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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-15 · 161 added, 165 removed, 93 unchanged (78% of the section changed)

1 unchanged sentence

(The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Form 10-K for the year ended December 31, 2022.)

Astronics Corporation (“Astronics” or the “Company”) is a leading supplier of advanced technologies and products to the global aerospace and defense industries.

Astronics Corporation, through its subsidiaries, is a leading supplier of advanced technologies and products to the global aerospace and defense industries.

Our products and services include advanced, high-performance electrical power generation and distribution systems, seat motion solutions, lighting and safety systems, avionics products, aircraft structures, systems certification, and automated test systems.

Our Aerospace segment designs and manufactures products for the global aerospace industry.

Product lines include lighting and safety systems, electrical power generation, distribution and seat motions systems, aircraft structures, avionics products, systems certification, and other products.

Our primary Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft for the commercial, military and general aviation markets, suppliers to those OEM’s, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S.

Product lines include lighting and safety systems, electrical power generation, distribution and seat motion systems, aircraft structures, avionics products, systems certification, and other products.

Our primary Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft for the commercial transport, military and general aviation markets, suppliers to those OEMs, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S.

Department of Defense (“USDOD”).

Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the aerospace and defense, communications and mass transit industries as well as training and simulation devices for both commercial and military applications.

In the Test Systems segment, Astronics’ products are sold to a global customer base including OEM's and prime government contractors for both electronics and military products.

Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the aerospace and defense and mass transit industries as well as training and simulation devices for both commercial and military applications.

In the Test Systems segment, Astronics’ products are sold to a global customer base including OEMs and prime government contractors for both electronics and military products.

Our strategy is to increase our value by developing technologies and capabilities, either internally or through acquisition, and using those capabilities to provide innovative solutions to our targeted markets where our technology can be beneficial.

Important factors affecting our growth and profitability are the ongoing impacts of the COVID-19 pandemic and the timing and extent of recovery (as discussed more fully below), supply chain pressures, the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft.

Important factors affecting our growth and profitability are the ongoing impacts of the COVID-19 pandemic and the timing and extent of recovery (as discussed more fully below), supply chain and labor market pressures, the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft.

New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy.

Once designed into a new aircraft, the spare parts business is frequently retained by the Company.

Once one of our products is designed into a new aircraft, the spare parts business is also frequently retained by the Company.

Future growth and profitability of the Test Systems business is dependent on developing and procuring new and follow-on business.

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Test Systems segment customers include the USDOD, prime contractors to the USDOD, mass transit operators and prime contractors to mass transit operators.

In September 2021 the Company also entered into an agreement with the U.S.

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, $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 nine months ended October 1, 2022.

Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term.

We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.

Challenges which continue to face us include the ongoing COVID-19 pandemic and its continued impact on the aerospace industry, supply chain pressures including material availability and cost increases, labor availability and cost, inflationary pressures, and improving shareholder value through increasing profitability.

Increasing profitability is dependent on many things, primarily sales growth, both acquired and organic, and the Company’s ability to pass cost increases along to customers and control operating expenses and to identify means of creating improved productivity.

Sales are driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft and our products, continued government funding of defense programs, the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for new aircraft platforms and continually identifying and winning new business for our Test Systems segment.

Reduced aircraft build rates driven by a weak economy, aircraft groundings, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand for our products, which will result in lower profits.

Reduction of defense spending may result in fewer opportunities for us to compete, which could result in lower profits in the future.

Many of our newer development programs are based on new and unproven technology and at the same time we are challenged to develop the technology on a schedule that is consistent with specific programs.

Delays in delivery schedules and incremental costs resulting from supply chain pressures can also result in lower profits.

We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.

Our ABL Revolving Credit Facility and Term Loan Facility each subject us to various financial and other affirmative and negative covenants with which we must comply on an ongoing or periodic basis.

These include financial covenants pertaining to minimum trailing four quarter EBITDA requirements, minimum liquidity requirements and minimum fixed charge coverage ratio requirements, and excess cash flow repayment provisions.

An unexpected decline in our revenues or operating income, including occurring as a result of events beyond our control, could cause us to violate our financial covenants.

During 2023, given the ongoing challenges faced in our business as described herein, including as a result of the COVID-19 pandemic and its continued impact on the aerospace industry, and based upon our 2023 Outlook as described herein, our ability to satisfy the already tight financial covenants in our ABL Revolving Credit Facility and Term Loan Facility is expected to be challenging and is an item that our management team will be closely monitoring throughout the year.

While the Company expects to remain in compliance with the required financial covenants for the duration of the agreements, any unexpected negative impacts to our business, including as a result of additional supply chain pressures, the timing of customer orders and our ability to delivery schedules, or labor availability and cost pressures, could result in lower revenues and reduced financial profits, and, as a result thereof, our inability to satisfy the financial covenants in our ABL Revolving Credit Facility and Term Loan Facility during 2023.

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 $5.2 million in the first 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 three months ended April 2, 2022, the Company recognized $6.0 million of the award.

We are also monitoring the ongoing conflict between Russia and Ukraine and the related export controls and financial and economic sanctions imposed on certain industry sectors, including the aviation sector, and parties in Russia by the U.S., the U.K., the European Union and others.

Although the conflict has not resulted in a direct material adverse impact on our business to date, the implications of the Russia and Ukraine conflict in the short-term and long-term are difficult to predict at this time.

Factors such as increased energy costs, the availability of certain raw materials for aircraft manufacturers, embargoes on flights from Russian airlines, sanctions on Russian companies, and the stability of Ukrainian customers could impact the global economy and aviation sector.

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 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.

The transaction included two elements of contingent earnouts.

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.

In March 2023, the Company agreed with the final earnout calculation for the calendar 2022 earnout in the amount of $3.4 million.

The Company recorded the gain and received the payment in the first quarter of 2023.

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) April 1, 2023 April 2, 2022

Sales $ 156,538 $ 116,176

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Net Gain on Sale of Business $ (3,427) $ (11,284)

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

Interest Expense, Net $ 5,470 $ 1,631

Effective Tax Rate (41.3) % 161.7 %

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

CONSOLIDATED THIRD QUARTER RESULTS

Consolidated sales were up $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.

Bookings were $184.2 million, for a book-to-bill ratio of 1.40:1.

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

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 $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, 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 $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.

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

Consolidated sales were up $40.4 million, or 34.7%, from the first quarter of 2022.

Aerospace sales increased $34.2 million, or 33.7%, driven by higher sales to the commercial transport market.

Test Systems sales increased $6.2 million, due primarily to the reversal of a $5.8 million deferred revenue liability assumed with an acquisition and associated with a customer program which is no longer expected to occur.

Consolidated cost of products sold in the first quarter of 2023 was $129.0 million, compared with $96.2 million in the prior-year period.

The increase was primarily due to higher volume and higher material and labor costs.

The prior-year period benefited the AMJP Program grant which provided a $6.0 million offset to cost of products sold.

Selling, general and administrative (“SG&A”) expenses were $29.9 million in the first quarter of 2023 compared with $24.1 million in the prior-year period primarily due to increased wages and benefits and an increase of $3.2 million in litigation-related legal expenses.

The Company recognized in the quarter a final earnout of $3.4 million for the 2019 sale of its semiconductor test business, compared with $11.3 million recognized in the prior-year period.

Other income in the 2023 first quarter included $1.8 million associated with the reversal of a liability related to an equity investment.

Interest expense was $5.5 million in the current period, compared with $1.6 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities.

Interest expense includes approximately $0.6 million of non-cash amortization of capitalized financing-related fees.

Income tax expense was $1.3 million in the current period, primarily due to a valuation allowance applied against the deferred tax asset associated with research and development costs that are required to be capitalized for tax purposes.

Consolidated net loss was $4.4 million, or $0.14 per diluted share, compared with net loss of $3.1 million, or $0.10 per diluted share, in the prior year.

Bookings were $157.8 million in the quarter resulting in a book-to-bill ratio of 1.05:1, excluding the impact of the $5.8 million adjustment to sales referred to previously.

Backlog at quarter end was a record $578.5 million.

Approximately $498.7 million of backlog is expected to ship over the next twelve months.

COVID-19 Impacts on Our Business

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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 nine months of 2022 in our aerospace business, COVID-19 related disruptions are ongoing and continue to adversely challenge our commercial transport market.

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 throughout 2022 and into 2023 in our aerospace business, 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.

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.

We had a solid start to the year as continued strong customer demand and an improving supply chain helped us exceed the upper end of our revenue expectations for the quarter.

Our leading position in passenger power and inflight connectivity for commercial aerospace combined with the robust recovery in that market has driven demand for our products.

The trends give us confidence in the revenue ramp we are planning for the rest of 2023.

We expect revenue to increase significantly in the second quarter to $165 million to $175 million and are maintaining full year guidance of $640 million to $680 million.

We have also restructured our Test segment to take out approximately $4 million to $5 million in costs and improve operating results.

We expect this effort, together with the cooperation of our supply chain and strong customer demand, will improve financial results as we advance through the year.

Consolidated backlog at April 1, 2023 was $578.5 million.

Approximately 86% of the backlog is expected to be recognized as revenue in over the next twelve months and the balance thereafter.

Planned capital expenditures for 2023 are expected to be approximately $14 million to $17 million.

While core aerospace markets have strengthened as vaccination rates rise and passenger traffic accelerated, the ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic, virus variants, vaccination rates and efficacy and the related length of impact on the global economy, supply chain and specifically on the markets we are active in, which are uncertain and cannot be predicted at this time.

SEGMENT RESULTS OF OPERATIONS AND OUTLOOK

Operating 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.

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

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

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

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

AEROSPACE SEGMENT

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) April 1, 2023 April 2, 2022

Sales $ 135,715 $ 101,394

Less Inter-segment Sales

(10) (23) — (9)

Total Aerospace Sales

$ 135,597 $ 101,394

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

Operating Profit $ 4,087 $ 3,050

Operating Margin 3.0 % 3.0 %

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Commercial Transport $ 94,213 $ 64,089

Military 41,336 54,847 12,463 17,064

Military Aircraft 14,064 14,976

General Aviation 19,448 15,867

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$ 135,597 $ 101,394

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

(In thousands) April 1, 2023 December 31, 2022

$ 498,348 $ 481,416

$ 492,159 $ 477,660

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 $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 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

Aerospace segment sales increased $56.5 million, or 21.2%, to $322.9 million.

Sales continued to be positively affected by reasons discussed above.

Aerospace segment operating loss was $7.1 million compared with operating loss of $6.4 million for the same period last year.

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 FIRST QUARTER RESULTS

Aerospace segment sales increased $34.2 million, or 33.7%, to $135.6 million driven by a 47.0%, or $30.1 million increase in commercial transport sales.

Sales to this market were $94.2 million, or 60.2% of consolidated sales in the quarter, compared with $64.1 million, or 55.1% of consolidated sales in the first quarter of 2022.

Improving global airline travel driving higher fleet utilization and increased production rates resulted in increased demand.

General Aviation sales increased $3.6 million, or 22.6%, to $19.4 million.

Aerospace segment operating profit improved to $4.1 million compared with operating profit of $3.1 million in the same period last year, which included an AMJP grant offset to cost of sales of $6.0 million.

Absent the impact of the AMJP grant on last year’s first quarter, aerospace operating profit improved $7.0 million on a sales increase of $34.2 million.

The improvement in operating profit was driven by higher volume primarily in the commercial transport market, partially offset by the effects of material and labor inflation.

AEROSPACE OUTLOOK

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.

Aerospace bookings were $150.1 million, for a book-to-bill ratio of 1.11:1.

Backlog for the Aerospace segment was a record $492.2 million at quarter end with approximately $441.7 million expected to be recognized as revenue over the next twelve months.

Our Aerospace business continues to accelerate, in step with the air travel recovery that is underway worldwide.

Our business is trending back to pre-pandemic levels and will benefit further from a number of high-profile programs that we have won during the downturn, including our involvement on the U.S.

Army’s Future Long-Range Assault Aircraft (“FLRAA”) program which we expect to begin in the next several weeks.

Margin performance will continue to improve as supply chain spot buys decline and volume increases.

TEST SYSTEMS SEGMENT

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) April 1, 2023 April 2, 2022

Sales $ 20,941 $ 14,798

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Operating Margin (2.9) % (12.1) %

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

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

(In thousands)

October 1, 2022 December 31, 2021

April 1, 2023 December 31, 2022

$ 103,778 $ 111,513

Backlog $ 86,319 $ 93,696

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 $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 FIRST QUARTER RESULTS

Test Systems segment sales were $20.9 million, up $6.2 million compared with the prior-year period primarily as a result of a reversal of $5.8 million deferred revenue liability recorded with a previous acquisition.

Absent that item, Test Systems sales increased $0.4 million.

Test Systems segment operating loss was $0.6 million compared with operating loss of $1.8 million in the first quarter of 2022.

Absent the non-operating sales adjustment resulting from the reversal of the deferred revenue liability, Test Systems operating loss for the current period was $6.4 million and was negatively affected by mix, under absorption of fixed costs due to volume and $2.6 million in increased litigation-related legal expenses.

Shortly after the quarter ended the Test Systems segment implemented restructuring initiatives to align the workforce and management structure with near-term revenue expectations and operational needs.

These initiatives are expected to provide savings of $4 million to $5 million annually, beginning with the third quarter.

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 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.

Bookings for the Test Systems segment in the quarter were $7.7 million, for a book-to-bill ratio of 0.51:1 for the quarter, excluding the impact of the $5.8 million adjustment to sales referred to previously.

The Test Systems segment’s backlog at the end of the first quarter of 2023 was $86.3 million, with approximately $57.1 million expected to be recognized as revenue over the next twelve months.

In April 2023, Astronics announced that the Test business had been awarded a contract award to produce portable radio test equipment for the U.S.

Marine Corps’ Handheld Radio Test Sets program (“HHRTS”).

This program is expected to generate revenue of approximately $40 million over a five-year period.

An initial task order for approximately $10 million is expected in the coming weeks.

Our Test business is going through a transition period.

We have been quite successful winning new business, including radio test programs for both the U.S.

Army and U.S.

Marine Corps, which promise to be major contributors to our results in the near future.

However, these programs have developed more slowly than expected, so we found it necessary to restructure and right size the business for the interim period.

We expect the restructuring to improve profitability for the segment at current run rates until the new programs gain traction.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities:

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.

Cash used for operating activities totaled $19.2 million for the first three months of 2023, as compared with $0.3 million cash provided by operating activities during the same period in 2022.

Cash flow from operating activities decreased compared with the same period of 2022 primarily related to increases in inventory to fulfill customer demand in upcoming quarters coupled with increased lead times on certain key components required inventory to be purchased further in advance.

In contrast, operating cash flows in the first quarter of 2022 benefited from the receipt of income tax refunds and AMJP grant proceeds.

We expect to generate positive cash flow for the remainder of 2023.

Investing Activities:

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.

Cash provided by investing activities was $1.9 million for the first three months of 2023 compared with $20.8 million in cash provided by investing activities in the same period of 2022.

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 compared to $3.4 million received in the current year related to the calendar 2022 earnout.

The Company expects capital spending in 2023 to be in the range of $14 million and $17 million.

Financing Activities:

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”).

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 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.

Cash provided by financing activities totaled $9.2 million for the first three months of 2023, as compared with cash used for financing activities of $26.7 million during the same period in 2022.

The Company had net proceeds on our credit facilities of $14.1 million in the first three months of 2023 compared with net repayments of $26.0 million in the same period in 2022.

During the current year period, the Company also paid $4.3 million in debt issuance costs associated with the January 2023 refinancing.

Additional debt issuance costs of $3.0 million will be paid in the future, largely comprised of the remaining Term Loan commitment fee, which is discussed further below.

The Company's long-term debt at December 31, 2022 consisted of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”).

The maturity date of the loans under the Agreement was November 30, 2023.

At December 31, 2022, there was $164.0 million outstanding on the Agreement and there remained $6.0 million available.

The Company amended the Agreement on January 19, 2023 by entering into the Sixth Amended and Restated Credit Agreement (the “ABL Revolving Credit Facility”).

The ABL Revolving Credit Facility set the maximum aggregate amount that the Company can borrow under the revolving credit line at $115 million, with borrowings subject to a borrowing base determined primarily by certain domestic inventory and accounts receivable.

The maturity date of borrowings under the ABL Revolving Credit Facility is January 19, 2026.

Under the terms of the ABL Revolving Credit Facility, the Company will now pay interest on the unpaid principal amount of the facility at a rate equal to SOFR (which is required to be at least 1.00%) plus 2.25% to 2.75%.

The Company will pay a quarterly commitment fee under the ABL Revolving Credit Facility in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability.

Under the provisions of the ABL Revolving Credit Facility, the Company has a cash dominion arrangement with the lead banking institution whereby eligible daily cash receipts are contractually utilized to pay down outstanding borrowings.

Eligible cash receipts that have not yet been applied to outstanding debt balance are classified as restricted cash in the accompanying consolidated balance sheets.

At April 1, 2023, there was $88.1 million outstanding on the ABL Revolving Credit Facility and there remained $26.9 million available.

The Company is also required to maintain minimum liquidity of $20 million through the date of delivery of the compliance certificate for the quarter ended March 31, 2024, and $10 million thereafter.

The Company also entered into a $90 million asset-based Term Loan Facility on January 19, 2023.

The Term Loan Facility is secured primarily by fixed assets, real estate and intellectual property.

The maturity date of the Term Loan Facility is the earlier of the stated maturity date of the ABL Revolving Credit Facility or January 19, 2027, provided the ABL Revolving Credit Facility is extended beyond that date.

The Company pays interest under the Term Loan Facility at a rate equal to SOFR (which is required to be at least 2.50%) plus 8.75%.

The Company will pay a commitment fee under the Term Loan Facility of 5% of the total aggregate commitment, or $4.5 million, $1.8 million which was paid on the closing date, $1.8 million of which will be paid on June 19, 2023 and $0.9 million of which will be paid on the date that the financial statements and compliance certificate for the fiscal quarter of the Company ending on or about March 31, 2024 are required to be delivered under the Term Loan Facility.

Amortization of the principal under the Term Loan Facility will begin in April with a monthly amortization rate of 0.292% of the outstanding term loan principal balance for the period April 1, 2023 through June 1, 2023, increasing to 0.542% per month for the period July 1, 2023 through September 1, 2023 then increasing to 0.833% thereafter.

Total scheduled principal payments of $6.8 million are payable over the next twelve months and as such, have been classified as current in the accompanying

consolidated condensed balance sheet as of April 1, 2023.

The weighted-average interest rate on current maturities of long-debt is 13.60%.

The remaining balance $83.2 million is recorded as long-term in the accompanying consolidated condensed balance sheet.

Pursuant to the ABL Revolving Credit Facility and the Term Loan Facility, the Company is required to comply with a minimum trailing four quarter EBITDA of $14.7 million for the Company’s first quarter of 2023, $23.3 million in the second quarter, $39.2 million in the third quarter, $51.7 million in the fourth quarter, $57.6 million in the first quarter of 2024, $65.2 million in the second quarter of 2024 and $70 million thereafter.

In addition, mandatory prepayment of a portion of excess cash flow, as defined by the Term Loan Facility, is payable towards the principal amount outstanding on an annual basis.

Any voluntary prepayments made are subject to a prepayment fee, as defined by the Term Loan Facility.

Beginning with the first quarter of 2024, the Company is subject to a minimum fixed charge coverage ratio of 1.10 to 1.00.

Further, the Company is subject to restrictions on additional indebtedness, share repurchases and dividend payments, and a limitation on capital expenditures.

The Company is in compliance with all covenant requirements as of April 1, 2023.

The Company incurred $8.5 million in incremental debt issuance costs related to the new facilities, allocated between the ABL Revolving Credit Facility and the Term Loan Facility.

All costs are amortized to interest expense over the term of the respective agreement.

Deferred debt issuance costs associated with the ABL Revolving Credit Facility ($2.6 million as of April 1, 2023) are recorded within other assets and those associated with the Term Loan Facility ($5.8 million as of April 1, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.

Certain of the Company’s subsidiaries are borrowers or guarantors under the ABL Revolving Credit Facility and the Term Loan Facility.

In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the credit facilities 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, cross default under other material debt agreements, and a going concern qualification for any reason other than loan maturity date give the agent the option to declare all such amounts immediately due and payable.

Cash on hand at the end of the quarter was $5.7 million.

Net debt was $172.4 million, compared with $150.2 million at the end of 2022.

The Company expects its sales growth and reductions in working capital will provide sufficient cash flows to fund operations.

However, the Company may also evaluate various actions and alternatives to enhance its profitability and cash generation from operating activities, which could include manufacturing efficiency initiatives, cost-reduction measures, 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 and comply with financial debt covenants 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 or access our existing financing, and our operations in the future and could allow our debt holders to demand payment of all outstanding amounts.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.

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

The Company’s backlog at April 1, 2023 was $578.5 million compared with $571.4 million at December 31, 2022 and $475.1 million at April 2, 2022.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Except as noted below, our contractual obligations and commitments have not changed materially from the disclosures in our 2022 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 the result of the requirement to capitalize and amortize certain research and development expenses for U.S.

tax purposes beginning in 2022.

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.

Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $178.1 million at April 1, 2023.

A change of 1% in interest rates of all variable rate debt would impact annual net loss by approximately $1.8 million, before income taxes.

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

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The Company believes that the impact of changes in foreign currency exchange rates in 2023 have not been significant.

The future impacts of the Russia and Ukraine conflict and the COVID-19 pandemic and their residual effects, including economic uncertainty, inflationary environment and disruption within the global supply chain, labor markets and aerospace industry, on our business remain uncertain.

As we cannot anticipate the ultimate duration or scope of the Russia-Ukraine war and the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.

CRITICAL ACCOUNTING POLICIES

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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