ASTRONICS CORP 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Form 10-K for the year ended December 31, 2020.) 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 seat motions systems, aircraft structures, avionics products, systems certification, and other products. Our primary 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 industries 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, often 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. Test Systems segment customers include the Department of Defense, prime contractors to the Department of Defense, mass transit operators and prime contractors to mass transit operators. 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 plus certain contingent purchase consideration (“earn-out”). The transaction included two 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, no 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 for the year ended December 31, 2019. In February 2021, the Company was notified by the buyer that they have calculated $10.7 million as being payable to the Company under the contingent earnouts related to the year ended December 31, 2020. In April 2021, the buyer provided a revised calculation, indicating, rather, that $7.1 million is payable to the Company for the 2020 earnout. The Company and the buyer are currently reviewing the calculations and underlying data and are engaged in negotiations. The Company expects to record the additional gain for whatever amount is realized on the earnout when that review is complete and agreement is reached. The timing and amount of any amount realized is uncertain and subject to risks and uncertainties as we continue the review and negotiation process. 25 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK Six Months Ended Three Months Ended ($ in thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Sales $ 217,015 $ 281,278 $ 111,158 $ 123,694 Gross Profit (sales less cost of products sold) $ 29,668 $ 62,552 $ 15,395 $ 26,833 Gross Margin 13.7 % 22.2 % 13.8 % 21.7 % Selling, General and Administrative Expenses $ 45,100 $ 61,771 $ 21,315 $ 32,904 SG&A Expenses as a Percentage of Sales 20.8 % 22.0 % 19.2 % 26.6 % Impairment Loss $ — $ 87,016 $ — $ 12,608 Interest Expense, Net of Interest Income $ 3,457 $ 3,316 $ 1,699 $ 1,983 Effective Tax Rate (0.2) % 3.4 % 0.8 % 3.6 % Net Loss $ (20,008) $ (90,542) $ (8,099) $ (23,579) A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A. CONSOLIDATED SECOND QUARTER RESULTS Consolidated sales were down $12.5 million from the second quarter of 2020. Aerospace sales were down $13.4 million, and Test System sales increased $0.8 million. Consolidated cost of products sold in the second quarter of 2021 was $95.8 million, compared with $96.9 million in the prior-year period. The decrease was primarily due to lower sales volume related to the continued impacts of the COVID-19 pandemic on the global aerospace industry. Gross margin declined from 21.7% to 13.8% due to leverage lost on lower volumes. Selling, general and administrative (“SG&A”) expenses were $21.3 million in the second quarter of 2021 compared with $32.9 million in the prior-year period. The current year period benefited from a $2.2 million non-cash reduction of the fair value of a contingent consideration liability related to the 2019 acquisition of Diagnosys Test Systems. The Company incurred $4.9 million in restructuring-related severance charges in the second quarter of 2020, primarily in the Aerospace segment. Further, non-cash goodwill impairment charges of $12.6 million in the Aerospace segment were recognized in the second quarter of 2020 due to reduced expectations of future operating results due to further commercial aircraft order reductions, delays and cancellations at a major customer of our PECO reporting unit. Other Expense, Net of Other Income in the prior year included a $3.5 million impairment of an equity investment. The effective tax rate for the quarter was 0.8%, compared with 3.6% in the second quarter of 2020. The 2021 tax rate was impacted by State and Foreign income taxes. The 2020 tax rate was impacted by permanently non-deductible goodwill impairment of $12.6 million which no tax benefit has been recognized, and a Federal valuation allowance recorded of approximately $0.5 million. Consolidated net loss was $8.1 million, or $0.26 per diluted share, compared with net loss of $23.6 million, or $0.77 per diluted share, in the prior year. The after tax impact of the prior year impairment was $0.41 per diluted share. Supply chain pressures became increasingly impactful as the quarter progressed, mostly affecting delivery schedules but with some pricing pressure also. These pressures limited the Company’s ability to respond to accelerated or quick-turn delivery requests from customers. The Company estimates that revenue would have been $5 million to $10 million higher in the second quarter if its supply chain was performing normally. Bookings were $126.3 million, for a book-to-bill ratio of 1.14:1. Backlog at the end of the quarter was $312.7 million. Approximately $183.6 million, or 59%, of backlog is expected to ship in the remainder of 2021. CONSOLIDATED YEAR-TO-DATE RESULTS Consolidated sales were down $64.3 million. Aerospace sales were down $73.0 million from the first half of 2020. Test System sales increased $8.7 million. Consolidated cost of products sold in the first half of 2021 was $187.3 million, compared with $218.7 million in the prior-year period. The decrease was primarily due to lower volume related to the continued impacts of the COVID-19 pandemic on the global aerospace industry. 26 Table of Contents SG&A expenses were $45.1 million in the first half of 2021 compared with $61.8 million the prior-year period. The current year period benefited from a $2.2 million non-cash reduction of the fair value of a contingent consideration liability. The Company incurred $5.4 million in restructuring-related severance charges in the first half of 2020, primarily in the Aerospace segment. Non-cash goodwill and long-lived asset impairment charges of $87.0 million in the Aerospace segment were recognized in 2020 due to reduced expectations of future operating results caused by the COVID-19 pandemic. Other Expense, Net of Other Income in the prior year included a $3.5 million impairment of an equity investment. The effective tax rate for the first half of 2021 was (0.2)%, compared with 3.4% in the first half of 2020. The tax rate in the 2021 period was impacted by State and Foreign income taxes as well as changes in the valuation allowance previously recorded against federal deferred tax assets. The 2020 tax rate was impacted by permanently non-deductible goodwill impairments of $60.8 million and a Federal valuation allowance recorded of approximately $7.5 million. Consolidated net loss was $20.0 million, or $0.65 per diluted share, compared with net loss of $90.5 million, or $2.94 per diluted share, in the prior year. The after-tax impact of the prior year impairment was $2.64 per diluted share. COVID-19 Impacts on Our Business The spread of the COVID-19 outbreak has disrupted businesses on a global scale. On March 11, 2020, the World Health Organization classified the outbreak as a pandemic. COVID-19 has caused disruption and volatility in the global capital markets, and has authored an economic slowdown in the Aerospace industry in particular. As we entered this crisis, the Company established two clear priorities: first and foremost the health and safety of our employees and their families, and second, continuing to meet the needs of our customers and secure the financial well-being of the Company. Substantially all of our operations and production activities have, to-date, remained operational. In response to the COVID-19 crisis, we implemented changes in our work practices to maintain a safe working environment for production employees at our facilities, while enabling other employees to productively work from home. As we commence bringing employees back to the workplace and return to in-person meetings with customers and suppliers, we are adopting a flexible work approach. This will allow for a smooth transition from COVID-19 conditions to a future that better meets the needs of the business and the interests of our employees. In terms of maintaining our financial health and liquidity, in early 2020, we implemented workforce reduction activities to align capacity with expected demand. We also implemented significant cost conservation measures, and we continue to closely monitor spending priorities. As economic activity recovers, we continue to monitor the situation, to assess further possible implications on our operations, supply chain, liquidity, cash flow and customer orders, and to take actions in an effort to mitigate adverse consequences. We believe that our existing financial arrangements are sufficient to meet our operating needs, and have adequate borrowings availability under our Credit Agreement that could provide additional relief if necessary. See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to supply chain disruptions. Outlook Consolidated sales were $217 million in the first half of 2021 and we are expecting an uptick in the second half to about $240 million, weighted slightly to the fourth quarter. We are assuming that the world will continue to make steady progress against the pandemic, and that supply chain stresses will not get worse. We will be watching eagerly for demand signals which will determine our expectations for 2022. Our expectation for capital expenditures for 2021 remains unchanged at $10 million to $11 million. Consolidated backlog at July 3, 2021 was $312.7 million. Approximately 59% of the backlog is expected to be recognized as revenue in 2021. Our expectation for capital expenditures for 2021 remains unchanged at $10 million to $11 million. While core aerospace markets have strengthened as vaccination rates rise and passenger traffic accelerated, 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, virus variants, vaccination rates and efficacy and the related length of impact on the global economy and specifically on the markets we are active in, which is uncertain and cannot be predicted at this time. SEGMENT RESULTS OF OPERATIONS AND OUTLOOK Operating profit, as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. Operating profit is reconciled to earnings before income taxes in Note 16 of the Notes to Consolidated Condensed Financial Statements included in this report. 27 Table of Contents AEROSPACE SEGMENT Six Months Ended Three Months Ended (In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Sales $ 170,650 $ 243,734 $ 89,220 $ 102,597 Less Inter-segment Sales (14) (91) — (24) Total Aerospace Sales $ 170,636 $ 243,643 $ 89,220 $ 102,573 Operating Loss $ (8,269) $ (80,235) $ (2,706) $ (17,090) Operating Margin (4.8) % (32.9) % (3.0) % (16.7) % Aerospace Sales by Market (In thousands) Commercial Transport $ 86,001 $ 170,323 $ 47,793 $ 67,548 Military 37,783 32,165 16,801 14,052 Business Jet 29,022 30,548 14,994 15,542 Other 17,830 10,607 9,632 5,431 $ 170,636 $ 243,643 $ 89,220 $ 102,573 Aerospace Sales by Product Line (In thousands) Electrical Power & Motion $ 64,092 $ 116,019 $ 34,748 $ 46,563 Lighting & Safety 51,468 65,653 24,368 27,731 Avionics 32,864 41,277 18,021 19,134 Systems Certification 1,838 4,991 960 1,660 Structures 2,544 5,096 1,491 2,054 Other 17,830 10,607 9,632 5,431 $ 170,636 $ 243,643 $ 89,220 $ 102,573 (In thousands) July 3, 2021 December 31, 2020 Total Assets $ 474,682 $ 484,885 Backlog $ 239,088 $ 191,081 AEROSPACE SECOND QUARTER RESULTS Aerospace segment sales decreased $13.4 million, or 13.0%, to $89.2 million. Sales continued to be negatively affected by low commercial aircraft build rates and a weak commercial aircraft aftermarket as airlines have reduced spending and grounded aircraft due to the global COVID-19 pandemic. Commercial aerospace continues to see depressed sales relative to pre-pandemic levels. Sales to this market were $47.8 million, or 43.0% of consolidated revenue in the quarter, compared with $67.5 million, or 54.6% of consolidated revenue in the second quarter of 2020. Demand related to new build and retrofit narrow body aircraft is improving and expected to continue to build through 2021 and into the future. The improvement has been driven by growing domestic travel supporting increased production rates of the 737 MAX and narrow body aircraft being placed back in service. The production and utilization rates of widebody aircraft have remained very low as international travel has been slow to recover. Military Aircraft sales increased $2.7 million, or 19.6%, to $16.8 million. Improvement year-over-year includes incremental non-recurring engineering revenue associated with new programs under development. Business Jet sales were down $0.5 million, or 3.5%, to $15.0 million. Other revenue increased $4.2 million to $9.6 driven by increased contract manufacturing programs. Aerospace segment operating loss was $2.7 million compared with operating loss of $17.1 million for the same period last year. Leverage lost on reduced sales significantly impacted operating results. Aerospace operating profit in the prior-year period was 28 Table of Contents impacted by goodwill impairment charges of $12.6 million and restructuring-related severance charges of $4.6 million, as previously discussed. AEROSPACE YEAR-TO-DATE RESULTS Aerospace segment sales decreased $73.0 million, or 30.0%, to $170.6 million. Sales continued to be negatively affected by reasons stated during the quarter. Aerospace segment operating loss was $8.3 million compared with operating loss of $80.2 million for the same period last year. Leverage lost on reduced sales significantly impacted operating results. Aerospace operating profit in the prior-year period was impacted by impairment charges of $87.0 million, of which $86.3 million was related to goodwill, and restructuring-related severance charges of $5.1 million. AEROSPACE OUTLOOK Aerospace bookings in the second quarter of 2021 were $118.2 million, for a book-to-bill ratio of 1.32:1. The Aerospace segment’s backlog at the end of the second quarter of 2021 was $239.1 million with approximately $155.7 million expected to be recognized as revenue over the remaining part of 2021 and $196.7 million scheduled over the next 12 months. TEST SYSTEMS SEGMENT Six Months Ended Three Months Ended (In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Sales $ 46,683 $ 37,985 $ 21,938 $ 21,432 Less Inter-segment Sales (304) (350) — (311) Total Test Systems Sales $ 46,379 $ 37,635 $ 21,938 $ 21,121 Operating profit (loss) $ 243 $ 3,334 $ (946) $ 2,612 Operating Margin 0.5 % 8.9 % (4.3) % 12.4 % Test Systems Sales by Market (In thousands) Semiconductor $ — $ 2,822 $ — $ 1,188 Aerospace & Defense 46,379 34,813 21,938 19,933 $ 46,379 $ 37,635 $ 21,938 $ 21,121 (In thousands) July 3, 2021 December 31, 2020 Total Assets $ 99,205 $ 105,079 Backlog $ 73,621 $ 92,337 TEST SYSTEMS SECOND QUARTER RESULTS Test Systems segment sales were $21.9 million, up $0.8 million compared to the prior-year period. Test Systems operating loss was $0.9 million, or 4.3% of sales, compared with operating profit of $2.6 million, or 12.4% of sales, in the second quarter of 2020. Operating profit in the second quarter of 2021 was negatively affected by $1.0 million in legal fees related to infringement claims. Operating results in 2020 benefited from $1.2 million in semiconductor warranty revenue. TEST SYSTEMS YEAR-TO-DATE RESULTS Test Systems segment sales were $46.4 million, up $8.7 million compared with the prior-year period. Test Systems operating profit was $0.2 million, or 0.5% of sales, compared with $3.3 million, or 8.9% of sales, in the second quarter of 2020. Operating profit in the first half of 2021 was negatively affected by $1.9 million in legal fees related to infringement claims. Operating results in 2020 benefited from $2.8 million in semiconductor warranty revenue. 29 Table of Contents TEST SYSTEMS OUTLOOK Bookings for the Test Systems segment in the quarter were $8.2 million, for a book-to-bill ratio of 0.37:1 for the quarter. The Test Systems segment’s backlog at the end of the second quarter of 2021 was $73.6 million, with approximately $27.9 million expected to be recognized as revenue over the remaining part 2021 and approximately $41.4 million scheduled over the next 12 months. LIQUIDITY AND CAPITAL RESOURCES Operating Activities: Cash used for operating activities totaled $2.3 million for the first six months of 2021, as compared with $41.5 million cash provided by operating activities during the same period in 2020. Cash flow from operating activities decreased compared with the same period of 2020 primarily due to lower net income adjusted for non-cash expenses and income in 2021 compared with 2020 due to the impacts of the COVID-19 pandemic on our business, coupled with changes in net operating assets. Investing Activities: Cash used for investing activities was $3.6 million for the first six months of 2021 compared with $2.3 million in cash used for investing activities in the same period of 2020 due to a decrease in capital expenditures coupled with proceeds from the sale of assets in the prior year. The Company expects capital spending in 2021 to be in the range of $10 million and $11 million. Financing Activities: Cash used for financing activities totaled $0.9 million for the first six months of 2021, as compared with $24.0 million cash used for financing activities during the same period in 2020. Cash flow used for financing activities decreased compared with the same period of 2020 due to net payments on our senior credit facility of $15.0 million in the first six months of 2020, coupled with $7.7 million of share repurchases before the 10b-5 plan associated with the share repurchase program was terminated. 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 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 four 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. In May 2020, the Company executed an amendment to the Agreement (the “Amended Facility”), which reduced the revolving credit line from $500 million to $375 million. The Amended Facility suspended 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 July 3, 2021, there was $173.0 million outstanding on the revolving credit facility and there remained $200.9 million available subject to the minimum liquidity covenant discussed below, net of outstanding letters of credit. 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 July 3, 2021, outstanding letters of credit totaled $1.1 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 was required to maintain a minimum interest coverage ratio of 1.75x on a quarterly basis, except for the first quarter of 2021, which was set at 1.50x. The Company was in compliance with its financial covenants at July 3, 2021. During the suspension period, the Company paid 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 paid 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 30 Table of Contents points of the commitment for each consenting lender. The Amended Facility also temporarily restricts certain activities, including acquisitions and share repurchases, through the second quarter of 2022. 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. OFF BALANCE SHEET ARRANGEMENTS We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition. BACKLOG The Company’s backlog at July 3, 2021 was $312.7 million compared with $283.4 million at December 31, 2020 and $307.2 million at June 27, 2020. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations and commitments have not changed materially from the disclosures in our 2020 Annual Report on Form 10-K. MARKET RISK The Company believes that there have been no material changes in the current year regarding the market risk information for its exposure to interest rate fluctuations. Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates related primarily to the Euro and the Canadian dollar. The Company believes that the impact of changes in foreign currency exchange rates in 2021 have not been significant. CRITICAL ACCOUNTING POLICIES Refer to Note 2 of the Notes to Consolidated Condensed Financial Statements included in this report for the Company’s critical accounting policies with respect to revenue recognition. For a complete discussion of the Company’s other critical accounting policies, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2020. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 1 of the Notes to Consolidated Condensed Financial Statements included in this report. FORWARD-LOOKING STATEMENTS Information included in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk See Market Risk in Item 2, above. 31 Table of Contents