What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-15 compared with 2022-08-11 · 113 added, 92 removed, 145 unchanged (59% of the section changed)

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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 $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 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 Company received $7.4 million under the grant in 2021, $5.2 million in the first quarter of 2022 and $2.1 million in the third quarter of 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.

The Company recognized the remaining $6.0 million of the award during the nine months ended October 1, 2022.

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

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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

($ in thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

Sales $ 376,741 $ 328,856 $ 131,438 $ 111,841

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SG&A Expenses as a Percentage of Sales 20.4 % 20.3 % 21.8 % 19.4 %

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

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

Interest Expense, Net of Interest Income $ 5,812 $ 5,252 $ 2,519 $ 1,795

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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 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.

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 THIRD QUARTER RESULTS

Consolidated sales were up $19.6 million from the third quarter of 2021.

Aerospace sales were up $16.4 million, or 17.1%, and Test Systems sales increased $3.2 million.

Consolidated cost of products sold in the third quarter of 2022 was $117.1 million, compared with $94.6 million in the prior-year period.

The increase was primarily due to higher volume combined with material and labor inflation, addressing supply chain constraints to meet customer requirements and the lag in price increases implemented where possible to offset higher costs and product mix.

The prior-year period benefited by a $1.1 million offset to cost of products sold from the AMJP Program grant.

Selling, general and administrative (“SG&A”) expenses were $28.7 million in the third quarter of 2022 compared with $21.7 million in the prior-year period primarily due to increased wages and benefits.

Third quarter 2022 reflects $4.6 million related to the settlement of a litigation claim, a customer accommodation dispute, and a lease termination settlement.

The Company expects to be indemnified by other parties with respect to the litigation matter for approximately $1.5 million and will record the gain as an offset to SG&A when received, likely in the fourth quarter of 2022.

Tax benefit in the quarter was $2.4 million primarily due to changes in the year-to-date and forecasted loss before income taxes.

Consolidated net loss was $14.9 million, or $(0.46) per diluted share, compared with net loss of $7.2 million, or $(0.23) per diluted share, in the prior year.

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Backlog at the end of the quarter was $547.1 million.

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

Approximately $426.5 million, or 78%, of backlog is expected to be recognized as revenue over the next twelve months and the balance thereafter.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales were up $47.9 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.

Aerospace sales were up $56.5 million from the first nine months of 2021.

Test Systems sales decreased $8.6 million.

Consolidated cost of products sold in 2022 was $326.7 million, compared with $282.0 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.

The current year period benefited from $6.0 million recognized as an offset to cost of products sold related to the AMJP award, compared to a benefit from the grant of $1.1 million in the prior year.

Research and development expenses increased $4.9 million due to higher innovation spend.

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.

SG&A expenses were $76.9 million in 2022 compared with $66.8 million the prior-year period primarily due to increased wages and benefits.

The current-year period reflects $4.6 million related to the settlement of a litigation claim, a customer accommodation dispute, and a lease termination settlement.

The Company expects to be indemnified by other parties for approximately $1.5 million related to the litigation claim and will record the gain as an offset to SG&A when received, likely in the fourth quarter of 2022.

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

The effective tax rate for 2022 was (28.3)%, compared with (1.4)% in the prior year period.

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

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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.

Although we saw stable and growing backlog during the first nine months 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.

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.

Increasing sales is critical to satisfying our customers’ demand, and improving financial results.

Revenue has been starting to ramp and we believe it will accelerate as we move forward.

As previously reported, we are expecting sales of $140 million to $150 million in the fourth quarter of 2022, an increase of 10%, or $14 million, at the midpoint over the trailing third quarter.

This would result in estimated 2022 sales to be up approximately 17% from last year’s revenue of $445 million.

While disappointed with the lower sales level for the year than we had previously anticipated, we remain very encouraged with the demand for our products, our position in the industry and the significant opportunities in which we are engaged.

Our initial look at 2023 suggests sales of $640 million to $680 million.

This expectation is supported by cumulative bookings of $686 million over the last four quarters and our record backlog of $547 million.

Our supply chain has been a challenge during the last year, but we now see clear signs of improvement and anticipate continued recovery over the course of 2023.

Consolidated backlog at October 1, 2022 was $547.1 million.

Approximately 78% of the backlog is expected to be recog nized as revenue in over the next twelve months and the balance thereafter.

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

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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, other corporate expenses and other non-operating sales and expenses.

Operating loss, 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.

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AEROSPACE SEGMENT

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

(In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

Sales $ 322,871 $ 266,425 $ 112,177 $ 95,775

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$ 322,861 $ 266,402 $ 112,177 $ 95,766

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

Operating (Loss) Profit $ (7,085) $ (6,352) $ (6,859) $ 1,917

Operating Margin (2.2) % (2.4) % (6.1) % 2.0 %

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$ 322,861 $ 266,402 $ 112,177 $ 95,766

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

(In thousands) October 1, 2022 December 31, 2021

$ 478,385 $ 458,334

$ 464,307 $ 334,659

AEROSPACE SECOND QUARTER RESULTS

AEROSPACE THIRD QUARTER RESULTS

Aerospace segment sales increased $16.4 million, or 17.1%, to $112.2 million.

Commercial aerospace sales increased 36.2%, or $20.8 million, and drove the improvement.

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.

Sales to this market were $78.4 million compared with $57.5 million in the third quarter of 2021.

Improving domestic airline travel that is driving higher fleet utilization and increased narrowbody production rates drove demand for Astronics’ products.

General Aviation sales increased $2.6 million, or 21.8%, to $14.8 million due in part to higher demand in the business jet market for antenna systems and enhanced vision system 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 further increases in demand for its products.

Military Aircraft sales decreased $4.6 million, or 27.0%, to $12.5 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.

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

Other revenue decreased $2.5 million to $6.6 million driven by decreased contract manufacturing programs.

Aerospace segment operating loss was $6.9 million compared with operating profit of $1.9 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, as well as the settlement of a litigation claim and a customer accommodation dispute that resulted in $4.1 million of expense during the quarter.

We expect to be indemnified by other parties for approximately $1.5 million related to the litigation claim and will record that gain when such proceeds are received, likely in the fourth quarter.

Operating profit in the prior-year period benefited from the $1.1 million AMJP benefit.

AEROSPACE YEAR-TO-DATE RESULTS

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Aerospace segment operating loss was $7.1 million compared with operating loss of $6.4 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 segment experienced increased sales and the $6.0 million AMJP benefit in the 2022 period compared to an AMJP benefit of $1.1 million in the prior year, however, the operating loss was impacted by continued increases to input costs caused by inflationary impacts and supply chain constraints.

Additionally, the 2022 period included $4.1 million related to the settlement of a litigation claim and a customer accommodation dispute and a $2.5 million increase of expense associated with the reinstated 401K contribution.

As previously noted, we expect to be indemnified by other parties for approximately $1.5 million related to the litigation claim and will record that gain when such proceeds are received, likely in the fourth quarter.

AEROSPACE OUTLOOK

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.

Aerospace bookings in the third quarter of 2022 were $165.7 million, for a book-to-bill ratio of 1.48:1.

The Aerospace segment’s backlog at the end of the third quarter of 2022 was $464.3 million with approximately $375.2 million expected to be recognized as revenue over the next twelve months.

TEST SYSTEMS SEGMENT

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

(In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

Sales $ 53,899 $ 62,811 $ 19,261 $ 16,128

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Total Test Systems Sales $ 53,880 $ 62,454 $ 19,261 $ 16,075

Operating (Loss) Profit $ (1,813) $ 243 $ (26) $ (946)

Operating Loss $ (4,125) $ (1,958) $ (2,312) $ (2,201)

Operating Margin (7.7) % (3.1) % (12.0) % (13.7) %

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(In thousands)

July 2, 2022 December 31, 2021

October 1, 2022 December 31, 2021

$ 108,473 $ 105,335

Backlog $ 82,807 $ 81,033

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 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 THIRD QUARTER RESULTS

Test Systems segment sales were $19.3 million, up $3.2 million compared with the prior-year period driven by higher defense revenue.

Test Systems’ operating loss was $2.3 million compared with operating loss of $2.2 million in the third quarter of 2021.

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

The current year included a lease termination settlement of $0.5 million.

TEST SYSTEMS YEAR-TO-DATE RESULTS

Test Systems segment sales were $53.9 million, down $8.6 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 operating loss was $4.1 million compared with operating loss of $2.0 million in the prior-year period.

An increased operating loss in 2022 was driven by lower volume.

The current year included a lease termination settlement of $0.5 million.

TEST SYSTEMS OUTLOOK

Bookings for the Test Systems segment in the quarter were $18.4 million, for a book-to-bill ratio of 0.96:1 for the quarter.

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.

The Test Systems segment’s backlog at the end of the third quarter of 2022 was $82.8 million, with approximately $51.3 million expected to be recognized as revenue over the next twelve months.

Our Test business achieved a big win during the quarter when we were down-selected by the U.S.

Army as the winner of a major radio test competition.

A directed procurement is underway to finalize the terms of a contract, a process that is expected to be completed soon.

Preliminarily, the Company expects the program could generate sales of $150 million to $200 million in the coming years.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities:

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 used for operating activities totaled $39.1 million for the first nine months of 2022, as compared with $18.5 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.

Accounts receivable has increased with a higher volume of sales while inventory balances have increased to fulfill customer demand in upcoming quarters coupled with increased lead times on certain key components required inventory to be purchased further in advance.

Investing Activities:

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.

Cash provided by investing activities was $17.7 million for the first nine months of 2022 compared with $4.6 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 to 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 $9 million and $10 million.

Financing Activities:

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.

Cash used for financing activities totaled $4.9 million for the first nine months of 2022, as compared with $12.3 million cash provided by 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 $4.0 million in the first nine months of 2022, coupled with $1.0 million in costs associated with amending our credit facility.

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

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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.

On August 9, 2022, the Company executed a further amendment to the Agreement, 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 amendment extended the maturity date of the loans under the facility from May 30, 2023 to August 31, 2023.

On October 21, 2022, the Company executed an additional amendment to the Agreement, under which the lenders waived enforcement of their rights against the Company arising from the Company’s failure to comply with the maximum net leverage ratio and minimum liquidity covenants, each as of September 30, 2022.

The amendment increased the revolving credit line to $180 million as of October 21, 2022, with a reduction to $170 million effective November 21, 2022.

Under the provisions of this amendment, the inclusion of any “going concern” language in the Company’s financial statements would constitute an event of default.

A further amendment to the Agreement was executed on November 14, 2022 (the “Amended Facility”), which extended the maturity date of the loans under the facility from August 31, 2023 to November 30, 2023.

Under the Amended Facility, the revolving credit line is set at $180 million, with a reduction to $170 million effective December 21, 2022.

The amendment requires the Company to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments, of $10 million as of November 30, 2022 and December 31, 2022, and $15 million at the end of any month thereafter.

The Amended Facility requires the Company to comply with a minimum Adjusted EBITDA covenant on a trailing twelve month basis, set at $15 million as of December 31, 2022 and March 31, 2023, and $25 million in each quarter thereafter.

The amendment eliminated the net leverage ratio covenant for the remaining term of the agreement.

At October 1, 2022, there was $159.0 million outstanding on the revolving credit facility and there remained $19.9 million available subject to the minimum liquidity covenant discussed above, net of outstanding letters of credit.

The credit facility allocates up to $20 million of the $180 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit.

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.

At October 1, 2022, outstanding letters of credit totaled $1.1 million.

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 5.50%.

Effective January 17, 2023, interest is payable on the unpaid principal amount of the facility at a rate equal to SOFR (which shall be at least 1.00%), plus 8.50%.

The Company also pays a commitment fee to the lenders in an amount

equal to 0.40% on the undrawn portion of the Amended Facility.

Each amendment executed in 2022 required payment of a consent fee of 5 to 10 basis points of the commitment for each consenting lender.

The Amended Facility restricts 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 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.

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 term loan agreement, and expect to complete the process in the coming weeks.

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.

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.

If we are unable to obtain a new long-term financing facility before we file our 2022 Form 10-K 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.

The Company expects its sales growth and improvement in inventory management will provide sufficient cash flows to fund operations.

However, the Company may also evaluate various actions and alternatives to enhance its cash generation from operating activities, which could include manufacturing efficiency initiatives, working with vendors and suppliers to reduce lead times and expedite shipment of critical components, and working with customers to expedite receivable collections.

Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results.

Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.

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 July 2, 2022 was $494.4 million compared with $415.7 million at December 31, 2021 and $312.7 million at July 3, 2021.

The Company’s backlog at October 1, 2022 was $547.1 million compared with $415.7 million at December 31, 2021 and $354.4 million at October 2, 2021.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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.

Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business and amount to approximately $151.6 million payable in the coming year at October 1, 2022 and $134.0 million at December 31, 2022.

As a result of amendments to our credit facility since December 31, 2021, future interest payments are expected to be $15.7 million through the expiration of the credit facility.

Absent any legislative changes, the Company expects to pay approximately $5 million to $6 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.

These expected tax payments are 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.

Interest on our revolving credit facility is payable on the unpaid principal amount of the facility at a rate equal to the SOFR (which shall be at least 1.00%), plus 5.50%.

Effective January 17, 2023, interest is payable on the unpaid principal amount of the facility at a rate equal to SOFR (which shall be at least 1.00%), plus 8.50%.

As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than with other reference rates such as LIBOR, which may result in increased borrowing costs for the Company.

A hypothetical increase in the SOFR of 100 basis points would impact annual income by approximately $1.6 million, before income taxes.

Although the majority of our sales, expenses and cash flows are transacted in U.S.

16 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis