What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-09 · 103 added, 164 removed, 113 unchanged (70% of the section changed)

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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.

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), supply chain pressures, 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.

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Department of Transportation (“USDOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”) for a grant of up to $14.7 million.

The Company received the first installment of $7.3 million under the grant in September 2021.

The remaining balance due to be received of $7.4 million has been classified within Prepaid Expenses and Other Current Assets on the Consolidated Condensed Balance Sheets as of October 2, 2021.

The Company expects to receive a second installment in the range of $5 million to $6 million during the fourth quarter of 2021 and a final installment in the second or third quarter of 2022 upon final confirmation from the USDOT of the Company meeting its grant commitments.

The receipt of the full award is primarily conditioned upon the Company committing to not furlough or lay off a defined group of employees during the six-month period of performance between September 2021 and March 2022.

The Company received $7.4 million under the grant in 2021 and $5.2 million in the first quarter of 2022.

The Company expects to receive the remainder in the second or third quarter of 2022 upon final confirmation from the USDOT of the Company meeting its grant commitments.

The receipt of the full award is primarily conditioned upon the Company committing to not furlough, lay off or reduce the compensation levels of a defined group of employees during the six-month period of performance between September 2021 and March 2022.

The grant benefit will be recognized over the six-month performance period as a reduction to cost of products sold in proportion to the compensation expense that the award is intended to defray.

During the quarter ended October 2, 2021, the Company recognized $1.1 million of the award.

The unearned portion of the AMJP award of $13.6 million has been reported within Accrued Expenses and Other Current Liabilities in the Consolidated Balance Sheet at October 2, 2021.

The Company recognized the remaining $6.0 million of the award during the quarter ended April 2, 2022.

On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment.

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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 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.

In the fourth quarter of 2021, the Company agreed to an earnout payment of $10.7 million for the calendar 2020 earnout, which was recorded in 2021 as a separate line item below operating loss and was received by the Company in early January 2022.

In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $11.3 million.

The Company recorded the gain and received the payment in the first quarter of 2022.

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Nine Months Ended Three Months Ended

($ in thousands) October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

Three Months Ended

($ in thousands) April 2, 2022 April 3, 2021

Sales $ 116,176 $ 105,857

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SG&A Expenses as a Percentage of Sales 20.7 % 22.5 %

Impairment Loss $ — $ 87,016 $ — $ —

Net Gain on Sale of Businesses $ (11,284) $ —

Interest Expense, Net of Interest Income $ 1,631 $ 1,758

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

CONSOLIDATED THIRD QUARTER RESULTS

Consolidated sales were up $5.3 million from the third quarter of 2020.

CONSOLIDATED FIRST QUARTER RESULTS

Consolidated sales were up $10.3 million from the first quarter of 2021.

Aerospace sales were up $20.0 million, or 24.5%, and Test System sales decreased $9.7 million.

Total sales and volume continued to reflect the ongoing impacts of the COVID-19 pandemic on the global aerospace industry.

Supply chain pressures impacted delivery schedules and costs, limiting the Company’s ability to respond to accelerated or quick-turn delivery requests from customers and delayed shipments that otherwise would have been made during the quarter.

The Company estimates that revenue would have been $8 million to $10 million higher in the third quarter if its supply chain was functioning normally.

Consolidated cost of products sold in the third quarter of 2021 was $94.6 million, compared with $91.3 million in the prior-year period.

The increase was primarily due to higher sales volume driven by improvement in the global aerospace industry, offset by $1.1 million recognized as an offset to cost of products sold from the AMJP program.

The grant is benefiting cost of products sold over the six-month period of performance.

Selling, general and administrative (“SG&A”) expenses were $21.7 million in the third quarter of 2021 compared with $24.2 million in the prior-year period due primarily to lower legal expenses in the current year’s third quarter related to a patent claim.

The effective tax rate for the quarter was (4.9)%, compared with 52.8% in the third quarter of 2020.

The 2021 tax rate was impacted by State and Foreign income taxes.

The 2020 tax rate was impacted by a discrete adjustment related to accrued state income tax refunds of approximately $3.1 million.

In addition, the 2020 tax rate was impacted by changes in the forecasted tax rate related to permanently non-deductible goodwill impairments and an expected U.S.

Federal net operating loss carryback.

While demonstrating some improvement, sales continued to reflect the ongoing impacts of the COVID-19 pandemic on the global aerospace industry.

Supply chain pressures continue to impact delivery schedules and costs, limiting the Company’s ability to respond to desired requests from customers and delaying shipments.

Supply chain challenges caused about $15 million in revenue to slide out of the quarter.

These orders were not lost and will remain in backlog until the required raw materials arrive.

Consolidated cost of products sold in the first quarter of 2022 was $96.2 million, compared with $91.6 million in the prior-year period.

The increase was primarily due to higher volume as the global aerospace industry continues its recovery from the COVID-19 pandemic.

The current year period benefited from $6.0 million recognized as an offset to cost of products sold related to the AMJP award.

Research and development expenses increased $1.9 million due to higher innovation spend.

Selling, general and administrative (“SG&A”) expenses were $24.1 million in the first quarter of 2022 compared with $23.8 million in the prior-year period.

In March 2022, the Company agreed with the earnout calculation from the buyer of its former semiconductor test business for an earnout in the amount of $11.3 million related to performance in calendar 2021.

The Company recorded the gain and received the payment in the first quarter of 2022.

The semiconductor test business was sold in 2019.

The effective tax rate for the quarter was 161.7%, compared with (0.9)% in the first quarter of 2021.

In the past, research and development costs were deducted as incurred.

However, beginning with the 2022 tax year, these costs are required to be capitalized for tax purposes and amortized over 5 years.

The tax rate was also impacted by a valuation allowance applied against the associated deferred tax asset created by the new treatment, due to the Company’s cumulative losses over the last three years.

Consolidated net loss was $3.1 million, or $0.10 per diluted share, compared with net loss of $11.9 million, or $0.39 per diluted share, in the prior year.

The prior-year net loss benefited from a $3.1 million tax adjustment related to a revised state income tax filing position.

Bookings were $175.6 million, for a book-to-bill ratio of 1.51:1.

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Approximately $364.3 million, or 77%, of backlog is expected to ship in the remainder of 2022.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales were down $58.9 million.

Aerospace sales were down $59.8 million from the prior-year period and continued to be negatively affected by the continued impacts of the COVID-19 pandemic, while the prior-year period was inclusive of pre-pandemic levels during the first quarter.

Test System sales increased $0.9 million.

Consolidated cost of products sold in 2021 was $282.0 million, compared with $310.1 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.

The current year period benefited from $1.1 million recognized as an offset to cost of products sold related to the AMJP award.

SG&A expenses were $66.8 million in 2021 compared with $85.9 million the prior-year period.

The decrease was primarily due to the cost control measures implemented at the onset of the pandemic late in the first quarter of 2020 which resulted in lower labor costs and discretionary spending.

Lower legal expenses associated with a patent claim contributed to the decrease.

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 $5.6 million in restructuring-related severance charges in the prior-year period, 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 nine months 2021 was (1.4)%, compared with 8.7% in the prior-year period.

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 U.S.

Federal and most State deferred tax assets.

The 2020 tax rate was impacted by permanently non-deductible goodwill impairments of $60.8 million, a U.S.

Federal valuation allowance recorded of approximately $7.5 million, and a discrete adjustment related to accrued state income tax refunds of approximately $3.1 million.

Consolidated net loss was $27.2 million, or $0.88 per diluted share, compared with net loss of $95.8 million, or $3.11 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.

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic.

The spread of the COVID-19 pandemic disrupted businesses on a global scale, led to significant volatility in financial markets and affected the aviation and industrial industries.

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.

However, the impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by customer demand variability.

Although we saw stable and growing backlog during the first half of 2022 in our aerospace business, COVID-19 related disruptions are ongoing and continue to adversely challenge our commercial transport market.

While we remain bullish about the aerospace business, we believe the recovery to pre-pandemic activity, particularly in the widebody market, will take longer than originally anticipated at the outset of the pandemic.

activity continues to recover, we will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders.

See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to supply chain disruptions and the recent government vaccine mandates.

We are expecting to close 2021 with a higher shipment level in the final quarter.

Supply chain challenges introduce a level of uncertainty, but we expect fourth quarter revenues of $115 million to $118 million.

We expect shipping volume to continue to strengthen as we move into 2022, but we are not yet comfortable providing guidance for the year.

Based on current estimates, we expect the AMJP to contribute approximately $7.3 million to gross profit as an offset to cost of goods sold in the fourth quarter, with the remaining benefit to gross profit of approximately $6.2 million to be recorded in the

first quarter of 2022.

However, actual benefit between the two quarters may differ from these estimates based on actual payroll attribution for the eligible employee group.

Consolidated backlog at October 2, 2021 was $354.4 million.

We are maintaining our previous revenue guidance of $550 million to $600 million for the year.

We believe this range accommodates the supply chain and labor challenges that we are likely to face, although some unpredictability certainly exists.

We expect volume to ramp as we move though the year.

We expect revenue in the second quarter will be between $125 million and $135 million, with similar rates of improvement in the third and fourth quarters.

Consolidated backlog at April 2, 2022 was $475.1 million.

Approximately 77% of the backlog is expected to be recognized as revenue in 2022.

Planned capital expenditures for 2021 have been reduced to approximately $8 million to $9 million from previous expectations of $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 are uncertain and cannot be predicted at this time.

Planned capital expenditures for 2022 are expected to be approximately $15 million to $20 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, supply chain and specifically on the markets we are active in, which are 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.

Operating profit, as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense, other corporate expenses and other non-operating sales and expenses.

Cost of products sold and other operating expenses are directly identifiable to the respective segment.

Operating profit (loss) is reconciled to loss before income taxes in Note 16 of the Notes to Consolidated Condensed Financial Statements included in this report.

Operating loss is reconciled to loss before income taxes in Note 15 of the Notes to Consolidated Condensed Financial Statements included in this report.

AEROSPACE SEGMENT

Nine Months Ended Three Months Ended

(In thousands) October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

Three Months Ended

(In thousands) April 2, 2022 April 3, 2021

Sales $ 101,394 $ 81,430

Less Inter-segment Sales

(23) (91) (9) —

Total Aerospace Sales

$ 101,394 $ 81,416

Operating Loss $ (6,352) $ (86,567) $ 1,917 $ (6,332)

Operating Profit (Loss) $ 3,050 $ (5,563)

Operating Margin 3.0 % (6.8) %

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$ 101,394 $ 81,416

(In thousands) October 2, 2021 December 31, 2020

(In thousands) April 2, 2022 December 31, 2021

$ 465,611 $ 458,334

$ 394,043 $ 334,659

AEROSPACE THIRD QUARTER RESULTS

AEROSPACE FIRST QUARTER RESULTS

Aerospace segment sales increased $20.0 million, or 24.5%, to $101.4 million.

Commercial aerospace sales were up 30.6%, or $13.5 million, and drove the improvement even as sales remain below pre-pandemic levels.

Sales to this market were $57.5 million, or 51.5% of consolidated revenue in the quarter, compared with $44.1 million, or 41.4% of consolidated revenue in the third quarter of 2020.

Improving domestic travel, increased production rates including the 737 MAX and higher fleet utilization are driving increased demand for Astronics products.

General Aviation sales were down $2.6 million, or 17.7%, to $12.1 million as higher demand in the business jet market somewhat offset lower VVIP activity.

The Company expects the strong demand being realized in the business jet industry to translate into higher demand for its products as production levels begin to increase in 2022.

Commercial aerospace sales increased 67.7%, or $25.9 million, and drove the improvement.

Sales to this market were $64.1 million, or 55.1% of consolidated revenue in the quarter, compared with $38.2 million, or 36.1% of consolidated revenue in the first quarter of 2021.

Improving domestic travel, increased narrowbody production rates including the 737 MAX and higher fleet utilization are driving increased demand for Astronics products.

General Aviation sales increased $1.8 million, or 13.1%, to $15.9 million as higher demand in the business jet market somewhat offset lower VVIP activity.

The Company expects the strong demand being realized in the business jet industry to translate into higher demand for its products as OEM production levels increase.

Military Aircraft sales decreased $6.0 million, or 28.6%, to $15.0 million.

The prior-year period benefited from incremental non-recurring engineering revenue associated with development of new programs.

Other revenue increased $3.4 million to $9.0 million driven by increased contract manufacturing programs.

Aerospace segment operating profit was $1.9 million compared with operating loss of $6.3 million for the same period last year driven by increased sales, reflecting improvements in commercial aerospace, and the $1.1 million AMJP benefit which helped offset the impacts of supply chain constraints.

Sequentially, compared with the second quarter of 2021, Aerospace revenue grew 7% and operating profit improved $4.6 million to $1.9 million.

AEROSPACE YEAR-TO-DATE RESULTS

Aerospace segment sales decreased $59.8 million, or 18.3%, to $266.4 million.

Sales continued to be negatively affected by the continued impacts of the COVID-19 pandemic, while the prior-year period was inclusive of pre-pandemic levels during the first quarter of the year.

Aerospace segment operating loss was $6.4 million compared with operating loss of $86.6 million for the same period last year.

Leverage lost on reduced commercial aircraft sales significantly impacted operating results.

Aerospace operating loss 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 $5.3 million.

The prior-year period benefited from incremental non-recurring engineering revenue associated with development of new programs and higher sales of lighting and safety products.

Aerospace segment operating profit was $3.1 million compared with operating loss of $5.6 million for the same period last year.

The improvement was driven by increased sales and the $6.0 million AMJP benefit, partially offset by a $0.8 million increase of expense associated with the reinstated 401K contribution accrual.

Sequentially, compared with the fourth quarter of 2021, Aerospace revenue grew 2.6% and operating profit improved $5.3 million to $3.1 million.

AEROSPACE OUTLOOK

Aerospace bookings in the third quarter of 2021 were $142.5 million, for a book-to-bill ratio of 1.49:1.

The Aerospace segment’s backlog at the end of the third quarter of 2021 was $285.8 million with approximately $101.1 million expected to be recognized as revenue over the remaining part of 2021 and $231.3 million scheduled over the next 12 months.

Aerospace bookings in the first quarter of 2022 were $160.8 million, for a book-to-bill ratio of 1.59:1.

The Aerospace segment’s backlog at the end of the first quarter of 2022 was $394.0 million with approximately $322.5 million expected to be recognized as revenue over the remaining part of 2022 and $356.0 million scheduled over the next 12 months.

Demand has been strong across our aerospace product range, with a book-to-bill of 1.48 over the last twelve months and record high backlog of at the end of the first quarter.

Most of this demand has been driven by recovery in the narrowbody market, though in the first quarter we saw signs that the widebody market is picking up also, which is necessary to return to pre-COVID levels in the near future.

TEST SYSTEMS SEGMENT

Nine Months Ended Three Months Ended

(In thousands) October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

Three Months Ended

(In thousands) April 2, 2022 April 3, 2021

Sales $ 14,798 $ 24,745

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Operating Margin (12.1) % 4.9 %

Test Systems Sales by Market

(In thousands)

Semiconductor $ — $ 3,407 $ — $ 585

Aerospace & Defense 62,454 58,186 16,075 23,373

$ 62,454 $ 61,593 $ 16,075 $ 23,958

All Test Systems sales are to the Aerospace and Defense Market.

(In thousands)

October 2, 2021 December 31, 2020

April 2, 2022 December 31, 2021

$ 96,285 $ 105,335

Backlog $ 81,095 $ 81,033

TEST SYSTEMS THIRD QUARTER RESULTS

Test Systems segment sales were $16.1 million, down $7.9 million compared with the prior-year period driven by lower defense and transit revenue caused by COVID-related delays.

Test Systems operating loss was $2.2 million, or 13.7% of sales, compared with operating profit of $0.9 million, or 3.9% of sales, in the third quarter of 2020.

Operating loss in the third quarter of 2021 was negatively affected by lower volume and $1.0 million in legal fees related to infringement claims and contractual disputes.

Operating results in 2020 benefited from $0.6 million in semiconductor warranty revenue.

TEST SYSTEMS YEAR-TO-DATE RESULTS

Test Systems segment sales were $62.5 million, up $0.9 million compared with the prior-year period.

Aerospace & Defense sales increased $4.3 million.

Sales from the divested semiconductor business contributed $3.4 million in the prior-year period.

Test Systems operating loss was $2.0 million, or 3.1% of sales, compared with operating profit of $4.3 million, or 6.9% of sales, in the third quarter of 2020.

Operating profit in 2021 was negatively affected by low volume and $2.9 million in legal fees related to infringement claims and contractual disputes.

Operating results in 2020 benefited from $3.4 million in semiconductor warranty revenue.

TEST SYSTEMS FIRST QUARTER RESULTS

Test Systems segment sales were $14.8 million, down $9.7 million compared with the prior-year period driven by lower defense revenue.

Test Systems operating loss was $1.8 million, or 12.1% of sales, compared with operating profit of $1.2 million, or 4.9% of sales, in the first quarter of 2021.

Operating loss in the first quarter of 2022 was negatively affected primarily by lower volume.

Operating profit in the first quarter of 2021 was negatively affected by $0.9 million in legal fees related to infringement claims.

TEST SYSTEMS OUTLOOK

Bookings for the Test Systems segment in the quarter were $14.8 million, for a book-to-bill ratio of 1.00:1 for the quarter.

The Test Systems segment’s backlog at the end of the third quarter of 2021 was $68.6 million, with approximately $12.2 million expected to be recognized as revenue over the remaining part 2021 and approximately $33.8 million scheduled over the next 12 months.

The Test Systems segment’s backlog at the end of the first quarter of 2022 was $81.1 million, with approximately $41.8 million expected to be recognized as revenue over the remainder of 2022 and approximately $51.1 million scheduled over the next 12 months.

The first quarter was one of treading water for our Test business, with light shipments and bookings.

We are pursuing some significant projects which are scheduled for award mid-year.

Those awards will largely determine the trajectory of the business through the end of 2022 and into 2023.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities:

Cash used for operating activities totaled $18.5 million for the first nine months of 2021, as compared with $31.5 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 changes in net operating assets, primarily increases in accounts receivable and inventory.

Cash provided by operating activities totaled $0.3 million for the first three months of 2022, as compared with $6.9 million cash used for operating activities during the same period in 2021.

Cash flow from operating activities increased compared with the same period of 2021 primarily related to cash received from income tax refunds and the AMJP program, offset by changes in net operating assets, including increase in accounts receivable and inventory as sales and demand increases.

Investing Activities:

Cash used for investing activities was $4.6 million for the first nine months of 2021 compared with $4.0 million in cash used for investing activities in the same period of 2020.

A higher level of capital expenditures in the prior-year period was partially offset by proceeds from the sale of assets in that period.

Cash provided by investing activities was $20.8 million for the first three months of 2022 compared with $1.9 million in cash used for investing activities in the same period of 2021.

Investing cash flows in 2022 were positively impacted by the receipt of $10.7 million and $11.3 million related with the calendar 2020 and 2021 earnouts, respectively, from the sale of the semiconductor business.

The Company expects capital spending in 2022 to be in the range of $15 million and $20 million.

Financing Activities:

Cash provided by financing activities totaled $12.3 million for the first nine months of 2021, as compared with $29.5 million cash used for financing activities during the same period in 2020.

Cash flow provided by financing activities increased compared with the same period of 2020 due to net proceeds on our senior credit facility of $10.0 million in the first nine months of 2021 compared with net repayments of $20.0 million in the first nine months of 2020.

Cash used in 2020 also included $7.7 million of share repurchases in the prior year 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 is set at 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 returns to 3.75 to 1 for each quarter thereafter.

At October 2, 2021, there was $183.0 million outstanding on the revolving credit facility and there remained $190.9 million available subject to the minimum liquidity covenant discussed below, net of outstanding letters of credit.

Cash used for financing activities totaled $26.7 million for the first three months of 2022, as compared with $0.6 million cash used for financing activities during the same period in 2021.

Cash used for financing activities increased compared with the same period of 2021 due to net payments on our senior credit facility of $26.0 million in the first three months of 2022, coupled with $0.8 million in costs associated with the March 1, 2022 amendment of our credit facility.

At April 2, 2022, there was $137.0 million outstanding on the revolving credit facility and there remained $86.9 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 $225 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit.

At October 2, 2021, outstanding letters of credit totaled $1.1 million.

Through the third quarter of 2021, the Amended Facility required 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.

As noted above, the maximum net leverage ratio was set at 6.00 to 1 for the quarter ended October 2, 2021.

The Company was in compliance with its financial covenants at October 2, 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 pays 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 also pays a commitment fee to the lenders in an amount equal to 0.10% to 0.35% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio.

The Amended Facility provided for the payment of a consent fee of 15 basis points of the commitment for each consenting lender.

The Amended Facility also temporarily restricts certain activities, including acquisitions and share repurchases, through the second quarter of 2022.

At April 2, 2022, outstanding letters of credit totaled $1.1 million.

On March 1, 2022, the Company executed an amendment to the Amended Facility, which reduced the revolving credit line from $375 million to $225 million and extended the maturity date of the loans under the facility from February 16, 2023 to May 30, 2023.

Interest will be payable on the unpaid principal amount of the facility at a rate equal to the Secured Overnight Financing Rate (“SOFR”, which shall be at least 1.00%), plus between 1.50% to 3.25% 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 0.40% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio.

The amendment provided for the payment of a consent fee of 10 basis points of the commitment for each consenting lender.

The amendment requires the Company to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments, of $35 million.

The maximum net leverage ratio is set at 4.75 to 1 for the first and second quarters of 2022 and 3.75 to 1 thereafter, and the definition of Adjusted EBITDA has been modified to exclude income from earnout payments and asset sales.

The Company was in compliance with its financial covenants at April 2, 2022.

The Amended Facility continues the temporary restrictions on certain activities, including dividend payments, acquisitions and share repurchases, through the third 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.

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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.

Subsequent to October 2, 2021, the Company sold one of its Aerospace facilities for $9.1 million.

Net cash proceeds were approximately $8.8 million.

A gain on sale of approximately $5.0 million will be recorded during the fourth quarter of 2021.

In September, the U.S.

Department of Transportation announced that it had approved for the Company to receive up to $14.7 million under the AMJP program.

The Company received its first installment of approximately $7.3 million in September.

The Company expects to receive a second installment in the range of $5 million to $6 million in the fourth quarter of 2021, and a final installment in the second or third quarter of 2022, upon final confirmation of meeting its award commitments.

The Company expects additional cash inflows over the next several quarters related to an earn-out from the 2019 sale of its semiconductor test business, an approximate $10 million tax refund and improved sales volumes.

We intend to refinance the amended agreement with a new long-term financing facility in the coming months.

We are currently in the process of evaluating terms and conditions for a new long-term financing arrangement.

If we are unable to obtain a new long-term financing facility before we file our second quarter 2022 Form 10-Q to replace our existing debt facility, borrowings outstanding under our existing debt facility will come due within 12 months of that filing date and could result in substantial doubt about our ability to continue as a going concern in the event that we are not reasonably assured to have sufficient cash balances to repay the remaining obligations at maturity.

In 2021, the Company was awarded a grant of up to $14.7 million as part of the Aviation Manufacturing Jobs Protection (“AMJP”) Program.

The grant was being recognized ratably over the six-month period of performance.

In the first quarter of 2022, $6.0 million was recognized as an offset to cost of products sold.

The period of performance concluded in March 2022.

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.

The Company’s backlog at October 2, 2021 was $354.4 million compared with $283.4 million at December 31, 2020 and $282.2 million at September 26, 2020.

The Company’s backlog at April 2, 2022 was $ 475.1 million compared with $415.7 million at December 31, 2021 and $297.5 million at April 3, 2021.

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.

Except as noted below, our contractual obligations and commitments have not changed materially from the disclosures in our 2021 Annual Report on Form 10-K.

Absent any legislative changes, the Company expects to pay approximately $10 million to $12 million in income tax payments related to the 2022 tax year.

These expected tax payments are largely the result of the requirement to capitalize and amortize certain research and development expenses for U.S.

tax purposes beginning in 2022.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis