ASTRONICS CORP 10-Q

Item 1. Financial Statements ASTRONICS CORPORATION Consolidated Condensed Balance Sheets October 1, 2022 with Comparative Figures for December 31, 2021 (Unaudited) (In thousands) October 1, 2022 December 31, 2021 Current Assets: Cash and Cash Equivalents $ 2,568 $ 29,757 Accounts Receivable, Net of Allowance for Estimated Credit Losses 133,835 107,439 Inventories 190,198 157,576 Prepaid Expenses and Other Current Assets 20,736 45,089 Total Current Assets 347,337 339,861 Property, Plant and Equipment, Net of Accumulated Depreciation 90,640 95,236 Operating Right-of-Use Assets 14,463 16,169 Other Assets 5,490 5,270 Intangible Assets, Net of Accumulated Amortization 82,814 94,320 Goodwill 58,143 58,282 Total Assets $ 598,887 $ 609,138 Current Liabilities: Accounts Payable $ 53,216 $ 34,860 Current Operating Lease Liabilities 4,971 6,778 Accrued Expenses and Other Current Liabilities 46,253 49,619 Customer Advance Payments and Deferred Revenue 29,048 27,356 Total Current Liabilities 133,488 118,613 Long-term Debt 159,000 163,000 Long-term Operating Lease Liabilities 10,966 12,018 Other Liabilities 58,345 58,903 Total Liabilities 361,799 352,534 Shareholders’ Equity: Common Stock 354 353 Accumulated Other Comprehensive Loss ( 16,690 ) ( 14,495 ) Other Shareholders’ Equity 253,424 270,746 Total Shareholders’ Equity 237,088 256,604 Total Liabilities and Shareholders’ Equity $ 598,887 $ 609,138 See notes to consolidated condensed financial statements. 3 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Operations Three and Nine Months Ended October 1, 2022 With Comparative Figures for 2021 (Unaudited) (In thousands, except per share data) Nine Months Ended Three Months Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Sales $ 376,741 $ 328,856 $ 131,438 $ 111,841 Cost of Products Sold 326,711 281,957 117,050 94,610 Gross Profit 50,030 46,899 14,388 17,231 Selling, General and Administrative Expenses 76,907 66,829 28,702 21,729 Loss from Operations ( 26,877 ) ( 19,930 ) ( 14,314 ) ( 4,498 ) Net Gain on Sale of Business ( 11,284 ) — — — Other Expense, Net of Other Income 1,180 1,627 427 546 Interest Expense, Net of Interest Income 5,812 5,252 2,519 1,795 Loss Before Income Taxes ( 22,585 ) ( 26,809 ) ( 17,260 ) ( 6,839 ) Provision for (Benefit from) Income Taxes 6,383 373 ( 2,403 ) 335 Net Loss $ ( 28,968 ) $ ( 27,182 ) $ ( 14,857 ) $ ( 7,174 ) Loss Per Share: Basic $ ( 0.90 ) $ ( 0.88 ) $ ( 0.46 ) $ ( 0.23 ) Diluted $ ( 0.90 ) $ ( 0.88 ) $ ( 0.46 ) $ ( 0.23 ) See notes to consolidated condensed financial statements. 4 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Comprehensive Loss Three and Nine Months Ended October 1, 2022 With Comparative Figures for 2021 (Unaudited) (In thousands) Nine Months Ended Three Months Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net Loss $ ( 28,968 ) $ ( 27,182 ) $ ( 14,857 ) $ ( 7,174 ) Other Comprehensive (Loss) Income: Foreign Currency Translation Adjustments ( 3,241 ) ( 1,165 ) ( 1,674 ) ( 1,143 ) Retirement Liability Adjustment – Net of Tax 1,046 1,302 348 434 Total Other Comprehensive (Loss) Income ( 2,195 ) 137 ( 1,326 ) ( 709 ) Comprehensive Loss $ ( 31,163 ) $ ( 27,045 ) $ ( 16,183 ) $ ( 7,883 ) See notes to consolidated condensed financial statements. 5 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Cash Flows Nine Months Ended October 1, 2022 With Comparative Figures for 2021 Nine Months Ended (Unaudited, In thousands) October 1, 2022 October 2, 2021 Cash Flows from Operating Activities: Net Loss $ ( 28,968 ) $ ( 27,182 ) Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities: Depreciation and Amortization 20,905 21,950 Provisions for Non-Cash Losses on Inventory and Receivables 1,033 2,750 Equity-based Compensation Expense 5,178 5,147 Non-Cash Accrued 401K Contribution 3,300 — Deferred Tax Benefit — ( 145 ) Non-Cash Severance Expense — 182 Operating Lease Non-Cash Expense 4,568 3,783 Non-cash Litigation Provision 2,000 — Net Gain on Sale of Business, Before Taxes ( 11,284 ) — Contingent Consideration Liability Fair Value Adjustment — ( 2,200 ) Other 2,997 3,010 Cash Flows from Changes in Operating Assets and Liabilities: Accounts Receivable ( 28,196 ) ( 15,027 ) Inventories ( 35,444 ) ( 3,255 ) Accounts Payable 17,595 ( 1,883 ) Accrued Expenses 638 1,733 Other Current Assets and Liabilities ( 4,015 ) ( 666 ) Customer Advance Payments and Deferred Revenue 1,990 ( 2,215 ) Income Taxes 14,583 217 Operating Lease Liabilities ( 5,715 ) ( 4,395 ) Supplemental Retirement Plan and Other Liabilities ( 306 ) ( 304 ) Cash Flows from Operating Activities ( 39,141 ) ( 18,500 ) Cash Flows from Investing Activities: Proceeds from Sale of Business and Assets 21,981 30 Capital Expenditures ( 4,283 ) ( 4,639 ) Cash Flows from Investing Activities 17,698 ( 4,609 ) Cash Flows from Financing Activities: Proceeds from Long-term Debt 109,625 20,000 Principal Payments on Long-term Debt ( 113,625 ) ( 10,000 ) Stock Award Activity 104 3,187 Finance Lease Principal Payments ( 85 ) ( 878 ) Debt Acquisition Costs ( 968 ) — Cash Flows from Financing Activities ( 4,949 ) 12,309 Effect of Exchange Rates on Cash ( 797 ) ( 521 ) Decrease in Cash and Cash Equivalents ( 27,189 ) ( 11,321 ) Cash and Cash Equivalents at Beginning of Period 29,757 40,412 Cash and Cash Equivalents at End of Period $ 2,568 $ 29,091 Supplemental Disclosure of Cash Flow Information Non-Cash Investing Activities: Capital Expenditures in Accounts Payable $ 1,392 $ — See notes to consolidated condensed financial statements. 6 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Shareholders' Equity Three and Nine Months Ended October 1, 2022 With Comparative Figures for 2021 (Unaudited) (In thousands) Nine Months Ended Three Months Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Common Stock Beginning of Period $ 289 $ 278 $ 290 $ 283 Net Issuance of Common Stock for Restricted Stock Units (“RSU’s”) 1 6 — 6 Class B Stock Converted to Common Stock 1 5 1 — End of Period 291 289 291 289 Convertible Class B Stock Beginning of Period 64 69 64 64 Class B Stock Converted to Common Stock ( 1 ) ( 5 ) ( 1 ) — End of Period 63 64 63 64 Additional Paid in Capital Beginning of Period 92,037 82,187 95,861 85,829 Net Exercise of Stock Options and Equity-based Compensation Expense 5,579 8,328 1,457 4,686 Tax Withholding Related to Issuance of RSU’s ( 298 ) — — — End of Period 97,318 90,515 97,318 90,515 Accumulated Comprehensive Loss Beginning of Period ( 14,495 ) ( 16,450 ) ( 15,364 ) ( 15,604 ) Foreign Currency Translation Adjustments ( 3,241 ) ( 1,165 ) ( 1,674 ) ( 1,143 ) Retirement Liability Adjustment – Net of Taxes 1,046 1,302 348 434 End of Period ( 16,690 ) ( 16,313 ) ( 16,690 ) ( 16,313 ) Retained Earnings Beginning of Period 287,225 312,803 266,338 292,795 Net Loss ( 28,968 ) ( 27,182 ) ( 14,857 ) ( 7,174 ) Reissuance of Treasury Shares for 401K Contribution ( 9,158 ) — ( 2,382 ) — End of Period 249,099 285,621 249,099 285,621 Treasury Stock Beginning of Period ( 108,516 ) ( 108,516 ) ( 96,513 ) ( 108,516 ) Shares Issued to Fund 401K Obligation 15,523 — 3,520 — End of Period ( 92,993 ) ( 108,516 ) ( 92,993 ) ( 108,516 ) Total Shareholders’ Equity $ 237,088 $ 251,660 $ 237,088 $ 251,660 See notes to consolidated condensed financial statements. 7 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Shareholders' Equity, Continued Three and Nine Months Ended October 1, 2022 With Comparative Figures for 2021 (Unaudited) (In thousands) Nine Months Ended Three Months Ended (Shares) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Common Stock Beginning of Period 28,911 27,825 29,047 28,315 Net Issuance from Exercise of Stock Options 20 554 — 534 Net Issuance of Common Stock for RSU’s 105 — 57 — Class B Stock Converted to Common Stock 74 512 6 42 End of Period 29,110 28,891 29,110 28,891 Convertible Class B Stock Beginning of Period 6,375 6,877 6,331 6,420 Net Issuance from Exercise of Stock Options 24 13 — — Class B Stock Converted to Common Stock ( 74 ) ( 512 ) ( 6 ) ( 42 ) End of Period 6,325 6,378 6,325 6,378 Treasury Stock Beginning of Period 3,808 3,808 3,387 3,808 Shares Issued to Fund 401K Obligation ( 545 ) — ( 124 ) — End of Period 3,263 3,808 3,263 3,808 See notes to consolidated condensed financial statements. 8 Table of Contents ASTRONICS CORPORATION Notes to Consolidated Condensed Financial Statements October 1, 2022 (Unaudited) 1) Basis of Presentation The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating Results The results of operations for any interim period are not necessarily indicative of results for the full year. In addition, the COVID-19 pandemic and supply chain disruptions have increased the volatility we experience in our financial results in recent periods and this could continue in future interim and annual periods. Operating results for the nine months ended October 1, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s 2021 annual report on Form 10-K. Description of the Business Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense and electronics industries. Our products and services include advanced, high-performance electrical power generation, distribution and motion systems, lighting and safety systems, avionics products, systems and certification, aircraft structures and automated test systems. We have principal operations in the United States (“U.S.”), Canada, France and England, as well as engineering offices in the Ukraine and India. On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The transaction included two elements of contingent earnouts. In December 2021, the Company agreed to a payment of $ 10.7 million for the calendar 2020 earnout, which was recorded in the fourth quarter of 2021 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. Impact of the COVID-19 Pandemic 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. 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 three quarters 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. The Company qualified for government subsidies from the Canadian and French governments as a result of the COVID-19 pandemic’s impact on our foreign operations. The Canadian and French subsidies are income-based grants intended to reimburse the Company for certain employee wages. The grants are recognized as income over the periods in which the Company recognizes as expenses the costs the grants are intended to defray. The amount recognized during the three and nine months ended October 1, 2022 was immaterial. 9 Table of Contents In September 2021 the Company was awarded a grant of up to $ 14.7 million from the U.S. Department of Transportation (“USDOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”). 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 ratably 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 nine months ended October 1, 2022, the Company recognized $ 6.0 million of the award. The following table presents the COVID-19 related government assistance, including AMJP, recorded during the three and nine months ended October 1, 2022 and October 2, 2021: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Reduction in Cost of Products Sold $ 6,008 $ 3,185 $ — $ 1,706 Reduction in Selling, General and Administrative Expenses — 190 — 43 Total $ 6,008 $ 3,375 $ — $ 1,749 Trade Accounts Receivable and Contract Assets The allowance for estimated credit losses is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as the age of the receivable balances, historical experience, credit quality, current economic conditions, and reasonable and supportable forecasts of future economic conditions that may affect a customer’s ability to pay. The allowance for estimated credit losses balance was $ 3.4 million and $ 3.2 million at October 1, 2022 and December 31, 2021, respectively. The Company’s bad debt expense was $ 0.3 million and $ 0.4 million during the three and nine months ended October 1, 2022 and insignificant during the three and nine months ended October 2, 2021. Total write-offs charged against the allowance were insignificant in both the three and nine months ended October 1, 2022 and October 2, 2021. Total recoveries were insignificant in both the three and nine months ended October 1, 2022 and October 2, 2021. The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the current COVID-19 pandemic, industry conditions, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables and contract assets as airlines and other aerospace companies’ cash flows are impacted by the COVID-19 pandemic. Research and Development Expenses Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation. Research and development expenses amounted to $ 12.0 million and $ 11.3 million for the three months ended and $ 36.8 million and $ 31.9 million for the nine months ended October 1, 2022 and October 2, 2021, respectively. These costs are included in cost of products sold. Goodwill Impairment The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As of October 1, 2022, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed in the three or nine months then ended. Valuation of Long-Lived Assets Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value. As of October 1, 2022 and for the three and nine month periods then ended, the Company concluded that no indicators of impairment relating to long-lived assets existed. 10 Table of Contents Foreign Currency Translation The aggregate foreign currency transaction gain or loss included in operations was insignificant for the three and nine months ended October 1, 2022 and October 2, 2021. Newly Adopted Accounting Pronouncement Recent Accounting Pronouncement Adopted Standard Description Financial Statement Effect or Other Significant Matters ASU No. 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers This amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers , as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The impact of adoption on the Company's consolidated financial statements will be prospective only and depend on the magnitude of future business acquisitions. Date of adoption: Q1 2022 We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures. 2) Revenue On October 1, 2022, we had $ 547.1 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $ 426.5 million of our remaining performance obligations as revenue over the next twelve months and the balance thereafter. We recognized $ 7.3 million and $ 6.5 million during the three months ended and $ 13.3 million and $ 15.1 million during the nine months ended October 1, 2022 and October 2, 2021, respectively, in revenues that were included in the contract liability balance at the beginning of the period. The Company's contract assets and contract liabilities consist primarily of costs and profits in excess of billings and billings in excess of cost and profits, respectively. The following table presents the beginning and ending balances of contract assets and contract liabilities during the nine months ended October 1, 2022: (In thousands) Contract Assets Contract Liabilities Beginning Balance, January 1, 2022 $ 25,941 $ 28,495 Ending Balance, October 1, 2022 $ 31,263 $ 29,838 The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Balance Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. As of October 1, 2022, the Company has capitalized $ 1.6 million of costs. As of December 31, 2021, the Company did no t have material capitalized fulfillment costs. 11 Table of Contents The following table presents our revenue disaggregated by Market Segments as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Aerospace Segment Commercial Transport $ 211,721 $ 143,550 $ 78,389 $ 57,549 Military 41,336 54,847 12,463 17,064 General Aviation 48,748 41,131 14,751 12,109 Other 21,056 26,874 6,574 9,044 Aerospace Total 322,861 266,402 112,177 95,766 Test Systems Segment Aerospace & Defense 53,880 62,454 19,261 16,075 Test Systems Total 53,880 62,454 19,261 16,075 Total $ 376,741 $ 328,856 $ 131,438 $ 111,841 The following table presents our revenue disaggregated by Product Lines as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Aerospace Segment Electrical Power & Motion $ 132,757 $ 102,742 $ 46,155 $ 38,650 Lighting & Safety 90,339 76,929 29,740 25,461 Avionics 67,453 47,355 24,172 14,491 Systems Certification 6,656 7,937 3,985 6,099 Structures 4,600 4,565 1,551 2,021 Other 21,056 26,874 6,574 9,044 Aerospace Total 322,861 266,402 112,177 95,766 Test Systems 53,880 62,454 19,261 16,075 Total $ 376,741 $ 328,856 $ 131,438 $ 111,841 3) Inventories Inventories consisted of the following: ( In thousands ) October 1, 2022 December 31, 2021 Finished Goods $ 32,484 $ 28,579 Work in Progress 33,867 22,954 Raw Material 123,847 106,043 $ 190,198 $ 157,576 The Company has evaluated the carrying value of existing inventories and believe they are properly reflected at their lower of carrying value or net realizable value. Future changes in demand or other market developments could result in future inventory charges. The Company is actively managing inventories and aligning them to meet known current and future demand. 12 Table of Contents 4) Property, Plant and Equipment Property, Plant and Equipment consisted of the following: (In thousands) October 1, 2022 December 31, 2021 Land $ 8,501 $ 8,632 Buildings and Improvements 69,986 70,566 Machinery and Equipment 122,337 121,960 Construction in Progress 8,384 5,680 209,208 206,838 Less Accumulated Depreciation 118,568 111,602 $ 90,640 $ 95,236 5) Intangible Assets The following table summarizes acquired intangible assets as follows: October 1, 2022 December 31, 2021 (In thousands) Weighted Average Life Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Patents 11 years $ 2,146 $ 2,044 $ 2,146 $ 1,979 Non-compete Agreement 4 years 11,082 10,972 11,082 10,592 Trade Names 10 years 11,339 9,151 11,447 8,518 Completed and Unpatented Technology 9 years 47,747 33,784 47,932 30,441 Customer Relationships 15 years 141,939 75,488 142,276 69,033 Total Intangible Assets 12 years $ 214,253 $ 131,439 $ 214,883 $ 120,563 All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Amortization Expense $ 11,254 $ 11,565 $ 3,728 $ 3,853 Amortization expense for acquired intangible assets expected for 2022 and for each of the next five years is summarized as follows: (In thousands) 2022 $ 14,922 2023 $ 13,878 2024 $ 12,856 2025 $ 10,935 2026 $ 9,533 2027 $ 7,825 6) Goodwill The following table summarizes the changes in the carrying amount of goodwill for the nine months ended October 1, 2022: (In thousands) December 31, 2021 Foreign Currency Translation October 1, 2022 Aerospace $ 36,648 $ ( 140 ) $ 36,508 Test Systems 21,634 1 21,635 $ 58,282 $ ( 139 ) $ 58,143 13 Table of Contents The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As of October 1, 2022 and October 2, 2021, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed in the three or nine months then ended. 7) Long-term Debt and Notes Payable 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, 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 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. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets. In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Amended Facility automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the agent the option to declare all such amounts immediately due and payable. 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. 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 14 Table of Contents 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. 8) Product Warranties In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months . The Company determines warranty reserves needed by product line based on experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Balance at Beginning of Period $ 8,183 $ 7,018 $ 7,759 $ 6,835 Warranties Issued 2,541 3,506 858 1,485 Warranties Settled ( 2,769 ) ( 2,427 ) ( 859 ) ( 764 ) Reassessed Warranty Exposure ( 221 ) ( 808 ) ( 24 ) ( 267 ) Balance at End of Period $ 7,734 $ 7,289 $ 7,734 $ 7,289 9) Income Taxes The effective tax rates were approximately 13.9 % and ( 4.9 )% for the three months ended and ( 28.3 )% and ( 1.4 )% for the nine months ended October 1, 2022 and October 2, 2021, respectively. Beginning with the 2022 tax year, certain research and development costs are required to be capitalized and amortized over sixty months for income tax purposes. The tax rate in the 2022 period was impacted by a valuation allowance applied against the deferred tax asset associated with the research and development costs that are expected to be capitalized and 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. In addition, the tax rate in the 2022 period was also impacted by state income taxes and the federal research and development credit expected for 2022. The Company records a valuation allowance against the deferred tax assets if and to the extent it is more likely than not that the Company will not recover the deferred tax assets. In evaluating the need for a valuation allowance, the Company weighs all relevant positive and negative evidence, and considers among other factors, historical financial performance, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, and tax planning strategies. Losses in recent periods and cumulative pre-tax losses in the three year period ending with the current year, combined with the significant uncertainty brought about by the COVID-19 pandemic, is collectively considered significant negative evidence under ASC 740 when assessing whether an entity can use projected income as a basis for concluding that deferred tax assets are realizable on a more-likely than not basis. For purposes of assessing the recoverability of deferred tax assets, the Company determined that it could not include future projected earnings in the analysis due to recent history of losses and therefore had insufficient objective positive evidence that the Company will generate sufficient future taxable income to overcome the negative evidence of cumulative losses. Accordingly, during the years ended December 31, 2021 and 2020, the Company determined that a portion of its deferred tax assets are not expected to be realizable in the future and the Company continues to maintain the valuation allowance against its deferred tax assets as of October 1, 2022. 15 Table of Contents 10) Earnings Per Share Basic and diluted weighted-average shares outstanding are as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Weighted Average Shares - Basic 32,085 30,927 32,241 30,954 Net Effect of Dilutive Stock Options — — — — Weighted Average Shares - Diluted 32,085 30,927 32,241 30,954 Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation of diluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares covered by out-of-the-money stock options was approximately 1,106,000 shares as of October 1, 2022 and 647,000 shares as of October 2, 2021. Further, due to our net loss in the three and nine month periods ended October 1, 2022 and October 2, 2021, the assumed exercise of stock compensation had an antidilutive effect and therefore was excluded from the computation of diluted loss per share. Currently, the Company expects to fund the 401K contribution for the quarter ended October 1, 2022 with treasury stock in lieu of cash. The earnings per share calculation for the quarter ended October 1, 2022 is inclusive of the approximately 0.1 million in shares outstanding for the equivalent shares needed to fulfill the obligation using the closing share price as of October 1, 2022. Actual shares issued may differ based on the sale price on the settlement date. 11) Shareholders' Equity Share Buyback and Reissuance The Company’s Board of Directors from time to time authorizes the repurchase of common stock, which allows the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. Common shares repurchased by the Company are recorded at cost as treasury shares and result in a reduction of equity. Under its current credit agreement, and as described further in Note 7, the Company is currently restricted from further stock repurchases. When treasury shares are reissued, the Company determines the cost using an average cost method. The difference between the average cost of the treasury shares and reissuance price is included in Additional paid-in capital or Retained earnings. During the nine months ended October 1, 2022, the Company reissued 545,000 treasury shares and recorded the difference between the average cost and the reissuance price, $ 9.2 million, as a reduction to Retained earnings. Comprehensive Loss and Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: (In thousands) October 1, 2022 December 31, 2021 Foreign Currency Translation Adjustments $ ( 8,648 ) $ ( 5,407 ) Retirement Liability Adjustment – Before Tax ( 10,324 ) ( 11,370 ) Tax Benefit of Retirement Liability Adjustment 2,282 2,282 Retirement Liability Adjustment – After Tax ( 8,042 ) ( 9,088 ) Accumulated Other Comprehensive Loss $ ( 16,690 ) $ ( 14,495 ) 16 Table of Contents The components of other comprehensive (loss) income are as follows: Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Foreign Currency Translation Adjustments $ ( 3,241 ) $ ( 1,165 ) $ ( 1,674 ) $ ( 1,143 ) Retirement Liability Adjustments: Reclassifications to General and Administrative Expense: Amortization of Prior Service Cost 302 302 101 101 Amortization of Net Actuarial Losses 744 1,000 247 333 Retirement Liability Adjustment 1,046 1,302 348 434 Other Comprehensive (Loss) Income $ ( 2,195 ) $ 137 $ ( 1,326 ) $ ( 709 ) 12) Supplemental Retirement Plan and Related Post Retirement Benefits The Company has two non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain current and retired executive officers. The following table sets forth information regarding the net periodic pension cost for the plans. Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Service Cost $ 103 $ 146 $ 34 $ 49 Interest Cost 626 573 209 192 Amortization of Prior Service Cost 290 290 97 97 Amortization of Net Actuarial Losses 712 970 238 324 Net Periodic Cost $ 1,731 $ 1,979 $ 578 $ 662 Participants in the SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The Company also has a defined benefit plan related to its subsidiary in France. The net periodic cost for both plans for the three and nine months ended October 1, 2022 and October 2, 2021 is immaterial. The service cost component of net periodic benefit costs above is recorded in Selling, General and Administrative Expenses within the Consolidated Condensed Statements of Operations, while the remaining components are recorded in Other Expense, Net of Other Income. 13) Sales to Major Customers The loss of major customers or a significant reduction in business with a major customer would significantly, negatively impact our sales and earnings. In the three and nine months ended October 1, 2022 and October 2, 2021, the Company had no customers in excess of 10% of consolidated sales. 14) Legal Proceedings Lufthansa One of the Company’s subsidiaries is involved in numerous patent infringement actions brought by Lufthansa Technik AG (“Lufthansa”) in Germany, UK and France. The Company is vigorously defending all such litigation and proceedings. Additional information about these legal proceedings can be found in Note 19 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. As previously disclosed, under English law, Lufthansa has the option of pursuing a claim in the UK matter in relation to the defendants’ profits from their infringing activities or pursuing a claim in relation to Lufthansa’s own lost profits. In September 2022, Lufthansa elected to claim damages based on defendants’ profits. The reserve for the German indirect claim and UK damages and interest was approximately $ 24.6 million at December 31, 2021 and $ 24.1 million at October 1, 2022, which included an additional $ 0.1 million and $ 0.5 million in interest accrued during the three and nine months ended October 1, 2022. The Company currently believes it is unlikely that the appeals process will be completed or the damages and related interest will be paid within the next twelve months. Therefore, the liability related to these matters is classified within Other Liabilities (non-current) in the Consolidated Condensed Balance Sheets at October 1, 2022 and December 31, 2021. There were no other significant developments in any of these matters during the three and nine months ended October 1, 2022. 17 Table of Contents At December 31, 2021, we had recorded a liability of $ 1.0 million for reimbursement of Lufthansa’s legal expenses associated with the UK matter. During the nine months ended October 1, 2022, $ 0.3 million was paid. The remaining liability of $ 0.7 million is expected to be paid within the next twelve months and, as such, is classified in Accrued Expenses and Other Current Liabilities in the accompanying Consolidated Condensed Balance Sheet as of October 1, 2022. Other On March 23, 2020, Teradyne, Inc. filed a complaint against the Company and its subsidiary, Astronics Test Systems (“ATS”) (together, “the Defendants”) in the United States District Court for the Central District of California alleging patent and copyright infringement, and certain other related claims. The Defendants moved to dismiss certain claims from the case. On November 6, 2020, the Court dismissed the Company from the case, and also dismissed a number of claims, though the patent and copyright infringement claims remain. The case proceeded to discovery. In addition, on December 21, 2020, ATS filed a petition for inter partes review (“IPR”) with the US Patent Trial and Appeal Board (“PTAB”), seeking to invalidate the subject patent, and on July 21, 2021, the PTAB instituted IPR. ATS requested and, on August 26, 2021, the District Court granted, a stay of litigation during the IPR proceeding. Oral arguments on the IPR were held on April 21, 2022. The PTAB issued its decision on July 20, 2022, in which it invalidated all of Teradyne’s patent claims. The stay of litigation was lifted with respect to the remaining claims in August 2022 and discovery has resumed. No amounts have been accrued for this matter in the October 1, 2022 or December 31, 2021 financial statements, as loss exposure was neither probable nor estimable at such times. In 2019, a former customer filed a lawsuit alleging damages associated with defective product. Mediation of the matter was held in November 2022. The Company agreed to make a payment of $ 2.0 million to settle the matter, and such amount has been reflected in the Selling, General and Administrative line in the three and nine month periods ended October 1, 2022. The Company expects to be indemnified by other parties for approximately $ 1.5 million and will record the gain as an offset to Selling, General and Administrative expense when received, likely in the fourth quarter of 2022. Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our financial condition or results of operations. 18 Table of Contents 15) Segment Information Below are the sales and operating loss by segment for the three and nine months ended October 1, 2022 and October 2, 2021 and a reconciliation of segment operating loss to loss before income taxes. Operating loss is net sales less cost of products sold and other operating expenses excluding interest and corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. Nine Months Ended Three Months Ended (In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Sales: Aerospace $ 322,871 $ 266,425 $ 112,177 $ 95,775 Less Inter-segment Sales ( 10 ) ( 23 ) — ( 9 ) Total Aerospace Sales 322,861 266,402 112,177 95,766 Test Systems 53,899 62,811 19,261 16,128 Less Inter-segment Sales ( 19 ) ( 357 ) — ( 53 ) Total Test Systems Sales 53,880 62,454 19,261 16,075 Total Consolidated Sales $ 376,741 $ 328,856 $ 131,438 $ 111,841 Segment Measure of Operating Loss and Margins Aerospace $ ( 7,085 ) $ ( 6,352 ) $ ( 6,859 ) $ 1,917 ( 2.2 ) % ( 2.4 ) % ( 6.1 ) % 2.0 % Test Systems ( 4,125 ) ( 1,958 ) ( 2,312 ) ( 2,201 ) ( 7.7 ) % ( 3.1 ) % ( 12.0 ) % ( 13.7 ) % Total Segment Measure of Operating Loss ( 11,210 ) ( 8,310 ) ( 9,171 ) ( 284 ) ( 3.0 ) % ( 2.5 ) % ( 7.0 ) % ( 0.3 ) % Deductions from Segment Measure of Operating Loss Net Gain on Sale of Business ( 11,284 ) — — — Interest Expense, Net of Interest Income 5,812 5,252 2,519 1,795 Corporate Expenses and Other 16,847 13,247 5,570 4,760 Loss Before Income Taxes $ ( 22,585 ) $ ( 26,809 ) $ ( 17,260 ) $ ( 6,839 ) During the three and nine months ended October 1, 2022, the Company settled a customer accommodation dispute for $ 2.1 million and a litigation for $ 2.0 million, both recorded within Selling, General and Administrative expense and impacting Aerospace segment profitability. Total Assets: (In thousands) October 1, 2022 December 31, 2021 Aerospace $ 478,385 $ 458,334 Test Systems 108,473 105,335 Corporate 12,029 45,469 Total Assets $ 598,887 $ 609,138 16) Fair Value A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or liability. The Company follows a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. 19 Table of Contents Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. On a Recurring Basis: A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited for $ 7.0 million in cash, plus an earn-out estimated at a fair value of $ 2.5 million at the time of acquisition. The terms of the Diagnosys acquisition allow for a potential earn-out of up to an additional $ 13.0 million over the three years post-acquisition based on achievement of new order levels of over $ 72.0 million during that period. The fair value assigned to the earnout was determined using the real options method, which requires Level 3 inputs such as new order forecasts, discount rate, volatility factors, and other market variables to assess the probability of Diagnosys achieving certain order levels over the period. Based on actual and forecasted new orders, the fair value was zero as of October 1, 2022 and December 31, 2021. The fair value was reduced to zero during the second quarter of 2021, with the contingent consideration liability fair value adjustment of $ 2.2 million recorded within the Selling, General and Administrative line in the Consolidated Condensed Statement of Operations in the nine months ended October 2, 2021. There were no other financial assets or liabilities carried at fair value measured on a recurring basis at October 1, 2022 or December 31, 2021. On a Non-recurring Basis: There were no non-recurring fair value measurements performed in the nine months ended October 1, 2022 and October 2, 2021. Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair value due to the variable rate feature of these instruments. 17) Restructuring Charges The COVID-19 pandemic has significantly impacted the global economy, and particularly the aerospace industry, resulting in reduced expectations of the Company’s anticipated future operating results. As a result, the Company executed restructuring activities in the form of workforce reduction, primarily in the second quarter of 2020, to align capacity with expected demand. Additional restructuring activities occurred during 2021 to align the workforce to expected activities and to consolidate certain facilities. Restructuring-related severance charges and other charges were insignificant in the three and nine months ended October 1, 2022. There were $ 0.5 million and $ 0.7 million in restructuring-related non-severance charges recorded in the three and nine months ended October 2, 2021. The following table reconciles the beginning and ending liability for restructuring charges: (In thousands) 2022 Balance as of January 1 $ 2,400 Restructuring Charges 199 Cash Paid ( 2,554 ) Balance as of October 1 $ 45 The liability is recorded within Accrued Expenses and Other Current Liabilities and is comprised of employee termination benefits expected to be paid within the next 12 months. The cash paid in the nine months ended October 1, 2022 primarily consists of severance payments of $ 0.4 million and payments under non-cancelable purchase commitments for inventory which was not expected to be purchased prior to the expiration date of such agreements as a result of the restructuring plan of $ 2.1 million. 20 Table of Contents 18) Subsequent Events On October 21, 2022 and November 14, 2022, the Company executed amendments to its Fifth Amended and Restated Credit Agreement. For more information, see Note 7, Debt. 21 Table of Contents