What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-09 · 104 added, 83 removed, 133 unchanged (58% of the section changed)

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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 Company expects to receive the remainder in the 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.

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

The grant benefit was 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.

The Company recognized the remaining $6.0 million of the award during the six months ended July 2, 2022.

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 total proceeds of the divestiture included two elements of contingent purchase consideration (“earnout”).

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.

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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Three Months Ended

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

Six Months Ended Three Months Ended

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

Sales $ 245,303 $ 217,015 $ 129,127 $ 111,158

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

CONSOLIDATED FIRST QUARTER RESULTS

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

CONSOLIDATED SECOND QUARTER RESULTS

Consolidated sales were up $18.0 million from the second quarter of 2021.

Aerospace sales were up $20.1 million, or 22.5%, and Test System sales decreased $2.1 million.

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.

Consolidated cost of products sold in the second quarter of 2022 was $113.4 million, compared with $95.8 million in the prior-year period.

The increase was primarily due to higher volume combined with the impact of material and labor inflation, addressing supply chain disruptions and labor constraints.

Research and development expenses increased $2.3 million due to higher innovation spend.

The prior-year period benefited from $0.9 million in COVID-19 subsidies offsetting costs of products sold.

Selling, general and administrative (“SG&A”) expenses were $24.1 million in the second quarter of 2022 compared with $21.3 million in the prior-year period.

The prior-year period benefited from a $2.2 million non-cash reduction of the fair value of a contingent consideration liability.

The effective tax rate for the quarter was (6.4)%, compared with 0.8% in the second quarter of 2021.

The tax rate for the quarter was impacted by changes in the year-to-date and forecasted income (loss) before income taxes.

Consolidated net loss was $11.0 million, or $0.34 per diluted share, compared with net loss of $8.1 million, or $0.26 per diluted share, in the prior year.

Bookings were $148.4 million, for a book-to-bill ratio of 1.15:1.

Backlog at the end of the quarter was $494.4 million.

Approximately $278.0 million, or 56%, of backlog is expected to be recognized as revenue in 2022.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales were up $28.3 million.

Aerospace sales were up $40.0 million from the first half of 2021.

Test System sales decreased $11.8 million.

Consolidated cost of products sold in the first half of 2022 was $209.7 million, compared with $187.3 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.

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Research and development expenses increased $4.2 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.

SG&A expenses were $48.2 million in the first half of 2022 compared with $45.1 million the prior-year period.

The prior-year period benefited from a $2.2 million non-cash reduction of the fair value of a contingent consideration liability.

The effective tax rate for the first half of 2022 was (165.0)%, compared with (0.2)% in the first half 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.

The 2022 tax rate was 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.

This was partially offset by the removal of valuation allowances related to net operating losses, tax credit carryovers, and certain timing differences that are expected to reverse during 2022 as well as a Federal research and development credit expected for 2022.

Consolidated net loss was $14.1 million, or $(0.44) per diluted share, compared with net loss of $20.0 million, or $(0.65) per diluted share, in the prior year.

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

Backlog at the end of the quarter was $475.1 million.

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

COVID-19 Impacts on Our Business

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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 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.

As economic 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.

We are revising our expected 2022 revenue to be in the range of $550 million to $580 million, which incorporates a reduction at the high end of the range from previous guidance.

The midpoint of this range would mean growth for the year of 27% over 2021 and implies average quarterly revenue of $160 million in the second half, a significant step up from recent levels.

This ramp is expected to be weighted more toward the fourth quarter, however, and while we continue to be challenged by ongoing supply chain challenges, we believe today that this expansion in revenue is necessary and achievable.

Higher volume will help satisfy customer demand, along with improved profitability and momentum as we close out 2022.

Consolidated backlog at July 2, 2022 was $494.4 million.

Approximately 56% of the backlog is expected to be recog nized as revenue in 2022.

Planned capital expenditures for 2022 are expected to be approximately $9 million to $10 million.

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AEROSPACE SEGMENT

Three Months Ended

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

Six Months Ended Three Months Ended

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

Sales $ 210,694 $ 170,650 $ 109,300 $ 89,220

Less Inter-segment Sales

(10) (14) (10) —

Total Aerospace Sales

$ 210,684 $ 170,636 $ 109,290 $ 89,220

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

Operating Loss $ (226) $ (8,269) $ (3,276) $ (2,706)

Operating Margin (0.1) % (4.8) % (3.0) % (3.0) %

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Military 28,873 37,783 13,897 16,801

Business Jet 15,867 14,028

General Aviation 33,997 29,022 18,130 14,994

Other 14,482 17,830 8,020 9,632

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$ 210,684 $ 170,636 $ 109,290 $ 89,220

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

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

$ 463,715 $ 458,334

$ 410,765 $ 334,659

AEROSPACE FIRST QUARTER RESULTS

AEROSPACE SECOND QUARTER RESULTS

Aerospace segment sales increased $20.1 million, or 22.5%, to $109.3 million.

Commercial aerospace sales increased 44.9%, or $21.5 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.

Sales to this market were $69.2 million compared with $47.8 million in the second quarter of 2021.

Improving domestic airline travel that is driving higher fleet utilization and increased narrowbody production rates, including the 737 MAX, resulted in higher demand for Astronics’ products.

General Aviation sales increased $3.1 million, or 20.9%, to $18.1 million as higher demand in the business jet market for antenna products.

The Company expects the strong end-user demand in the business jet industry to drive higher OEM production rates in the near future, resulting in increased demand for its products.

Military Aircraft sales decreased $2.9 million, or 17.3%, to $13.9 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.

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

Aerospace segment operating loss was $3.3 million compared with operating loss of $2.7 million for the same period last year.

Higher operating losses were driven by inflationary impacts on input costs and inefficiencies associated with production execution due to supply chain constraints that restricted shipment volume.

AEROSPACE YEAR-TO-DATE RESULTS

Aerospace segment sales increased $40.0 million, or 23.5%, to $210.7 million.

Sales continued to be positively affected by reasons discussed above.

Aerospace segment operating loss was $0.2 million compared with operating loss of $8.3 million for the same period last year.

The improvement was driven by increased sales and the $6.0 million AMJP benefit in the 2022 period, partially offset by a $1.7

million increase of expense associated with the reinstated 401K contribution.

Aerospace operating loss in the prior-year period was significantly impacted by leverage lost on reduced sales.

AEROSPACE OUTLOOK

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.

Aerospace bookings in the second quarter of 2022 were $126.0 million, for a book-to-bill ratio of 1.15:1.

The Aerospace segment’s backlog at the end of the second quarter of 2022 was $410.8 million with approximately $246.6 million expected to be recognized as revenue over the remaining part of 2022 and $360.2 million scheduled over the next 12 months.

During the quarter, we announced some significant program wins.

These included the award by Southwest Airlines to provide in-seat power systems, selection by Safran to provide satellite communication hardware for Airbus aircraft and being named the designer and developer of the electrical power distribution system for the Lilium eVTOL aircraft, our first announced eVTOL program.

While these wins did not contribute meaningfully to bookings in the quarter, we expect they will be major drivers for our business going forward.

TEST SYSTEMS SEGMENT

Three Months Ended

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

Six Months Ended Three Months Ended

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

Sales $ 34,638 $ 46,683 $ 19,840 $ 21,938

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(In thousands)

April 2, 2022 December 31, 2021

July 2, 2022 December 31, 2021

$ 100,224 $ 105,335

Backlog $ 83,635 $ 81,033

TEST SYSTEMS FIRST QUARTER RESULTS

TEST SYSTEMS SECOND QUARTER RESULTS

Test Systems segment sales were $19.8 million, down $2.1 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 was nearly break-even compared with operating loss of $0.9 million, or (4.3)% of sales, in the second quarter of 2021.

Continued lower volume has driven operating losses in the second quarters of 2022 and 2021.

TEST SYSTEMS YEAR-TO-DATE RESULTS

Test Systems segment sales were $34.6 million, down $11.8 million compared with the prior-year period driven by lower revenue on defense and mass transit programs.

Test Systems operating loss was $1.8 million, or (5.2)% of sales, compared with operating profit of $0.2 million, or 0.5% of sales, in the first half of 2021.

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

Operating profit in the first half of 2021 was negatively affected by $1.9 million in legal fees related to infringement claims.

TEST SYSTEMS OUTLOOK

Bookings for the Test Systems segment in the quarter were $22.4 million, for a book-to-bill ratio of 1.13:1 for the quarter.

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.

The Test Systems segment’s backlog at the end of the second quarter of 2022 was $83.6 million, with approximately $31.4 million expected to be recognized as revenue over the remainder of 2022 and approximately $51.5 million scheduled over the next 12 months.

Our Test business has been pursuing some significant awards which have been delayed to the second half of the year.

Our go-forward plan assumes that these awards will be made in the near future, supporting our plans for 2023 and beyond.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities:

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.

Cash used for operating activities totaled $10.3 million for the first six months of 2022, as compared with $2.3 million cash used for operating activities during the same period in 2021.

Cash flow from operating activities decreased compared with the same period of 2021 primarily related to increases in net operating assets, primarily accounts receivable and inventory, more than offsetting cash received from income tax refunds and the AMJP program.

Investing Activities:

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.

Cash provided by investing activities was $19.5 million for the first six months of 2022 compared with $3.6 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.

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Financing Activities:

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.

Cash used for financing activities totaled $27.7 million for the first six months of 2022, as compared with $0.9 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 $27.0 million in the first six months of 2022, coupled with $0.8 million in costs associated with the March 1, 2022 amendment of our credit facility.

The Company's long-term debt consists of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”).

On March 1, 2022, the Company executed an amendment to the Agreement, 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.

The definition of Adjusted EBITDA was modified to exclude income from earnout payments and asset sales.

On August 9, 2022, the Company executed a further amendment to the Agreement (the “Amended Facility”), which reduced the revolving credit line from $225 million to $190 million until September 12, 2022 with further reductions to $180 million effective September 12, 2022 and $170 million effective October 11, 2022.

The Amended Facility extended the maturity date of the loans under the facility from May 30, 2023 to August 31, 2023.

Interest is 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 4.75% 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 0.40% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio.

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

At July 2, 2022, there was $136.0 million outstanding on the revolving credit facility and there remained $87.9 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 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.

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

The Company is required 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 0.00 to 1 for the first and second quarters of 2022 under the previous facility.

The Amended Facility includes a maximum net leverage ratio of 4.25 to 1 for the third quarter of 2022 and 0.00375 to 1 thereafter.

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

The Amended Facility temporarily restricts acquisitions through the third quarter of 2022, as well as dividend payments and share repurchases through the maturity date of the Amended Facility.

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.

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.

We are currently in the process of evaluating terms and conditions for a new long-term financing arrangement, which includes an asset-based lending agreement and separate agreement that would monetize our real estate as collateral.

The extent to which we will be able to effect such refinancing, replacement or maturity extension on terms that are favorable to us or at all is dependent on a number of uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the aerospace and defense markets, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions.

In addition, rising interest rates could limit our ability to refinance our existing

credit facility when it matures or cause us to pay higher interest rates upon refinancing.

As the Company’s long-term debt approaches maturity, if the Company is unable to refinance, replace or extend the maturity on its credit facility, the Company’s liquidity, results of operations, and financial condition could be materially adversely impacted.

If we are unable to obtain a new long-term financing facility before we file our third quarter 2022 Form 10-Q to replace our existing debt facility, borrowings outstanding under our existing credit 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.

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 April 2, 2022 was $ 475.1 million compared with $415.7 million at December 31, 2021 and $297.5 million at April 3, 2021.

The Company’s backlog at July 2, 2022 was $494.4 million compared with $415.7 million at December 31, 2021 and $312.7 million at July 3, 2021.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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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