis performed.

Financial Instruments

The Company determined there were indicators of impairment over one of its investments in the second quarter of 2020 as a result of declining revenues and cash flows of the investee as well as significant uncertainties over the investee’s ability to raise additional capital or to finance its own activities. There were no observable price changes for this investment during 2020. We determined that the fair value of this investment was de minimus and we recorded an impairment charge of $3.5 million recorded within Other Expense, Net of Other Income in the accompanying Consolidated Condensed Statement Operations in the nine months ended September 26, 2020.

Foreign Currency Translation

The aggregate foreign currency transaction gain or loss included in operations was insignificant for the three and nine months ended September 26, 2020 and September 28, 2019.

Newly Adopted and Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted

Recent Accounting Pronouncements Not Yet Adopted

We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.

2) Revenue

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 services. Sales shown on the Company's Consolidated Condensed Statements of Operations are from contracts with customers.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 90 days after the performance obligation has been satisfied; 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. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer. As of September 26, 2020, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year.

The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract 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 Condensed 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. As of September 26, 2020, the Company does not have material capitalized fulfillment costs.

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. 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. Thus, the contract's transaction price is the revenue recognized when or as that performance obligation is satisfied. 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 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 distinct, and, therefore, are accounted for as new contracts. The effect of modifications has been reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.

The 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 that are subject to the requirement to accrue anticipated losses, the Company recognizes the entire anticipated loss in the period that the loss becomes probable.

For contracts with customers in which the Company promises to provide a product to the customer 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. The Company typically recognizes revenue on a straight-line basis throughout the contract period.

On September 26, 2020, we had $282.2 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $115.5 million of our remaining performance obligations as revenue in 2020.

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 Condensed Balance Sheet.

Billings in excess of cost includes billings in excess of revenue recognized as well as other elements of deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are reported in our Consolidated Condensed Balance Sheet, classified as current liabilities, within Customer Advance Payments and Deferred Revenue, and non-current liabilities, within Other Liabilities. 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 satisfies 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 $8.5 million and $5.1 million during the three months ended and $20.1 million and $15.7 million for the nine months ended September 26, 2020 and September 28, 2019, respectively, in revenues that were included in the contract liability balance at the beginning of the period.

The Company's contract assets and contract liabilities consist primarily of costs and profits in excess of billings and billings in excess of cost and profits, respectively. The following table presents the beginning and ending balances of contract assets and contract liabilities during the nine months ended September 26, 2020:

The following table presents our revenue disaggregated by Market Segments as follows:

The following table presents our revenue disaggregated by Product Lines as follows:

3) Inventories

Inventories consisted of the following:

The Company has evaluated the carrying value of existing inventories and believe they are properly reflected at their lower of carrying value or net realizable value. Future changes in demand or other market developments could result in future inventory charges. The Company is actively managing inventories and aligning them to meet known current and future demand.

4) Property, Plant and Equipment

Property, Plant and Equipment consisted of the following:

5) Intangible Assets

Amortization expense for acquired intangible assets expected for 2020 and for each of the next five years is summarized as follows:

6) Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 26, 2020:

Goodwill Impairment Testing

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.

In the first quarter of 2020, the World Health Organization characterized COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The United States, France, Canada and many other countries have issued formal stay-at-home orders to combat the pandemic, which require residents to stay home and non-essential businesses to temporarily close.

Beginning in the first quarter of 2020, the pandemic negatively impacted the global economy and aerospace industry, resulting in an abrupt and significant decrease of airline passenger travel. In response, the global airlines grounded a significant portion

of their fleet and have begun to defer or cancel aircraft scheduled for delivery this year. Additionally, airlines have announced plans to reduce capital and discretionary spending to conserve cash in the immediate future. In turn, aircraft manufacturers and tier one suppliers have experienced a disruption in production and demand as their customers defer delivery of new aircraft, resulting in slowed or halted production at facilities throughout the world. Commercial airlines and manufacturers are focusing on conserving cash to preserve liquidity, which will have a negative impact on airframe and aftermarket sales as compared with pre-pandemic forecasts.

Management considered these qualitative factors and the impact to each reporting unit’s revenue and earnings, and determined that it was more likely than not that the fair value of several reporting units was less than its carrying value. Therefore, we performed a quantitative test for all 8 reporting units with goodwill as of March 28, 2020.

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 sales 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. Accordingly, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

We determined that the estimated fair value of 4 of the 8 reporting units with goodwill significantly exceeded their respective carrying values and therefore, did not result in a goodwill impairment as of March 28, 2020.

For the remaining 4 reporting units with goodwill, we determined that the estimated fair value was less than their respective carrying values. We recognized full impairments of the goodwill of our Astronics Connectivity Systems and Certification (“ACSC”), PGA and Custom Control Concepts (“CCC”) reporting units, and a partial impairment of the goodwill of our PECO reporting unit as of March 28, 2020.

During the second quarter of 2020, further commercial aircraft order reductions, delays and cancellations at a major customer of our PECO reporting unit resulted in revisions to PECO’s forecast. We therefore performed a quantitative test for the PECO reporting unit as of June 27, 2020. As a result of this quantitative test, we determined that the estimated fair value was less than the respective carrying value as of June 27, 2020.

As a result, we recorded non-cash goodwill impairment charges in the Aerospace segment of approximately $86.3 million within the Impairment Loss line of the Consolidated Condensed Statements of Operations in the nine months ended September 26, 2020.

The goodwill remaining in our PECO reporting unit after the impairments is $20.2 million. There is greater risk of future impairments in the PECO reporting unit as any further deterioration in its performance compared to forecast, changes in order volumes or delivery schedules at its major customer, as well as any changes in economic forecasts and expected recovery in the aerospace industry, may require the Company to complete additional interim impairment tests in future quarters and could result in the reporting unit’s fair value again falling below carrying value in subsequent quarters. Further, if the composition of the reporting unit’s assets and liabilities were to change and result in an increase in the reporting unit’s carrying value, it could lead to additional impairment testing and further impairment losses.

As of September 26, 2020, the Company concluded that no indicators of additional impairment relating to intangible assets or goodwill existed and an interim test was not performed in the three months then ended.

7) Long-term Debt and Notes Payable

The Company's Fifth Amended and Restated Credit Agreement (the “Agreement”) provided for a $500 million revolving credit line with the option to increase the line by up to $150 million. The maturity date of the loans under the Agreement is February 16, 2023. The maximum permitted leverage ratio of funded debt, net of cash to Adjusted EBITDA (as defined in the Agreement) was 3.75 to 1, increasing to 4.50 to 1 for up to 4 fiscal quarters following the closing of an acquisition permitted under the Agreement, subject to limitations. The Company paid interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.00% and 1.50% based upon the Company’s leverage ratio. The Company also paid 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 COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s future operating results. As a result, the Company was projected to exceed its maximum permitted leverage ratio in the fourth quarter of 2020. Accordingly, on May 4, 2020, the Company executed an amendment to the Agreement (the “Amended Facility”), which reduced the revolving credit line from $500 million to $375 million. There remains the option to increase the line by up to $150 million. The Amended Facility suspends the application of the leverage ratio up through and including the second quarter of 2021 (the “suspension period”). The maximum net leverage ratio will be 6.00 to 1 for the third quarter of 2021, 5.50 to 1 for the fourth quarter of 2021, 4.50 to 1 for the first quarter of 2022, and return to 3.75 to 1 for each quarter thereafter.

At September 26, 2020, there was $168.0 million outstanding on the revolving credit facility and there remained $205.7 million available subject to the minimum liquidity covenant discussed below, net of outstanding letters of credit and bank guarantees. The credit facility allocates up to $20 million of the $375 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At September 26, 2020, outstanding letters of credit and bank guarantees totaled $1.3 million.

Through the third quarter of 2021, the Amended Facility requires the Company to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments, of $180 million at all times. Through the second quarter of 2021, the Company is required to maintain a minimum interest coverage ratio of 1.75x on a quarterly basis, except for the first quarter of 2021, which is set at 1.50x. The Company was in compliance with its financial covenants at September 26, 2020. During the suspension period, the Company will pay interest on the unpaid principal amount of the Amended Facility at a rate equal to one-, three- or six-month LIBOR (which shall be at least 1.00%) plus 2.25%. The Company will also pay a commitment fee to the lenders in an amount equal to 0.35% on the undrawn portion of the Amended Facility. After the suspension period, the Company will pay interest on the unpaid principal amount of the Amended Facility at a rate equal to one-, three- or six-month LIBOR (which shall be at least 1.00%) plus between 1.00% to 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 0.10% to 0.35% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio. The Amended Facility provided for the payment of a consent fee of 15 basis points of the commitment for each consenting lender.

The Amended Facility also temporarily restricts certain activities, including acquisitions and share repurchases, and requires mandatory prepayments during the suspension period when the Company’s cash balance exceeds $100 million. During the nine months ended September 26, 2020, subsequent to the execution of the Amended Facility, the Company made prepayments approximating $165 million.

The Company’s obligations under the Amended Facility are jointly and severally guaranteed by each domestic subsidiary of the Company other than non-material subsidiaries. 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 Amended Facility 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

9) Leases

The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. We have concluded that when an agreement grants us the right to substantially all of the economic benefits associated with an identified asset, and we are able to direct the use of that asset throughout the term of the agreement, we have a lease. We lease certain facilities and office equipment under finance leases, and we lease certain production facilities, office equipment and vehicles under operating leases. Some of our leases include options to extend or terminate the leases and these options have been included in the relevant lease term to the extent that they are reasonably certain to be exercised.

The weighted-average remaining term for the Company's operating and financing leases are approximately 6 and 2 years, respectively. The weighted-average discount rates for the Company's operating and financing leases are approximately 3.3% and 5.3%, respectively.

The following is a summary of the Company's ROU assets and liabilities:

The following is a summary of the Company's total lease costs:

The following is a summary of the Company's maturity of lease liabilities:

10) Income Taxes

The effective tax rates were approximately 8.7% and 22.9% for the nine months ended and 52.8% and 31.3% for the three months ended September 26, 2020 and September 28, 2019, respectively. The 2020 tax rate was impacted by permanently non-deductible goodwill impairments totaling $60.8 million, a Federal valuation allowance of approximately $7.5 million, and a tax benefit related to a revised state income tax filing position of approximately $3.1 million recorded during the three and nine months ended September 26, 2020.

During the three and nine months ended September 26, 2020, 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 2015 through 2018 to reflect this revised tax position and claim the associated tax benefits. In addition, the revised tax position will also be taken on the 2019 state income tax filing. Accordingly, the Company has recorded a discrete tax benefit of $3.1 million related to these items for the three and nine month periods ended September 26, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize net operating losses (“NOL”) to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. During the nine months ended September 26,

2020, the Company recorded a $1.5 million benefit relating to the NOL carryback provisions and the technical correction for qualified improvement property provided for in the CARES Act. The Company will continue to monitor additional guidance issued and assess the impact that various provisions will have on its business.

As a result of the COVID-19 pandemic and its adverse effects on the global economy and aerospace industry that began to take shape in the first quarter of fiscal 2020, the Company is now forecasting to generate a taxable loss in 2020 which can be carried back under the CARES Act to recover previously paid income taxes. After consideration of deferred tax liabilities that reverse in 2021 and beyond, the Company must rely on future taxable income in 2021 and beyond for purposes of asserting that the Company’s remaining U.S. Federal deferred tax assets are realizable on a more-likely-than-not basis as required under ASC 740. Losses in recent periods and projected losses, combined with the significant uncertainty brought about by the COVID-19 pandemic, is collectively considered significant negative evidence under ASC 740 when assessing whether an entity can use projected income as a basis for concluding that deferred tax assets are realizable on a more-likely-than-not basis. Accordingly, during the nine months ended September 26, 2020, the Company determined that a portion of its deferred tax assets are not expected to be realizable in the future. As a result, the Company recorded a partial valuation allowance of approximately $7.5 million during the nine months ended September 26, 2020 against its U.S. Federal deferred tax assets.

11) Earnings Per Share

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 831,000 shares as of September 26, 2020 and 279,000 shares as of September 28, 2019. Further, due to our net loss in the three and nine month periods ended September 26, 2020, the assumed exercise of stock compensation had an antidilutive effect and therefore was excluded from the computation of diluted loss per share.

12) Shareholders' Equity

Share Buyback Program

The Company’s Board of Directors from time to time authorizes the repurchase of common stock, which 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. Most recently, on September 17, 2019, the Company’s Board of Directors authorized a repurchase of up to $50 million. Approximately 282,000 shares were repurchased in the first quarter of 2020 at a cost of $7.7 million before the 10b5-1 plan associated with the share repurchase program was terminated on February 3, 2020.

Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss

13) Supplemental Retirement Plan and Related Post Retirement Benefits

The service cost component of net periodic benefit costs above is recorded in Selling, General and Administrative Expenses within the Consolidated Condensed Statements of Operations, while the remaining components are recorded to Other Expense, Net of Other Income.

14) Sales to Major Customers

The Company has a significant concentration of business with 2 major customers, each typically in excess of 10% of consolidated sales. The loss of either of these customers would significantly, negatively impact our sales and earnings.

Sales to these 2 customers represented 12% and 9% of consolidated sales for the nine months ended and 6% and 10% for the three months ended September 26, 2020. Sales to these customers were primarily in the Aerospace segment. Accounts receivable from these customers at September 26, 2020 was approximately $12.5 million. Sales to these 2 customers represented 13% and 14% of consolidated sales for the nine months ended and 12% and 14% for the three months ended September 28, 2019.

15) Legal Proceedings

On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserted that a subsidiary of the Company, AES, sold, marketed, and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa. Lufthansa sought an order requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers in Germany since November 26, 2003, and compensation for damages related to direct sales of the allegedly infringing power supply system in Germany (referred to as “direct sales”). The claim did not specify an estimate of damages and a related damages claim is being pursued by Lufthansa in separate court proceedings in an action filed in July 2017, as further discussed below.

In February 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment did not require AES to recall products that are already installed in aircraft or had been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which required AES to provide certain financial information regarding direct sales of the infringing product in Germany to enable Lufthansa to make an estimate of requested damages.

The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Higher Regional Court of Karlsruhe issued its ruling and upheld the lower court’s decision. The Company submitted a petition to grant AES leave for appeal to the German Federal Supreme Court. On April 18, 2018, the German Federal Supreme Court granted Astronics’ petition in part, namely with respect to the part concerning the amount of damages. On January 8, 2019, the German Federal Supreme Court held the hearing on the appeal. By judgment of March 26, 2019, the German Federal Supreme Court dismissed AES's appeal. With this decision, the above-mentioned proceedings are complete.

In July 2017, Lufthansa filed an action before the District Court of Mannheim for payment of damages caused by the court’s decision that AES infringed the patent, specifically related to direct sales of the product into Germany (associated with the original December 2010 action discussed above). In this action, which was served to AES on April 11, 2018, Lufthansa claimed payment of approximately $6.2 million plus interest. An oral hearing was held on September 13, 2019. A first instance decision in this matter was handed down on December 6, 2019. According to this ruling, Lufthansa was awarded damages in the amount of approximately $3.2 million plus interest. Prior to 2019, the Company had accrued $1.0 million related to this matter. As a result of the judgment on direct sales into Germany, the Company reflected an incremental reserve of $3.5 million in its December 31, 2019 financial statements related to this matter ($1.7 million of which was recorded in the three and nine month periods ended September 28, 2019). Payment of the first instance judgment was made during the nine months ended September 26, 2020 of approximately $4.7 million, inclusive of interest. AES has appealed this decision and the appeal is currently pending before the Higher Regional Court of Karlsruhe. If the first instance judgment is later reversed on appeal, the Company could reclaim any amounts that were previously paid to Lufthansa as far as the payments exceed the amount awarded by the appellate court, but there can be no assurances that we will be successful on such appeal.

On December 29, 2017, Lufthansa filed another infringement action against AES in the Regional State Court of Mannheim claiming that sales by AES to its international customers have infringed Lufthansa's patent if AES's customers later shipped the products to Germany (referred to as “indirect sales”). This action, therefore, addresses sales other than those covered by the action filed on December 29, 2010, discussed above. In this action, served on April 11, 2018, Lufthansa sought an order obliging AES to provide information and accounting and a finding that AES owes damages for the attacked indirect sales. Moreover, Lufthansa sought accounting and a finding that the sale of individual components of the EmPower system – either directly to Germany or to international customers if these customers later shipped these products to Germany – constitutes an indirect patent infringement of Lufthansa's patent in Germany. In addition, Lufthansa sought an order obliging AES to confirm by an affidavit that the accounting provided in September 2015 was accurate and a finding that AES is also liable for damages for the sale of modified products if the modification of the products was not communicated to all subsequent buyers of the products. No amount of claimed damages has been specified by Lufthansa.

An oral hearing in this matter was held on September 13, 2019, as part of the oral hearing for the direct sales damages claim discussed above. A first instance decision in this matter was handed down on December 6, 2019. According to this judgment, Lufthansa's claims were granted in part. The court granted Lufthansa's claims for a finding that indirect sales (as defined above) by AES to international customers constitute a patent infringement under the conditions specified in the judgment and that the sale of components of the EmPower system to Germany constitutes an indirect patent infringement. Moreover, the Court granted Lufthansa's request for an affidavit confirming that the accounting provided in September 2015 was accurate. The Court rejected Lufthansa's request for a finding that AES is also liable for damages for the sale of modified products as inadmissible. This is relevant, as it provides that once AES modified the system to remove the infringing feature, any subsequent outlets are deemed not to be infringing outlets for purposes of calculating damages. AES and Lufthansa both appealed this decision and the appeal is currently pending before the Higher Regional Court of Karlsruhe. In its appeal, Lufthansa extended its action by

requesting an additional finding that AES shall be held liable for all damages that Lufthansa incurred due to an alleged incorrect accounting of its past sales. No amount was quantified in Lufthansa's additional motion. The appeal is not likely to be settled in 2020.

With letter of April 28, 2020, Lufthansa notified AES of its intention to enforce the first instance decision with respect to the claims for accounting, information and confirmation of the earlier accounting by an affidavit. Lufthansa asked AES to provide the accounting on indirect sales (as defined above) as well as on the sales of individual parts, and also asked AES to provide the affidavit that the accounting provided in September 2015 was accurate. In July 2020, Lufthansa filed a request with the Regional State Court of Mannheim that AES be ordered to comply with the enforcement or to otherwise make payment of up to approximately $50,000. By decision on September 7, 2020, the District Court of Mannheim granted Lufthansa's request in part and ordered AES to make a coercive payment of approximately $25,000, which can be avoided if AES provides the requested accounting and information. AES has appealed the payment decision and is expecting a decision by the second instance Higher Regional State Court of Karlsruhe in November 2020. AES is in the process of preparing the requested accounting information.

If the December 6, 2019 decision of the Regional State Court of Mannheim is confirmed on appeal, AES would be responsible for payment of damages for indirect sales of patent-infringing EmPower in-seat power supply systems in the period from December 29, 2007 to May 22, 2018. AES modified the outlet units at the end of 2014 and substantially all of the modified outlet units sold from 2015 do not infringe the patent of Lufthansa. Since only sales of systems comprising patent-infringing outlet units trigger damages claims, the period for which AES is liable for damages in connection with indirect sales substantially finished at the end of 2014.

After the accounting, Lufthansa is expected to enforce its claim for damages in separate court proceedings. These proceedings would probably be tried before the Mannheim Court again, which makes it probable that the Mannheim court will determine the damages for the indirect sales on the basis of the same principles as in the direct sales proceedings (unless the latter ruling of the Mannheim court is reversed on appeal). Based on the information available currently, we estimate that the resulting damages would be approximately $11.6 million plus approximately $4.5 million of accrued interest at the end of 2019, for a total of approximately $16.1 million at December 31, 2019. Interest will accrue at a rate of 5% above the European Central Bank rate until final payment to Lufthansa.

Based upon the determination of the damages in the direct sales claim discussed above, in the September 26, 2020 consolidated financial statements, we have reflected a total accrual (inclusive of interest through September 26, 2020) of $16.5 million related to the indirect sales claim as management’s best estimate of the total exposure related to these matters that is probable and that can be reasonably estimated at this time. Additional interest accrued for the three and nine months ended September 26, 2020 was approximately $0.1 million and $0.4 million, respectively, and is recorded within Selling, General and Administrative Expense in the Company’s Consolidated Statement of Operations. In connection with the indirect sales claims, we currently believe it is unlikely that the appeals process will be completed and the damages and related interest will be paid within the next twelve months. Therefore the liability related to this matter, totaling $16.5 million, is classified within Other Liabilities (non-current) in the Consolidated Balance Sheet at September 26, 2020.

In December 2017, Lufthansa filed patent infringement cases in the United Kingdom (“UK”) and in France against AES. The Lufthansa patent expired in May 2018. In those cases, Lufthansa accuses AES of having manufactured, used, sold and offered for sale a power supply system, and offered and supplied parts for a power supply system that infringed upon a Lufthansa patent in those respective countries. In the French matter, the first instance court decided to bifurcate the issues of validity and infringement. The issue of alleged invalidity was heard on October 8, 2020. The court expects to rule on this matter on December 4, 2020. Such ruling will not involve any financial exposure to AES, as it will not deal with alleged infringement and the court will not order any damages. If the first instance court confirms the validity of the patent, the proceedings will continue with the issue of alleged infringement. No judgment on this issue is expected before late 2021.

In the UK matter, a trial took place in June 2020 to address the issues of infringement and validity of the patent. Judgment on those issues was rendered on June 22, 2020. The court held the UK patent valid and 3 out of 4 asserted claims infringed. In contrast to the decisions in Germany, the UK Court found that the modified components infringed a valid claim of the patent. If AES is not successful in any appeal phase, then the post-modification outlet units will be included in the calculation of monetary relief. Although the court has found the patent valid and some claims infringed, Lufthansa has yet to set out its case for monetary relief, which would need to be determined at a separate trial and would require extensive data gathering and analysis which has not yet been completed. Additionally, AES has applied to the Court of Appeal for permission to appeal the first instance UK findings. That application is pending. If the Court of Appeal rejects the application for permission to appeal made on the papers, AES may request an oral hearing. If permission to appeal is granted, any appeal on these substantive issues would likely be heard within 18 months of the trial. For this reason, while exposure in the UK matter is reasonably possible and such exposure could be material to the consolidated financial statements, it is not yet estimable, and thus, no liability has been recorded with respect to this matter at September 26, 2020.

Separate from any such damages Lufthansa may seek in connection with the UK infringement decision discussed above, as a result of the first instance judgement in their favor, Lufthansa is entitled to reimbursement from AES of a proportion of its legal expenditures in the UK case. An interim reimbursement of approximately $1.3 million was paid to Lufthansa in August 2020. The associated expense has been recorded in the Consolidated Condensed Statement of Operations in the nine-month period ended September 26, 2020 within Selling, General & Administrative Expenses. If the first instance decision is reversed on appeal, AES would be entitled to seek the return of such amounts from Lufthansa, as well as reimbursement of AES’s legal fees.

Each of the German, France and UK claims are separate and distinct. Validity and infringement of the Lufthansa patent in each country is a matter for the courts in each of these countries, whose laws differ from each other. In addition, the principles of calculating damages in each jurisdiction differ substantially. Therefore, the Company has assessed each matter separately and cannot apply the same calculation methodology as in the German direct and indirect matters. However, it is reasonably possible that additional damages and interest could be incurred if the court in France was to rule in favor of Lufthansa, or if any appeal in the UK matter is unsuccessful, but at this time we cannot reasonably estimate the range of loss. As loss exposure is not estimable at this time, the Company has not recorded any liability with respect to either of the matters as of September 26, 2020, except for the legal fee reimbursement in the UK case discussed above, which was paid during the three- and nine- month period ended September 26, 2020.

On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in that action alleges that AES manufactures, uses, sells and offers for sale a power supply system that infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that involved in the German action. On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and unenforceable. On July 20, 2016, the U.S. District Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice.

Lufthansa appealed the District Court's decision to the United States Court of Appeals for the Federal Circuit. On October 19, 2017, the Federal Circuit affirmed the district court’s decision, holding that the sole independent claim of the patent is indefinite, rending all claims on the patent indefinite. Lufthansa did not file a petition for en banc rehearing or petition the U.S. Supreme Court for a writ of certiorari. Therefore, there is no longer a risk of exposure from that lawsuit.

16) Segment Information

17) Fair Value

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. Fair value is 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.

The Company follows 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:

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 terms of the Diagnosys acquisition allow for a potential earn-out of up to an additional $13.0 million over the three years post-acquisition based on achievement of new order levels of over $72.0 million during that period. The fair value assigned to the earn-out is determined using the real options method, which requires Level 3 inputs such as new order forecasts, discount rate, volatility factors, and other market variables to assess the probability of Diagnosys achieving certain order levels over the period.

There were no other financial assets or liabilities carried at fair value measured on a recurring basis at December 31, 2019 or September 26, 2020.

On a Non-recurring Basis:

As further discussed in Note 6, we performed interim quantitative assessments for the reporting units which had goodwill as of March 28, 2020 and an additional interim quantitative assessment for the PECO reporting unit as of June 27, 2020. Based on our quantitative assessments, the Company recorded non-cash goodwill impairment charges associated with 4 Aerospace reporting units, totaling approximately $86.3 million within the Impairment Loss line in the Consolidated Condensed Statement of Operations in the nine months ended September 26, 2020. The impairment loss was calculated as the difference between the fair value of the reporting unit (which was calculated using level 3 inputs) and the carrying value of the reporting unit.

Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows of the asset or asset group (which are Level 3 inputs) with the asset of asset group’s 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. In conjunction with the deteriorating economic conditions associated with the COVID-19 pandemic, we recorded an impairment charge to ROU assets of approximately $0.7 million incurred in the Aerospace segment within the Impairment Loss line in the Consolidated Condensed Statement of Operations in the nine months ended September 26, 2020.

From time to time, the Company makes long-term, strategic equity investments in companies to promote business and strategic objectives. These investments are included in Other Assets on the Consolidated Condensed Balance Sheets. One of the investments incurred a full impairment charge which accounts for $3.5 million recorded within the Other Expense, Net of Other Income line in the accompanying Consolidated Condensed Statement of Operations for the nine months ended September 26, 2020. This is a level 3 measurement as there were no observable price changes during the year.

The Freedom and Diagnosys intangible assets were valued using a discounted cash flow methodology, as of their respective acquisitions dates, 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.

18) Acquisition and Divestiture Activities

Acquisitions

Diagnosys Inc. and its affiliates

On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited for $7.0 million in cash, plus an earn-out estimated at a fair value of $2.5 million. The terms of the acquisition allow for a potential earn-out of up to an additional $13.0 million over the three years post-acquisition based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India. Diagnosys is included in our Test Systems segment. Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets.

The purchase price allocation for this acquisition has been finalized. Purchased intangible assets and goodwill are not deductible for tax purposes. This transaction was not considered material to the Company’s financial position or results of operations.

Freedom Communication Technologies, Inc.

On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom. Freedom, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market. Freedom is included in our Test Systems segment. The total consideration for the transaction was $21.8 million, net of $0.6 million in cash acquired. The purchase price allocation for this acquisition has been finalized. Purchased intangible assets and goodwill are not deductible for tax purposes. This transaction was not considered material to the Company’s financial position or results of operations.

Divestitures

Semiconductor Test Business

On February 13, 2019, the Company completed a divestiture of its semiconductor business within the Test Systems segment. The business was not core to the future of the Test Systems segment. The total proceeds of the divestiture amounted to $103.8 million. The Company recorded a pre-tax gain on the sale of $80.1 million in the first quarter of 2019. The income tax expense relating to the gain was $19.7 million.

The transaction also included 2 elements of contingent earnouts. The First Earnout is calculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in each annual period from 2019 through 2022. The First Earnout may not exceed $35.0 million in total. The Second Earnout is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for each annual period from 2019 through 2022. The Second Earnout is not capped. For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, 0 amounts will be paid relative to such annual period; the sales in such annual period do not carry over to the next annual period. Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company will recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. No amounts were payable to the Company under the First Earnout for the year ending December 31, 2019.

Airfield Lighting Product Line

On July 12, 2019, the Company sold intellectual property and certain assets with its Airfield Lighting product line for $1.0 million in cash. The Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million during the third quarter of 2019.

Other Disposal Activity

As of December 31, 2019, the Company had agreed to sell certain facilities within the Aerospace segment. Accordingly, the property, plant and equipment assets associated with these facilities of $1.5 million was classified as held for sale in the Consolidated Condensed Balance Sheet at December 31, 2019. The sale was completed in the first quarter of 2020.

In the fourth quarter of 2019, in an effort to reduce the significant operating losses at our AeroSat business, we initiated a restructuring plan to reduce costs and minimize losses of our AeroSat antenna business. The plan narrows the initiatives for the AeroSat business to focus primarily on near-term opportunities pertaining to business jet connectivity. The plan has a downsized manufacturing operation remaining in New Hampshire, with significantly reduced personnel and operating expenses. Impairments and restructuring charges were recorded in 2019 as a result of the restructuring plan.

The Company incurred $0.4 million in additional restructuring charges associated with severance at AeroSat during the nine months ended September 26, 2020.

The COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s future operating results. As a result, the Company executed restructuring activities in the form of workforce reduction, primarily in the second quarter of 2020, to align capacity with expected demand. Additional restructuring charges of $0.2 million and $5.2 million in severance expense associated primarily with the Aerospace segment was recorded in the three and nine months ended September 26, 2020.

The following table reconciles the beginning and ending liability for restructuring charges relating to the Company’s restructuring plan described above:

The charge to Accrued Expenses and Other Current Liabilities is comprised of employee termination benefits expected to be paid within the next 12 months as well as the current portions of payments to be made under AeroSat’s non-cancelable inventory purchase commitments. The charge to Other Liabilities represents the non-current portions of payments to be made under AeroSat’s non-cancelable inventory purchase commitments. The non-cancelable purchase commitments are for inventory in the future which is not expected to be purchased prior to the expiration date of such agreements as a result of the restructuring plan.

OVERVIEW

Astronics Corporation (“Astronics” or the “Company”) is a leading supplier of advanced technologies and products to the global aerospace and defense industries. Our products and services include advanced, high-performance electrical power generation and distribution systems, seat motion solutions, lighting and safety systems, avionics products, aircraft structures, systems certification, and automated test systems.

Our Aerospace segment designs and manufactures products for the global aerospace industry. Product lines include lighting and safety systems, electrical power generation, distribution and motions systems, aircraft structures, avionics products, systems certification, and other products. Our Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft for the commercial, military and general aviation markets, suppliers to those OEM’s, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S. Department of Defense. Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the aerospace and defense, communications and mass transit test systems as well as training and simulation devices for both commercial and military applications. In the Test Systems segment, Astronics’ products are sold to a global customer base including OEM's and prime government contractors for both electronics and military products.

Our strategy is to increase our value by developing technologies and capabilities, either internally or through acquisition, and using those capabilities to provide innovative solutions to our targeted markets where our technology can be beneficial.

Important factors affecting our growth and profitability are the ongoing impacts of the COVID-19 pandemic and the timing and extent of recovery (as discussed more fully below), the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy. Once designed into a new aircraft, the spare parts business is frequently retained by the Company. Future growth and profitability of the test business is dependent on developing and procuring new and follow-on business. The nature of our Test Systems business is such that it pursues large multi-year projects. There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.

Acquisitions and Divestitures

On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The total proceeds of the divestiture amounted to $103.8 million. The Company recorded a pre-tax gain on the sale of $80.1 million in the first quarter of 2019. The income tax expense relating to the gain was $19.7 million.

On July 1, 2019, the Company acquired all of the issued and outstanding capital stock of Freedom Communication Technologies, Inc. (“Freedom”). Freedom, located in Kilgore, Texas, is a leader in wireless communication testing, primarily for the civil land mobile radio market. Freedom is included in our Test Systems segment. The total consideration for the transaction was $21.8 million, net of $0.6 million in cash acquired.

On July 12, 2019, the Company sold intellectual property and certain assets associated with its Airfield Lighting product line for $1.0 million in cash. The Airfield Lighting product line, part of the Aerospace segment, was not core to the business and represented less than 1% of revenue. The Company recorded a pre-tax loss on the sale of approximately $1.3 million.

On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited, for $7.0 million in cash, plus earn-outs estimated at a fair value of $2.5 million. Diagnosys Inc. and its affiliates (“Diagnosys”) is included in our Test Systems segment. Diagnosys is a developer and manufacturer of comprehensive automated test equipment providing test, support, and repair of high value electronics, electro-mechanical, pneumatic and printed circuit boards focused on the global mass transit and defense markets. The terms of the acquisition allow for a potential earn-out of up to an additional $13.0 million over the three years post acquisition based on achievement of new order levels of over $72.0 million during that period. The acquired business has operations in Westford, Massachusetts as well as Ferndown, England, and an engineering center of excellence in Bangalore, India.

A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.

CONSOLIDATED THIRD QUARTER RESULTS

Consolidated sales were down $70.5 million compared with the third quarter of 2019. Aerospace sales were down $75.2 million. Test System sales increased $4.6 million. Diagnosys contributed $3.1 million in sales in the third quarter of 2020.

Consolidated cost of products sold in the third quarter of 2020 was $91.3 million, compared with $140.2 million in the prior-year period. The decrease was primarily due to lower volume resulting from continued delays in the recertification of the 737 MAX and the impacts of the COVID-19 pandemic on the global economy and, particularly, the aerospace industry.

Selling, general and administrative (“SG&A”) expenses were $24.2 million in the third quarter of 2020 compared with $31.7 million in the prior-year period. Contributing to the decrease in SG&A in 2020 were workforce reduction activities and cost conservation measures including suspending cash bonus plans and wage adjustments. The third quarter of 2019 included an additional $1.7 million legal reserve for a long-term patent dispute.

The effective tax rate for the quarter was 52.8%, compared with 31.3% in the third quarter of 2019. The 2020 tax rate was impacted by a tax benefit related to a revised state income tax filing position that was recorded during the three months ended September 26, 2020 of approximately $3.1 million. The 2019 third quarter tax rate was unfavorably impacted by the gain on the sale of the semiconductor business.

Net loss was $5.3 million, or $(0.17) per diluted share, compared with net income of $1.2 million, or $0.04 per diluted share, in the prior year.

Bookings were $81.6 million, rebounding somewhat from the second quarter. The book-to-bill ratio was 0.77:1. Backlog at the end of the quarter was $282.2 million. Approximately $115.5 million, or 41%, of backlog is expected to be recognized as revenue over the remainder of 2020.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales were down $186.5 million compared with the prior-year period. Aerospace sales were down $194.3 million. Test System sales increased $7.8 million. The Acquired Businesses contributed an incremental $8.4 million in sales in 2020.

Consolidated cost of products sold was $310.1 million, compared with $445.1 million in the prior-year period. The decrease was primarily due to lower sales volume. Consolidated cost of products sold in the first nine months of 2019 included tariffs of $6.8 million, inventory charges of $3.6 million and program charges of $3.5 million.

SG&A expenses were $85.9 million compared with $90.7 million the prior-year period. Contributing to the decrease in SG&A in 2020 were workforce reduction activities and cost conservation measures including suspending cash bonus plans and wage adjustments, though these savings were partially offset by associated severance charges of $5.6 million. The prior-year period included an additional $1.7 million legal reserve for a long-term patent dispute. Further, non-cash goodwill and long-lived asset

impairment charges of $87.0 million in the Aerospace segment were recognized in the current year due to reduced expectations of future operating results due to the COVID-19 pandemic, which has significantly impacted the global economy, and particularly the aerospace industry. During the first quarter, the Company recognized full impairments of the goodwill of Astronics Connectivity Systems and Certification (“CSC”), PGA and Custom Control Concepts (“CCC”) reporting units, and a partial impairment of the goodwill of the PECO reporting unit. During the second quarter of 2020, an additional partial impairment of the PECO reporting unit was recorded. No impairment charges were recorded in the third quarter.

The effective tax rate was 8.7%, compared with 22.9% in the prior-year period. The 2020 tax rate was impacted by permanently non-deductible goodwill impairments of $60.8 million, a Federal valuation allowance of approximately $7.5 million, and a tax benefit related to a revised state income tax filing position of approximately $3.1 million recorded during the nine months ended September 26, 2020. The 2019 tax rate was unfavorably impacted by the gain on the sale of the semiconductor business.