MTS SYSTEMS CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in nine sections: •Overview •Financial Results •Cash Flow Comparison •Liquidity and Capital Resources •Off-balance Sheet Arrangements •Critical Accounting Policies and Estimates •Recently Issued Accounting Pronouncements •Quarterly Financial Information •Forward-looking Statements Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8 of Part II of this Annual Report on Form 10-K. All dollar amounts are in thousands unless otherwise noted. The following discussion includes a comparison of our Financial Results, Cash Flow Comparisons and Liquidity and Capital Resources for fiscal year 2020 and fiscal year 2019. A discussion of changes in our financial results and cash flow comparisons from fiscal year 2018 to fiscal year 2019 has been omitted from this Form 10-K, but may be found in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedSeptember 28, 2019 , filed with theSEC onNovember 25, 2019 . OverviewMTS Systems Corporation's testing and simulation hardware, software and service solutions help customers accelerate and improve their design, development and manufacturing processes and are used to determine the mechanical behavior of materials, products and structures, or create a desired human experience such as amusement rides, vehicle simulators or flight training simulators. Our precision sensors provide measurements of vibration, pressure, position, force and sound in a variety of applications. Further globalization and expansion of many industries along with growth in emerging markets, such asChina andIndia , provide a strong and vibrant market base from which we can grow revenue. We have aligned our organizational structure to be more flexible to the demands of globalized and volatile markets by adjusting our structure to be more cost effective and nimble in responding to our customers' needs. We continue to deliver distinctive business performance through our commitment to sustain the differentiated competitive advantage that comes from offering an innovative portfolio of Test & Simulation and Sensor solutions that create value for customers and are delivered with total customer satisfaction. Fiscal Year We have a 5-4-4 week, quarterly accounting cycle with the fiscal year ending on the Saturday closest toSeptember 30 . Fiscal years 2020 endedOctober 3, 2020 and included 53 weeks and fiscal year 2019 endedSeptember 28, 2019 and included 52 weeks. Coronavirus 2019 (COVID-19) Global Pandemic The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. As an essential critical infrastructure business, we have continued to operate in theU.S. and other parts of the world as permitted. Our production capacity continues to recover as jurisdictions ease work restrictions throughout the world; however, restrictions on our employees' ability to access our customers, temporary closures of customer facilities and delays in customer spending negatively impact our sales and operating results in fiscal year 2020. We anticipate these challenges to continue to negatively impact our fiscal year 2021 revenue and operating results. The future impact COVID-19 will have on our business, operations and financial results remains unknown at this time, and we are unable to accurately quantify the impact due to the significant global economic uncertainty. In response, we continue to right-size our operations and manage short-term business risk to allow for bottom-line improvement through the execution of cost savings initiatives previously discussed, including temporary salary and cash compensation reduction by senior executives and non-employee directors; other employee salary or work schedule reductions and temporary furloughs; and the reduction in discretionary spending, capital expenditures and a strong focus on working capital management in fiscal year 2020. Additionally, we continue to evaluate our global business operations and may take future actions as deemed necessary to improve our profitability and optimize our overall cost structure. See Note 20 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further discussion of COVID-19. 20 -------------------------------------------------------------------------------- Table of Contents Ransomware Incident InNovember 2020 , we were the victim of a ransomware incident that temporarily impacted our operations. As a result of the incident, certain of our data was encrypted, some of our data was exfiltrated from our systems, and business activities at several of our facilities were temporarily disrupted. As of the date hereof, our investigation indicates that the incident has been contained. We recovered the impacted data from the unauthorized actor, and we are not currently aware of any evidence of the impacted data being publicly released. We continue to investigate what information the unauthorized actor may have accessed or exfiltrated and resolve open items related to the incident. We expect expenses, net of insurance, to be approximately$2.0 to$3.0 million , with the majority incurred in the first quarter of fiscal 2021. We do not expect the temporary operational disruption that occurred to have a material impact on our financial results. Any failure or perceived failure by us to comply with applicable privacy or security laws, regulations, policies or obligations in connection with this incident, could result in government enforcement actions, regulatory investigations, litigation, fines and penalties and/or adverse publicity, which could impact expenses associated with the incident. Impairment of Assets In the fourth quarter of fiscal year 2020, we recorded impairment charges of$291,389 on goodwill, long-lived assets and an indefinite-lived asset in our Legacy Test, E2M and PCB reporting units. The charges relate to goodwill, technology and patents, trademarks and trade names, customer lists and other intangible assets that experienced a decline in market conditions as a result of COVID-19, including a sustained decrease in our stock price and significant declines in the flight simulation and entertainment markets. These charges are included in the impairment of assets line of the Consolidated Statements of Income. See Note 1 and Note 6 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information on the impairment analysis and corresponding impairment charges recorded. Acquisition EffectiveDecember 31, 2019 , we acquired R&D for an upfront cash purchase price of$58,373 primarily funded through our existing Revolving Credit Facility. The remaining purchase price is based on earn-out payments of up to an additional$26,000 contingent on financial performance throughJune 2021 . See Note 18 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further discussion of the acquisition of R&D. Restructuring Initiatives Throughout fiscal year 2020, we initiated a series of global workforce reductions and facility closures in Test & Simulation, including the reorganization of our European operations and a product rationalization of certain product lines inChina , intended to increase organizational effectiveness, improve profitability and reduce our overall cost structure in response to COVID-19. As a result, during fiscal year 2020, we recorded$11,848 of pre-tax severance and related expense. See Note 17 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further discussion of restructuring initiatives. Foreign Currency Over the past 15 years, approximately 60 to 70% of our revenue has been derived from customers outside of theU.S. Our financial results are principally exposed to changes in exchange rates between theU.S. dollar and the Euro, the Japanese yen and the Chinese yuan. A change in foreign exchange rates could positively or negatively affect our reported financial results. The discussion below quantifies the impact of foreign currency translation on our financial results for the periods discussed. 21 -------------------------------------------------------------------------------- Table of Contents Financial ResultsTotal Company Results of Operations The following table compares results of operations, separately identifying the estimated impact of currency translation, the acquisition of R&D in the second quarter of fiscal year 2020, restructuring costs incurred in fiscal year 2020 and acquisition-related costs associated with Endevco incurred in fiscal year 2020. Overall, our business was negatively impacted by COVID-19 resulting from our employees' inability to access our customers, reduced production capacity, temporary closures of customer facilities and delayed spending by our customers. Estimated Business Acquisition Currency 2020 Change /Restructuring 1 Translation 2019 Revenue$ 828,586 $ (108,534) $ 47,586$ (2,984) $ 892,518 Cost of sales 540,198 (62,050) 41,193 (2,533) 563,588 Gross profit 288,388 (46,484) 6,393 (451) 328,930 Gross margin 34.8 % 36.9 % Operating expenses Selling and marketing 120,288 (16,414) 5,097 (34) 131,639 General and administrative 96,089 (13,651) 23,225 (143) 86,658 Research and development 28,109 (2,564) (231) (24) 30,928 Impairment of assets 291,389 291,389 - - - Total operating expenses 535,875 258,760 28,091 (201) 249,225 Income (loss) from operations$ (247,487) $
(305,244) $ (21,698)
1 The Acquisition / Restructuring column includes operating results and costs incurred as part of the acquisition of R&D, costs incurred as part of the acquisition of Endevco and$11,848 of restructuring costs. Endevco operating results are not separately identifiable as Endevco has been integrated into the existing Sensors business. See Note 17 and Note 18 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information on restructuring and related expenses and the R&D acquisition, respectively. Revenue Increased / (Decreased) 2020 2019 $ % Revenue$ 828,586 $ 892,518 $ (63,932) (7.2) % The decrease in revenue of 7.2% was primarily driven by a decline in Test & Simulation and the unfavorable impact of currency translation, partially offset by growth in Sensors. Our business was negatively impacted by COVID-19 resulting from our employees' inability to access our customers, reduced production capacity, temporary closures of customer facilities and delayed spending by our customers. Test & Simulation revenue decreased$68,274 or 12.2%, primarily driven by lower volume from weakness in our ground vehicles sector, materials sector and service experienced in all regions, and the unfavorable impact of currency translation. This decline was partially offset by contributions of$47,586 from the R&D acquisition. Sensors revenue increased$4,247 , or 1.3%, primarily due to growth in our test sector from contracts with theU.S. Department of Defense and a full year of contributions from the Endevco acquisition. This increase was partially offset by weakness in the other three sectors, specifically inEurope , and the unfavorable impact of currency translation. Excluding the impact of currency translation and the R&D acquisition, revenue decreased 12.2%. 22
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Revenue by geography is as follows:
Increased / (Decreased)
2020 2019 $ %
Americas $ 323,626 $ 346,538 $ (22,912) (6.6) %
Europe 236,428 224,982 11,446 5.1 %
Asia 268,532 320,998 (52,466) (16.3) %
Total Revenue $ 828,586 $ 892,518 $ (63,932) (7.2) %
Gross Profit Increased / (Decreased)
2020 2019 $ %
Gross profit $ 288,388 $ 328,930 $ (40,542) (12.3) %
Gross margin 34.8 % 36.9 % (2.1) ppts
Gross profit declined 12.3% primarily driven by lower revenue volume in Test &
Simulation, higher restructuring costs of $6,651 and costs associated with the
Endevco integration, partially offset by contributions from the R&D acquisition,
lower compensation expense in Test & Simulation and the realization of temporary
and permanent cost savings from initiatives taken in fiscal year 2020. Gross
margin decreased 2.1 percentage points primarily due to leverage on lower
revenue volume in Test & Simulation, higher restructuring costs and the costs
associated with the Endevco integration, partially offset by lower compensation
expense in Test & Simulation and the realization of temporary and permanent cost
savings from initiatives taken in both businesses. Excluding the impact of
currency translation, R&D expenses, restructuring costs in both fiscal years and
the acquisition inventory fair value adjustment in both fiscal years, gross
profit declined 14.6% and the gross margin declined 1.1 percentage points.
Selling and Marketing Expense Increased / (Decreased)
2020 2019 $ %
Selling and marketing $ 120,288 $ 131,639 $ (11,351) (8.6) %
% of Revenue 14.5 % 14.7 %
Selling and marketing expenses declined 8.6% primarily due to lower
compensation, marketing and travel expense driven by the realization of
permanent and temporary cost savings from initiatives taken in fiscal year 2020
in response to COVID-19 and lower commission expense on fewer orders, partially
offset by higher restructuring costs of $3,720 and the addition of R&D expenses.
Excluding the impact of currency translation, R&D expenses, restructuring costs
in both fiscal years and acquisition-related expenses in both fiscal years,
selling and marketing expense decreased 12.4%.
General and Administrative Expense Increased / (Decreased)
2020 2019 $ %
General and administrative $ 96,089 $ 86,658 $ 9,431 10.9 %
% of Revenue 11.6 % 9.7 %
General and administrative expense increased 10.9% primarily due to the addition
of R&D expenses, the R&D contingent consideration fair value adjustment of
$8,092 , higher acquisition-related expenses of $1,653 and higher restructuring
costs of $509 , partially offset by lower compensation expense driven by
realization of permanent and temporary cost savings from initiatives taken in
fiscal year 2020 in response to COVID-19 and the stock-based compensation
forfeitures associated with our former CEO. Excluding the impact of currency
translation, R&D expenses, the R&D contingent consideration fair value
adjustment, restructuring costs in both fiscal years and acquisition-related
expenses in both fiscal years, general and administrative expense decreased
12.6%.
Research and Development Expense Increased / (Decreased)
2020 2019 $ %
Research and development $ 28,109 $ 30,928 $ (2,819) (9.1) %
% of Revenue 3.4 % 3.5 %
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Research and development expense decreased 9.1% primarily due to the shift of
internal resources to larger, capitalizable Test & Simulation projects and lower
compensation expense driven by the realization of permanent and temporary cost
savings from initiatives taken in fiscal year 2020 in response to COVID-19,
partially offset by investment in new product development during the first half
of fiscal year 2020 and the acquisition of Endevco. Excluding the impact of
currency translation, restructuring costs in the current fiscal year and
acquisition-related expense in the prior fiscal year, research and development
expense decreased 7.8%.
Impairment of Assets Increased / (Decreased)
2020 2019 $ %
Impairment of assets $ 291,389 $ - $ 291,389 NM
Impairment charges of $291,389 related to goodwill, long-lived assets and an
indefinite-lived asset in our Legacy Test, E2M and PCB reporting units were
recorded in fiscal year 2020. Specifically, these charges relate to goodwill,
technology and patents, trademarks and trade names, customer lists and other
intangible assets that experienced a decline in market conditions as a result of
COVID-19, including a sustained decrease in our stock price and significant
declines in the flight simulation and entertainment markets.
Income (Loss) from Operations Increased / (Decreased)
2020 2019 $ %
Income (loss) from operations $ (247,487) $ 79,705 $ (327,192) (410.5) %
% of Revenue (29.9) % 8.9 %
Income (loss) from operations declined 410.5% primarily due to impairment
charges taken in both segments in fiscal year 2020, lower gross profit in both
Test & Simulation and Sensors, the R&D contingent consideration fair value
adjustment, higher restructuring costs and acquisition-related expenses,
partially offset by lower operating compensation expense and the realization of
permanent and temporary cost savings from initiatives taken in both businesses
during fiscal year 2020. Excluding the impact of currency translation, the R&D
acquisition, the R&D contingent consideration fair value adjustment,
restructuring costs, the acquisition inventory fair value adjustments and
acquisition-related expenses in both fiscal years, income from operations
decreased 22.6%.
Interest Expense, Net Increased / (Decreased)
2020 2019 $ %
Interest expense, net $ 33,970 $ 31,558 $ 2,412 7.6 %
Interest expense increased primarily due to higher interest expense on an
increased debt position related to the issuance of the Notes in the fourth
quarter of fiscal year 2019 and accretion on the contingent consideration
purchase price of R&D, partially offset by the acceleration of non-cash debt
issuance costs related to the pre-payment on the tranche B term loan facility in
the prior year.
Other Income (Expense), Net Increased / (Decreased)
2020 2019 $ %
Other income (expense), net $ (2,249) $ 466 $ (2,715) (582.6) %
The decrease in other income (expense), net was primarily driven by an increase
in losses on foreign currency transactions and losses recognized on the sale of
assets.
Income Tax Provision (Benefit) Increased / (Decreased)
2020 2019 $ %
Income tax provision (benefit)
(17,201) (310.2) %
Effective rate 4.1 % 11.4 % NM
The effective tax rate was 4.1% primarily due to the current year impairment
loss which is non-deductible for tax purposes. Additionally, we recorded certain
discrete tax benefits of $2,439 related to our fiscal year 2019 return and the
impact of the final regulations issued by the Treasury and Internal Revenue
Service regarding global intangible low-taxed income (GILTI) in the fourth
quarter of fiscal year 2020. This benefit is partially offset by $583 of
discrete tax expense for stock-based compensation expense and $608 for foreign
taxes that are not creditable in the U.S. Excluding the impact of the impairment
of assets and these discrete items, the effective tax rate for fiscal year 2020
was 2.0%, a decrease compared to the prior year rate primarily driven by a
decline in earnings.
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Net Income (Loss) Increased / (Decreased)
2020 2019 $ %
Net income (loss) $ (272,051) $ 43,067 $ (315,118) (731.7) %
Diluted earnings per share $ (14.16) $ 2.21 $ (16.37) (740.7) %
Net income (loss) declined primarily due to impairment charges and lower income
from operations in both Test & Simulation and Sensors and increased interest
expense, partially offset by lower income tax expense from decreased earnings.
Backlog
Backlog of undelivered orders as of October 3, 2020 was $457,586 , an increase of
$37,471 , or 8.9%, compared to backlog of $420,115 as of September 28, 2019 .
Based on anticipated manufacturing schedules, we expect to convert approximately
68% of the backlog as of October 3, 2020 into revenue during fiscal year 2021.
The expected conversion rate is lower than the prior year rate of 82% primarily
due to timing of long-term contracts in Test & Simulation.
Backlog is not an absolute indicator of future revenue because a portion of the
orders in backlog could be canceled at the customer's discretion. While certain
contracts within backlog are subject to order cancellation, we have not
historically experienced a significant number of order cancellations. During
fiscal year 2020, order cancellations did not have a material impact on backlog.
Test & Simulation Segment
Results of Operations
The following tables compare results of operations for Test & Simulation,
separately identifying the estimated impact of currency translation and the
acquisition of R&D and restructuring costs incurred in fiscal year 2020. See
Note 16 to the Consolidated Financial Statements included in Item 8 of Part II
of this Annual Report on Form 10-K for additional information on our reportable
segments. Overall, Test & Simulation was negatively impacted by COVID-19
resulting from our employees' inability to access our customers, reduced
production capacity, temporary closures of customer facilities and delayed
spending by our customers.
Estimated
Business Acquisition / Currency
2020 Change Restructuring 1 Translation 2019
Revenue $ 490,634 $ (113,973) $ 47,586 $ (1,887) $ 558,908
Cost of sales 357,296 (72,407) 40,053 (1,843) 391,493
Gross profit 133,338 (41,566) 7,533 (44) 167,415
Gross margin 27.2 % 30.0 %
Operating expenses
Selling and marketing 65,226 (12,826) 5,097 151 72,804
General and administrative 58,506 (9,777) 20,682 (120) 47,721
Research and development 10,246 (2,329) (231) (4) 12,810
Impairment of assets 89,815 89,815 - - -
Total operating expenses 223,793 64,883 25,548 27 133,335
Income (loss) from operations $ (90,455) $ (106,449) 1 The Acquisition / Restructuring column includes operating results and costs incurred as part of the acquisition of R&D and$11,848 of restructuring costs. See Note 17 and Note 18 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information on restructuring and related costs and the R&D acquisition, respectively. 25 --------------------------------------------------------------------------------
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Revenue Increased / (Decreased)
2020 2019 $ %
Revenue $ 490,634 $ 558,908 $ (68,274) (12.2) %
Revenue decreased 12.2% primarily driven by lower volume from weakness in our
ground vehicles sector, materials sector and service experienced in all regions
as Test & Simulation was negatively impacted by COVID-19, and the unfavorable
impact of currency translation. The decline was partially offset by
contributions of $47,586 from the R&D acquisition. Excluding the impact of
currency translation and the R&D acquisition, revenue decreased 20.4%.
Revenue by geography is as follows:
Increased / (Decreased)
2020 2019 $ %
Americas $ 144,565 $ 179,421 $ (34,856) (19.4) %
Europe 145,758 120,164 25,594 21.3 %
Asia 200,311 259,323 (59,012) (22.8) %
Total Revenue $ 490,634 $ 558,908 $ (68,274) (12.2) %
Gross Profit Increased / (Decreased)
2020 2019 $ %
Gross profit $ 133,338 $ 167,415 $ (34,077) (20.4) %
Gross margin 27.2 % 30.0 % (2.8) ppts
Gross profit decreased 20.4% primarily due to lower revenue volume and higher
restructuring costs of $6,651 , partially offset by contributions from the R&D
acquisition and lower compensation expense driven by the realization of
permanent and temporary cost savings from initiatives taken in fiscal year 2020.
Gross margin decreased by 2.8 percentage points primarily driven by leverage on
lower revenue volume, higher restructuring costs and additional warranty expense
from experience rates on lower revenue volumes. The decrease was partially
offset by lower compensation expense and higher gross margin contribution from
product mix. Excluding the impact of currency translation, R&D expenses,
restructuring costs in both fiscal years and the acquisition inventory fair
value adjustment in the prior year, gross profit declined 25.5% and gross margin
declined 1.9 percentage points.
Selling and Marketing Expense Increased / (Decreased)
2020 2019 $ %
Selling and marketing $ 65,226 $ 72,804 $ (7,578) (10.4) %
% of Revenue 13.3 % 13.0 %
Selling and marketing expense decreased 10.4% primarily due to lower
compensation, reduced commission expense on fewer orders and decreased marketing
and travel expenses mainly driven by the realization of permanent and temporary
cost savings from initiatives taken in fiscal year 2020 in response to COVID-19,
partially offset by higher restructuring costs of $3,720 and the addition of R&D
expenses. Excluding the impact of currency translation, R&D expenses,
restructuring costs and acquisition-related expenses in both fiscal years,
selling and marketing expense decreased 17.5%.
General and Administrative Expense Increased / (Decreased)
2020 2019 $ %
General and administrative $ 58,506 $ 47,721 $ 10,785 22.6 %
% of Revenue 11.9 % 8.5 %
General and administrative expense increased 22.6% primarily driven by the
addition of R&D expenses, the R&D contingent consideration fair value adjustment
of $8,092 , higher acquisition-related expenses of $761 and higher restructuring
costs of $509 , partially offset by lower compensation expense driven by the
realization of permanent and temporary cost savings from initiatives taken in
fiscal year 2020 in response to COVID-19. Excluding the impact of currency
translation, R&D expenses, the R&D contingent consideration fair value
adjustment, and restructuring costs in both fiscal years and acquisition-related
expenses incurred in both fiscal years, general and administrative expense
decreased 17.9%.
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Research and Development Expense Increased / (Decreased)
2020 2019 $ %
Research and development $ 10,246 $ 12,810 $ (2,564) (20.0) %
% of Revenue 2.1 % 2.3 %
Research and development expense decreased 20.0% primarily due to the shift of
internal resources to larger, capitalizable Test & Simulation projects and lower
compensation driven by the realization of permanent and temporary cost savings
from initiatives taken in fiscal year 2020 in response to COVID-19, partially
offset by investment in new product development. Excluding the impact of
currency translation, restructuring costs in the current year and
acquisition-related expense in the prior year, research and development expense
decreased 17.1%.
Impairment of Assets Increased / (Decreased)
2020 2019 $ %
Impairment of assets $ 89,815 $ - $ 89,815 NM
Impairment charges of $89,815 related to goodwill and long-lived assets in our
Legacy Test and E2M reporting units were recorded in fiscal year 2020.
Specifically, these charges relate to goodwill, technology and patents,
trademarks and trade names, customer lists and other intangible assets that
experienced a decline in market conditions as a result of COVID-19, including a
sustained decrease in our stock price and significant declines in the flight
simulation and entertainment markets.
Income (Loss) from Operations Increased / (Decreased)
2020 2019 $ %
Income (loss) from operations $ (90,455) $ 34,080 $ (124,535) (365.4) %
% of Revenue (18.4) % 6.1 %
Income (loss) from operations decreased 365.4% primarily due to impairment
charges taken in fiscal year 2020, decreased gross profit on lower revenue
volume, higher restructuring costs of $11,018 and the R&D contingent
consideration fair value adjustment of $8,092 , partially offset by lower
operating compensation expense driven by the realization of permanent and
temporary cost savings from initiatives taken in fiscal year 2020 in response to
COVID-19, the contributions from the R&D acquisition and the E2M acquisition
inventory fair value adjustment in the prior year. Excluding the impact of
currency translation, the R&D acquisition, restructuring costs in both fiscal
years, the acquisition inventory fair value adjustment in the prior year and
acquisition-related expenses in both fiscal years, income from operations
decreased 53.3%.
Backlog
Backlog of undelivered orders at October 3, 2020 was $385,905 , an increase of
12.6% from backlog of $342,652 at September 28, 2019 . Based on anticipated
manufacturing schedules, we expect to convert approximately 63% of the backlog
as of October 3, 2020 into revenue during fiscal year 2021. The expected
conversion rate is lower than the prior year rate of 79% primarily due to timing
of long-term contracts. Order cancellations in fiscal year 2020 did not have a
material impact on backlog.
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Sensors Segment
Results of Operations
The following table compares results of operations for Sensors, separately
identifying the estimated impact of currency translation and the Endevco
acquisition-related expenses incurred in fiscal year 2020. See Note 16 to the
Consolidated Financial Statements included in Item 8 of Part II of this Annual
Report on Form 10-K for additional information on our reportable segments.
Overall, Sensors was negatively impacted by COVID-19 resulting from our
employees' inability to access our customers, reduced production capacity,
temporary closures of customer facilities and delayed spending by our customers.
Estimated
Business Currency
2020 Change Acquisition 1 Translation 2019
Revenue $ 339,223 $ 5,344 $ - $ (1,097) $ 334,976
Cost of sales 184,171 10,255 1,140 (690) 173,466
Gross profit 155,052 (4,911) (1,140) (407) 161,510
Gross margin 45.7 % 48.2 %
Operating expenses
Selling and marketing 55,062 (3,588) - (185) 58,835
General and administrative 37,583 (3,874) 2,543 (23) 38,937
Research and development 17,863 (235) - (20) 18,118
Impairment of assets 201,574 201,574 - - -
Total operating expenses 312,082 193,877 2,543 (228) 115,890
Income (loss) from operations $ (157,030) $
(198,788)
1 The Acquisition column includes costs incurred as part of the acquisition of
Endevco. Endevco operating results are not separately identifiable as Endevco
has been integrated into the existing Sensors business. See Note 18 to the
Consolidated Financial Statements included in Item 8 of Part II of this Annual
Report on Form 10-K for additional information on the Endevco acquisition.
Revenue Increased / (Decreased)
2020 2019 $ %
Revenue $ 339,223 $ 334,976 $ 4,247 1.3 %
Revenue increased 1.3% primarily driven by growth in our test sector from
contracts with the U.S. Department of Defense and a full year of contributions
from the Endevco acquisition. The increase was partially offset by weakness in
the other three sectors, specifically in Europe , as Sensors was negatively
impacted by COVID-19, and the unfavorable impact of currency translation.
Excluding the impact of currency translation, revenue growth was 1.6%.
Revenue by geography is as follows:
Increased / (Decreased)
2020 2019 $ %
Americas $ 180,332 $ 168,483 $ 11,849 7.0 %
Europe 90,670 104,818 (14,148) (13.5) %
Asia 68,221 61,675 6,546 10.6 %
Total Revenue $ 339,223 $ 334,976 $ 4,247 1.3 %
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Gross Profit Increased / (Decreased)
2020 2019 $ %
Gross profit $ 155,052 $ 161,510 $ (6,458) (4.0) %
Gross margin 45.7 % 48.2 % (2.5) ppts
Gross profit declined 4.0% primarily due to costs associated with the Endevco
integration, increased inventory reserve levels for specific product lines, the
Endevco acquisition inventory fair value adjustment of $680 , higher compensation
expense and the unfavorable impact of currency translation, partially offset by
increased revenue volume from contracts with the U.S. Department of Defense and
a full year of contributions from the Endevco acquisition. Gross margin declined
2.5 percentage points primarily driven by costs associated with the Endevco
integration, lower gross margin contribution from product mix, inventory reserve
adjustments, the Endevco acquisition inventory fair value adjustment and higher
compensation expense. Excluding the impact of currency translation and the
Endevco acquisition inventory fair value adjustments in both fiscal years, gross
profit declined 3.3% and gross margin declined 2.4 percentage points.
Selling and Marketing Expense Increased / (Decreased)
2020 2019 $ %
Selling and marketing $ 55,062 $ 58,835 $ (3,773) (6.4) %
% of Revenue 16.2 % 17.6 %
Selling and marketing expense declined 6.4% primarily driven by lower
compensation, marketing and travel expenses driven by the realization of
temporary cost savings from initiatives taken in fiscal year 2020 in response to
COVID-19, along with lower commission expense on fewer orders. Excluding the
impact of currency translation, selling and marketing expense decreased 6.1%.
General and Administrative Expense Increased / (Decreased)
2020 2019 $ %
General and administrative $ 37,583 $ 38,937 $ (1,354) (3.5) %
% of Revenue 11.1 % 11.6 %
General and administrative expense declined 3.5% primarily due to lower
compensation expense and professional fees driven by the realization of
temporary cost savings from initiatives taken in fiscal year 2020 in response to
COVID-19, partially offset by higher acquisition-related expenses of $892 .
Excluding the impact of currency translation and acquisition-related expenses in
both fiscal years, general and administrative expense decreased 6.0%.
Research and Development Expense Increased / (Decreased)
2020 2019 $ %
Research and development $ 17,863 $ 18,118 $ (255) (1.4) %
% of Revenue 5.3 % 5.4 %
Research and development expense declined 1.4% primarily driven by lower
compensation expense driven by the realization of temporary cost savings from
initiatives taken in fiscal year 2020 in response to COVID-19, partially offset
by the addition of Endevco expenses. Excluding the impact of currency
translation, research and development expense decreased 1.3%.
Impairment of Assets Increased / (Decreased)
2020 2019 $ %
Impairment of assets $ 201,574 $ - $ 201,574 NM
Impairment charges of $201,574 related to goodwill and an indefinite-lived asset
in our PCB reporting unit were recorded in fiscal year 2020. Specifically, these
charges relate to goodwill and trade names that experienced a decline in market
conditions as a result of COVID-19, including a sustained decrease in our stock
price.
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Income (Loss) from Operations Increased / (Decreased)
2020 2019 $ %
Income (loss) from operations $ (157,030) $ 45,620 $ (202,650) (444.2) %
% of Revenue (46.3) % 13.6 %
Income (loss) from operations declined 444.2% primarily due to impairment
charges taken in fiscal year 2020, additional expenses related to the Endevco
acquisition and lower gross profit, partially offset by lower operating
compensation expense and marketing expense driven by the realization of
temporary cost savings from initiatives taken in fiscal year 2020 in response to
COVID-19. Excluding the impact of currency translation, the Endevco acquisition
inventory fair value adjustment, acquisition-related expenses and impairment
charges, income from operations increased 1.4%.
Backlog
Backlog of undelivered orders at October 3, 2020 was $71,681 , a decrease of 7.5%
compared to backlog of $77,463 at September 28, 2019 . We expect to convert
approximately 93% of Sensors backlog to revenue in fiscal year 2021.
Cash Flow Comparison
The following table summarizes our cash flows from total operations:
Fiscal Year
2020 2019
Total cash provided by (used in):
Operating activities $ 47,849 $ 73,463
Investing activities (72,219) (182,756)
Financing activities 51,413 97,403
Effect of exchange rate changes on cash 3,933 (1,977)
Increase (decrease) during the period 30,976 (13,867)
Cash and cash equivalents balance, beginning of period 57,937 71,804
Cash and cash equivalents balance, end of period $ 88,913 $ 57,937
Operating Activities
The decrease in cash provided by operating activities was primarily due to lower
net income, higher cash used by other assets and liabilities related to accrued
project costs and higher accrued payroll and related costs associated with
restructuring actions. These increases were partially offset by impairment of
goodwill, long-lived assets and indefinite-lived asset, an increase in cash
provided by working capital associated with timing fluctuations from accounts
receivable payments received and unbilled accounts receivable accruals, advanced
payments received from customers, inventory purchases and accounts payable
payments and an increase in amortization due to the acquisition of R&D.
Investing Activities
The decrease in cash used in investing activities was primarily due to the
acquisition of E2M in the first quarter of fiscal year 2019, the acquisition of
Endevco in the fourth quarter of fiscal year 2019, and a reduction in cash used
to purchase property and equipment due to cost containment measures, partially
offset by the acquisition of R&D in the second quarter of fiscal year 2020.
Financing Activities
The decrease in cash provided by financing activities was primarily due to the
issuance of the Notes in the fourth quarter of fiscal year 2019 and borrowings
under the Revolving Credit Facility used to fund the acquisition of E2M in the
first quarter of fiscal year 2019. This decrease was partially offset by the use
of the proceeds from the Notes to repay all outstanding debt under the Revolving
Credit Facility and repay a portion of the tranche B term loan facility in the
fourth quarter of fiscal year 2019, an increase in borrowings under the
Revolving Credit Facility used to fund the acquisition of R&D in the second
quarter of fiscal year 2020 and a decrease in payment of cash dividends.
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Liquidity and Capital Resources
We had cash and cash equivalents of $88,913 as of October 3, 2020 . Of this
amount, $4,400 was located in North America , $55,884 in Europe and $28,629 in
Asia . Repatriation of certain foreign earnings is restricted by local law. The
North American cash balance was primarily invested in bank deposits. The cash
balances in Europe and Asia were primarily invested in money market funds and
bank deposits. In accordance with our investment policy, we place cash
equivalent investments with issuers who have high-quality investment credit
ratings. In addition, we limit the amount of investment exposure we have with
any particular issuer. Our investment objectives are to preserve principal,
maintain liquidity and achieve the best available return consistent with our
primary objectives of safety and liquidity. As of October 3, 2020 , we held no
short-term investments.
As a result of the transition tax related to the enactment of the Tax Act, we
are able to repatriate certain cash held in our foreign subsidiaries without
such funds being subject to additional federal income tax liability.
As of October 3, 2020 , our capital structure was comprised of $44,600 in
short-term debt, $550,071 in long-term debt and $221,183 in shareholders'
equity. The Consolidated Balance Sheets also included $10,098 of unamortized
debt issuance costs as of October 3, 2020 . Total interest-bearing debt as of
October 3, 2020 was $594,671 and we had approximately $96,529 of unused
borrowing capacity on the Revolving Credit Facility. In October 2020 , subsequent
to year-end, we paid an additional $7,000 on our outstanding Revolving Credit
Facility.
We have a credit agreement with a consortium of financial institutions (the
Credit Agreement) that provides for senior secured credit facilities consisting
of a Revolving Credit Facility and a Term Facility. The maturity date of the
Revolving Credit Facility and the loans under the Term Facility is July 5, 2023 ,
unless a term loan lender agrees to extend the maturity date pursuant to a loan
modification agreement made in accordance with the terms of the Credit
Agreement. The Credit Agreement also requires mandatory prepayments on our Term
Facility in certain circumstances, including the potential for an annual
required prepayment of a certain percentage of our excess cash flow.
Under the Credit Agreement, we are subject to customary affirmative and negative
covenants, including, among others, restrictions on our ability to incur debt;
create liens; dispose of assets; make investments, loans, advances, guarantees
and acquisitions; enter into transactions with affiliates; and enter into any
restrictive agreements and customary events of default (including payment
defaults, covenant defaults, change of control defaults and bankruptcy
defaults). The Credit Agreement also contains financial covenants, including the
ratio of consolidated total indebtedness to adjusted consolidated earnings
before income, taxes, depreciation and amortization (Adjusted EBITDA), as
defined in the Credit Agreement, as well as the ratio of Adjusted EBITDA to
consolidated interest expense. These covenants restrict our ability to pay
dividends and purchase outstanding shares of common stock.
On July 30, 2020 , we entered into a fifth amendment to the Credit Agreement,
which governs the Term Facility and Revolving Credit Facility, to increase the
maximum leverage ratio to 6.0x through March 31, 2021 with step downs
thereafter. In addition, we amended the interest coverage ratio to maintain 3.0x
through March 31, 2021 with subsequent revisions thereafter. This amendment was
completed to maximize flexibility and available liquidity under our current
capital structure in the event we would need to access additional funds. As of
October 3, 2020 and September 28, 2019 , we were in compliance with these
financial covenants. Specifically, we ended fiscal year 2020 with a leverage
ratio of 4.8x, which is below the current maximum leverage ratio of 6.0x under
the Credit Agreement.
In fiscal year 2019, we issued $350,000 in aggregate principal amount of 5.750%
senior unsecured notes due in 2027 (the Notes). The Notes were issued pursuant
to an Indenture dated as of July 16, 2019 among us, the Guarantors (as defined
therein) and Wells Fargo Bank, National Association , as trustee (the Indenture).
The Notes will mature on August 15, 2027 .
The Indenture governing the Notes contains covenants that limit, among other
things, our ability and the ability of our restricted subsidiaries to incur
additional indebtedness or issue certain preferred shares; create liens; pay
dividends, redeem stock or make other distributions; make investments; for our
restricted subsidiaries to pay dividends to us or make other intercompany
transfers; transfer or sell assets; merge or consolidate; enter into certain
transactions with our affiliates; and designate subsidiaries as unrestricted
subsidiaries. As of October 3, 2020 and September 28, 2019 , we were in
compliance with these financial covenants.
See Note 9 to the Consolidated Financial Statements included in Item 8 of Part
II of this Annual Report on Form 10-K for additional information on our
financing arrangements.
Shareholders' equity decreased by $262,876 during fiscal year 2020 primarily due
to $272,051 net loss and $11,510 dividends declared. This decrease was partially
offset by other comprehensive income of $13,492 and $7,214 stock-based
compensation.
As discussed, we implemented various permanent and temporary cost reduction
initiatives to manage and reduce operating costs and further enhance our
financial flexibility in response to COVID-19 and as a part of our general
global restructuring
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efforts in Test & Simulation, including the continued suspension of our
quarterly dividend. While we cannot predict the overall impact of COVID-19 on
our liquidity position, as of October 3, 2020 , we believe our current capital
resources will be sufficient to fund working capital requirements, capital
expenditures and operations for the foreseeable future, including at least the
next twelve months.
Contractual Obligations
As of October 3, 2020 , our contractual obligations are as follows:
Less than More than
Total 1 year 1 - 3 years 3 - 5 years 5 years
Long-term debt 1 $ 577,671 $ 27,600
162,362 29,066 54,472 40,698 38,126
Financing lease obligations 3 971 484 430 57 -
Operating lease obligations 4 20,074 7,490 7,523 3,074 1,987
Contingent consideration 5 26,497 26,497 - - -
Other long-term obligations 6 25,382 4,602 8,204 2,489 10,087
Total contractual obligations
7 $ 812,957 $ 95,739 $ 270,700 $ 46,318 $ 400,200
1 Long-term debt includes the Term Facility, the portion of the Revolving
Credit Facility that we used to finance the R&D acquisition and the Notes. For
the above period of less than one year, no excess cash flow prepayment is
required under the provisions of the Term Facility based on fiscal year 2020
results. The Term Facility amounts for periods subsequent to less than one year
exclude excess cash flow prepayments, which may be required under the provisions
of the Term Facility based on fiscal year 2021 and subsequent fiscal year
results as future prepayment amounts, if any, are not reasonably estimable as of
October 3, 2020 . Refer to Note 9 to the Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K for additional
information regarding our financing arrangements.
2 Interest payable on long-term debt includes interest on the Term Facility,
the portion of the Revolving Credit Facility that we used to finance the R&D
acquisition, the Notes and financing lease obligations.
3 Financing lease obligations represent contractual vehicle leases. Refer to
Note 4 to the Consolidated Financial Statements included in Item 8 of Part II of
this Annual Report on Form 10-K for additional information regarding our
financing lease obligations.
4 Operating leases are primarily for office space, as well as vehicles and
equipment. Refer to Note 4 to the Consolidated Financial Statements included in
Item 8 of Part II of this Annual Report on Form 10-K for additional lease
information.
5 In connection with the acquisition of R&D, we are contingently liable for an
earn-out payment up to $26,000 , subject to fluctuation in exchange rates, which
is payable in the fourth quarter of fiscal year 2021. While the final payment
amount is not certain, the amount included in the table reflects our best
estimate as of October 3, 2020 . Refer to Note 7 and Note 18 to the Consolidated
Financial Statements included in Item 8 of Part II of this Annual Report on Form
10-K for additional contingent consideration information.
6 Other long-term obligations include liabilities under pension, other
retirement plans and payroll tax payments deferred under the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act).
7 Long-term income tax liabilities for uncertain tax positions have been
excluded from the contractual obligations table as we are unable to make a
reasonably reliable estimate of the amount and period of related future
payments. As of October 3, 2020 , our long-term liability for uncertain tax
positions was $4,819 . Refer to Note 12 to the Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report on Form 10-K for additional
income tax information.
As of October 3, 2020 , we had letters of credit and guarantees outstanding
totaling $30,114 and $39,629 , respectively, primarily bond advance payments and
performance guarantees related to customer contracts in Test & Simulation.
Off-balance Sheet Arrangements
As of October 3, 2020 , we did not have any off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future material effect on
our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
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Critical Accounting Policies and Estimates
The Consolidated Financial Statements have been prepared in accordance with
GAAP, which require us to make estimates and assumptions in certain
circumstances that affect amounts reported, giving due consideration to
materiality, that affect the reported amounts of assets and liabilities,
revenues and expenses and related disclosures of any contingent assets and
liabilities at the date of the financial statements. We regularly review our
estimates and assumptions, which are based on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that of our significant accounting policies, the following are
particularly important to the portrayal of our results of operations and
financial position and is subject to an inherent degree of uncertainty as it may
require the application of a higher level of judgment by us. Our significant
accounting policies are fully described in Note 1 to the Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Revenue Recognition (Over Time)
Revenue is recognized either over time as work progresses or at a point-in-time,
dependent upon contract-specific terms and the pattern of transfer of control of
the product or service to the customer. Contracts with revenue recognized over
time use costs incurred to date relative to total estimated costs at completion
to measure progress toward satisfying the performance obligation. Incurred cost
represents work performed, which corresponds with, and thereby best depicts, the
transfer of control to the customer. Contract costs include materials, component
parts, labor and overhead costs. For contracts recognized over time, we estimate
the profit on a contract as the difference between the total estimated revenue
and expected costs to complete a contract and recognize that profit over time as
work progresses. Contract estimates are based on various assumptions to
determine the outcome of future events that may span several years. These
assumptions include labor productivity and availability, the complexity of the
work to be performed, the cost and availability of materials, and internal and
subcontractor performance.
As a significant change in one or more of these estimates could affect the
profitability of our contracts, we review and update our contract-related
estimates regularly. We recognize adjustments in estimated profit on contracts
under the cumulative catch-up method. Under this method, the impact of the
adjustment on profit recorded to date is recognized in the period the adjustment
is identified. Revenue and profit in future periods of contract performance is
recognized using the adjusted estimate. If at any time the estimate of contract
profitability indicates an anticipated loss on the contract, we recognize the
total loss in the period it is identified. Our review of contract-related
estimates has not resulted in adjustments that are significant to our results of
operations.
See Note 3 to the Consolidated Financial Statements included in Item 8 of Part
II of this Annual Report on Form 10-K.
Business Acquisitions
We account for acquired businesses using the acquisition method of accounting
which requires that the assets acquired and liabilities assumed be recorded at
the date of acquisition at their respective fair values. The judgments made in
determining the estimated fair value assigned to each class of assets acquired
and liabilities assumed, as well as asset lives, can materially impact net
income. Accordingly, for significant items, we typically engage a third-party
valuation firm. There are several methods that can be used to determine the fair
value of assets acquired and liabilities assumed in a business combination. For
intangible assets, we historically have utilized the "income method." This
method starts with a forecast of all of the expected future net cash flows
attributable to the subject intangible asset. These cash flows are then adjusted
to present value by applying an appropriate discount rate that reflects the risk
factors associated with the cash flow streams. Some of the more significant
estimates and assumptions inherent in the income method (or other methods)
include the projected future cash flows (including timing) and the discount rate
reflecting the risks inherent in the future cash flows. Estimating the useful
life of an intangible asset also requires judgment. For example, different types
of intangible assets will have different useful lives, influenced by the nature
of the asset, competitive environment and rate of change in the industry. All of
these judgments and estimates can significantly impact the determination of the
amortization period of the intangible asset, and thus net income. Contingent
consideration liabilities are remeasured to fair value each reporting period
using projected revenues, discount rates, probabilities of payment and projected
payment dates. Increases or decreases in the fair value of the contingent
consideration liability can result from changes in the timing and amount of
revenue estimates or in the timing or likelihood of achieving value-enhancing
milestones, and changes in discount periods and rates. Projected contingent
payment amounts are discounted back to the current period using a discount cash
flow model.
In connection with the acquisition of Endevco, the final valuation of assets
acquired was completed during the second quarter of fiscal year 2020. The
valuation of assets acquired and purchase price allocation related to the R&D
acquisition, which closed in the second quarter of fiscal year 2020, are
considered preliminary and expected to be finalized as soon as possible, but no
later than one year from the acquisition date.
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See Note 18 to the Consolidated Financial Statements included in Item 8 of Part
II of this Annual Report on Form 10-K.
Impairment of Goodwill , Indefinite-Lived Intangible Assets and Long-Lived Assets
Goodwill
Goodwill represents the excess of cost over the fair value of the identifiable
net assets of businesses acquired and allocated to our reporting units at the
time of acquisition. Goodwill for each reporting unit is tested for impairment
at least annually, during our fourth quarter, and whenever events occur or
circumstances change that indicate the carrying value of the reporting unit may
not be recoverable.
Evaluating goodwill for impairment involves the determination of the fair value
of each reporting unit in which goodwill is recorded using a qualitative or
quantitative analysis. A reporting unit is an operating segment or a component
of an operating segment for which discrete financial information is available
and reviewed by management on a regular basis. For fiscal year 2020, we have
identified five reporting units: Legacy Test, E2M, R&D, PCB and Temposonics.
Prior to completing a quantitative analysis, we have the option to perform a
qualitative assessment of goodwill to determine whether it is more likely than
not (i.e. a likelihood of more than 50%) that the fair value of a reporting unit
is less than its carrying value, including goodwill and other intangible assets.
If we conclude the fair value is more likely than not less than the carrying
value, a quantitative analysis is performed. Otherwise, no further testing is
necessary.
If the quantitative analysis is required or elected, an impairment test is
performed to compare the calculated fair value of each reporting unit to its
carrying value, including goodwill and other intangible assets. We estimate the
fair value of a reporting unit using both the income approach and the market
approach. The income approach uses a discounted cash flow model that requires
input of certain estimates and assumptions requiring significant judgment,
including projected revenue growth rates, gross profit margins, operating
margins, capital expenditures, working capital requirements, terminal growth
rates and discount rates. Revenue growth rates, gross profit margins, operating
expenses, capital expenditures and working capital requirements are projected
based on each reporting unit's current business, expected developments and
operational strategies typically over a five-year period. The discount rates
reflect the risk factors associated with the cash flow streams of the reporting
unit. The market approach uses a multiple of earnings and revenue based on
guidelines for publicly traded companies. If the fair value exceeds the carrying
value, no further work is required and no impairment loss is recognized. If the
carrying value exceeds the fair value, an impairment loss is recognized in an
amount equal to the excess, limited to the total amount of goodwill allocated to
that reporting unit.
For our fiscal year 2020 annual goodwill impairment analysis, performed during
the fourth quarter, we elected to bypass the qualitative analysis and performed
a quantitative analysis for each of our reporting units. Driven by a decline in
market conditions as a result of COVID-19, including a sustained decrease in our
stock price and significant declines in the flight simulation and entertainment
markets, our Legacy Test, E2M and PCB reporting units were determined to have a
carrying value in excess of their fair value, resulting in goodwill impairment
charges of $22,509 , $30,835 and $188,174 , respectively. The fair value exceeded
carrying value by a significant margin for our Temposonics and R&D reporting
units.
Indefinite-Lived Intangible Assets
Intangible assets with indefinite lives are not amortized. These assets are
tested for impairment at least annually, during the fourth quarter, and whenever
events occur or circumstances change that indicate the carrying value of the
asset may not be recoverable. Fair value of indefinite-lived intangible assets
is determined using a relief from royalty method if a quantitative analysis is
deemed necessary requiring input of certain estimates and assumptions requiring
judgment, including the royalty rate, discount rate and projected revenue
growth.
For our fiscal year 2020 annual indefinite-lived intangible asset impairment
analysis, performed during the fourth quarter of fiscal year 2020, we elected to
bypass the qualitative analysis and performed a quantitative analysis. Driven by
a decline in market conditions, including a sustained decrease in our stock
price as a result of COVID-19, we recorded an impairment charge of $13,400 to
our only indefinite-lived intangible asset.
Long-Lived Assets
Long-lived assets or asset groups, including intangible assets subject to
amortization and property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of those
assets may not be recoverable. We use undiscounted cash flows to determine
whether impairment exists and measure any impairment loss using discounted cash
flows to determine the fair value of long-lived assets. A long-lived asset
impairment charge of $36,471 in amortizing intangible assets was recognized in
the fourth quarter of fiscal year 2020 in Test & Simulation. The impairment was
driven by a significant decline in asset value due to an overall decline in
market conditions as a result of COVID-19, including significant declines in the
flight simulation and entertainment markets.
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See Note 1 and Note 6 to the Consolidated Financial Statements included in Item
8 of Part II of this Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 and
Note 4 to the Consolidated Financial Statements included in Item 8 of Part II of
this Annual Report on Form 10-K.
Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily
reflect trends in demand for our products or our operating efficiency. Revenue
and operating results in any quarter may be significantly affected by the timing
of revenue recognition for the various performance obligations included in a
contract based on transfer of control resulting in revenue being recognized at a
point in time rather than over time. Recognition of revenue over time for large,
long-term projects generally has the effect of minimizing significant
fluctuations quarter-over-quarter. See Note 3 to the Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K for
additional information on our revenue recognition policy. Quarterly earnings
also vary as a result of the use of estimates including, but not limited to, the
rates used in recording federal, state and foreign income tax expense and
impairment of assets. See Note 1 and Note 12 to the Consolidated Financial
Statements included in Item 8 of Part II of this Annual Report on Form 10-K for
additional information on our use of estimates, including impairment of assets
and income tax related matters, respectively.
Selected quarterly financial information is as follows:
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year1
(unaudited) (unaudited) (unaudited) (unaudited)Fiscal Year 2020 Revenue$ 205,843 $ 211,463 $ 196,225 $ 215,055 $ 828,586 Gross profit 76,609 71,241 65,495 75,043 288,388 Income (loss) before income taxes 6,455 (1,069) 3,351 (292,443) (283,706) Net income (loss)$ 5,306 $ (1,071) $ 4,389 $ (280,675) $ (272,051) Earnings (loss) per share Basic$ 0.28 $ (0.06) $ 0.23 $ (14.56) $ (14.16) Diluted$ 0.27 $ (0.06) $ 0.23 $ (14.56) $ (14.16) Fiscal Year 2019 Revenue$ 203,181 $ 233,046 $ 232,209 $ 224,082 $ 892,518 Gross profit 78,305 87,350 85,103 78,172 328,930 Income before income taxes 11,197 17,076 16,190 4,150 48,613 Net income$ 10,501 $ 14,160 $ 13,585 $ 4,821 $ 43,067 Earnings per share Basic$ 0.55 $ 0.74 $ 0.70 $ 0.25 $ 2.24 Diluted$ 0.54 $ 0.73 $ 0.70 $ 0.25 $ 2.21 1 The earnings (loss) per share amounts for each quarter may not sum to the fiscal year amounts due to rounding and the effect of weighting. Forward-looking Statements Statements contained in this Annual Report on Form 10-K including, but not limited to, the discussion under Item 7 of Part II, that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, certain statements in our future filings with theSEC , in press releases and in oral and written statements made by us or with our approval that are not statements of historical fact also constitute forward-looking statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, Adjusted EBITDA, net income or loss, earnings or loss per share, the payment or nonpayment of dividends, our capital structure, the adequacy of our liquidity and reserves, the anticipated level of expenditures required and other statements concerning future financial performance; (ii) statements of plans and objectives by our management or Board of Directors, including those relating to products or services, restructuring initiatives, or merger or acquisition activity; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators or statements relating to 35
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Table of Contents our order cancellation history, our ability to convert our backlog of undelivered orders into revenue, the timing of purchases, competitive advantages and growth in end markets; (v) statements regarding our products and their characteristics, fluctuations in the costs of raw materials for products, our geographic footprint, performance, sales potential or effect in the hands of customers; (vi) statements about the impact of COVID-19 and related economic uncertainty; and (vii) statements about the proposed merger, including the expected timeline to closing and the receipt of certain approvals . Words such as "believes," "anticipates," "expects," "intends," "targeted," "should," "potential," "goals," "strategy" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the currently-unknown impact of COVID-19 and related economic uncertainty, the risk that the proposed merger may not be completed in a timely manner or at all, the failure to satisfy the conditions to the consummation of the proposed merger, the impact of the proposed merger on our operations, and those risks described in Item 1A of Part I of this Annual Report on Form 10-K. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these forward-looking statements with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. You should carefully review the disclosures and the risk factors described in this Annual Report on Form 10-K and in other documents we file from time to time with theSEC , including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
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