ASTRONICS CORP 10-Q

Item 1. Financial Statements ASTRONICS CORPORATION Consolidated Condensed Balance Sheets April 1, 2023 with Comparative Figures for December 31, 2022 (Unaudited) (In thousands) April 1, 2023 December 31, 2022 Current Assets: Cash and Cash Equivalents $ 4,220 $ 13,778 Restricted Cash 1,497 — Accounts Receivable, Net of Allowance for Estimated Credit Losses 152,365 147,790 Inventories 199,944 187,983 Prepaid Expenses and Other Current Assets 16,150 15,743 Total Current Assets 374,176 365,294 Property, Plant and Equipment, Net of Accumulated Depreciation 88,623 90,658 Operating Right-of-Use Assets 12,179 13,028 Other Assets 7,564 8,605 Intangible Assets, Net of Accumulated Amortization 75,697 79,277 Goodwill 58,169 58,169 Total Assets $ 616,408 $ 615,031 Current Liabilities: Current Maturities of Long-term Debt $ 6,750 $ 4,500 Accounts Payable 63,266 64,193 Current Operating Lease Liabilities 4,307 4,441 Accrued Expenses and Other Current Liabilities 45,066 45,911 Customer Advance Payments and Deferred Revenue 27,432 32,567 Total Current Liabilities 146,821 151,612 Long-term Debt 165,603 159,500 Long-term Operating Lease Liabilities 8,964 9,942 Other Liabilities 56,096 54,057 Total Liabilities 377,484 375,111 Shareholders’ Equity: Common Stock 355 354 Accumulated Other Comprehensive Loss ( 9,117 ) ( 9,526 ) Other Shareholders’ Equity 247,686 249,092 Total Shareholders’ Equity 238,924 239,920 Total Liabilities and Shareholders’ Equity $ 616,408 $ 615,031 See notes to consolidated condensed financial statements. 3 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Operations Three Months Ended April 1, 2023 With Comparative Figures for 2022 (Unaudited) (In thousands, except per share data) Three Months Ended April 1, 2023 April 2, 2022 Sales $ 156,538 $ 116,176 Cost of Products Sold 129,028 96,243 Gross Profit 27,510 19,933 Selling, General and Administrative Expenses 29,880 24,100 Loss from Operations ( 2,370 ) ( 4,167 ) Net Gain on Sale of Business ( 3,427 ) ( 11,284 ) Other (Income), Net of Other Expense ( 1,288 ) 462 Interest Expense, Net of Interest Income 5,470 1,631 (Loss) Income Before Income Taxes ( 3,125 ) 5,024 Provision for Income Taxes 1,290 8,125 Net Loss $ ( 4,415 ) $ ( 3,101 ) Loss Per Share: Basic $ ( 0.14 ) $ ( 0.10 ) Diluted $ ( 0.14 ) $ ( 0.10 ) See notes to consolidated condensed financial statements. 4 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Comprehensive Loss Three Months Ended April 1, 2023 With Comparative Figures for 2022 (Unaudited) (In thousands) Three Months Ended April 1, 2023 April 2, 2022 Net Loss $ ( 4,415 ) $ ( 3,101 ) Other Comprehensive Income: Foreign Currency Translation Adjustments 224 ( 181 ) Retirement Liability Adjustment – Net of Tax 185 351 Total Other Comprehensive Income 409 170 Comprehensive Loss $ ( 4,006 ) $ ( 2,931 ) See notes to consolidated condensed financial statements. 5 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Cash Flows Three Months Ended April 1, 2023 With Comparative Figures for 2022 Three Months Ended (Unaudited, In thousands) April 1, 2023 April 2, 2022 Cash Flows from Operating Activities: Net Loss $ ( 4,415 ) $ ( 3,101 ) Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities: Depreciation and Amortization 6,662 7,088 Amortization of Deferred Financing Fees 616 — Provisions for Non-Cash Losses on Inventory and Receivables 627 175 Equity-based Compensation Expense 2,399 2,101 Operating Lease Non-Cash Expense 1,186 1,424 Non-Cash Accrued 401K Contribution 1,208 1,011 Net Gain on Sale of Business, Before Taxes ( 3,427 ) ( 11,284 ) Non-cash deferred liability recovery ( 5,824 ) — Other ( 525 ) 513 Changes in Operating Assets and Liabilities Providing (Using) Cash: Accounts Receivable ( 4,170 ) ( 10,024 ) Inventories ( 13,860 ) ( 9,015 ) Accounts Payable ( 3,488 ) 8,625 Accrued Expenses 2,909 ( 1,380 ) Other Current Assets and Liabilities 16 ( 363 ) Customer Advance Payments and Deferred Revenue 1,190 ( 113 ) Income Taxes 1,262 16,492 Operating Lease Liabilities ( 1,447 ) ( 1,724 ) Supplemental Retirement Plan and Other Liabilities ( 100 ) ( 109 ) Cash Flows (Used) Provided by Operating Activities ( 19,181 ) 316 Cash Flows from Investing Activities: Proceeds from Sale of Business 3,437 21,961 Capital Expenditures ( 1,573 ) ( 1,160 ) Cash Flows Provided by Investing Activities 1,864 20,801 Cash Flows from Financing Activities: Proceeds from Long-term Debt 126,122 17,925 Principal Payments on Long-term Debt ( 111,986 ) ( 43,925 ) Stock Award Activity ( 602 ) 108 Finance Lease Principal Payments ( 11 ) ( 23 ) Debt Acquisition Costs ( 4,347 ) ( 771 ) Cash Flows Provided (Used) by Financing Activities 9,176 ( 26,686 ) Effect of Exchange Rates on Cash 80 ( 173 ) Decrease in Cash and Cash Equivalents and Restricted Cash ( 8,061 ) ( 5,742 ) Cash and Cash Equivalents and Restricted Cash at Beginning of Period 13,778 29,757 Cash and Cash Equivalents and Restricted Cash at End of Period $ 5,717 $ 24,015 See notes to consolidated condensed financial statements. 6 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Shareholders’ Equity Three Months Ended April 1, 2023 With Comparative Figures for 2022 (Unaudited) (In thousands) Three Months Ended April 1, 2023 April 2, 2022 Common Stock Beginning of Period $ 291 $ 289 Net Issuance of Common Stock for Restricted Stock Units (“RSU’s”) 1 1 Class B Stock Converted to Common Stock 1 — End of Period 293 290 Convertible Class B Stock Beginning of Period 63 64 Class B Stock Converted to Common Stock ( 1 ) — End of Period 62 64 Additional Paid in Capital Beginning of Period 98,630 92,037 Net Exercise of Stock Options and Equity-based Compensation Expense 2,399 2,501 Tax Withholding Related to Issuance of RSU’s ( 603 ) ( 293 ) End of Period 100,426 94,245 Accumulated Comprehensive Loss Beginning of Period ( 9,526 ) ( 14,495 ) Foreign Currency Translation Adjustments 224 ( 181 ) Retirement Liability Adjustment – Net of Taxes 185 351 End of Period ( 9,117 ) ( 14,325 ) Retained Earnings Beginning of Period 240,360 287,225 Net Loss ( 4,415 ) ( 3,101 ) Reissuance of Treasury Shares for 401K Contribution ( 1,482 ) ( 5,077 ) End of Period 234,463 279,047 Treasury Stock Beginning of Period ( 89,898 ) ( 108,516 ) Shares Issued to Fund 401K Obligation 2,695 9,277 End of Period ( 87,203 ) ( 99,239 ) Total Shareholders’ Equity $ 238,924 $ 260,082 See notes to consolidated condensed financial statements. 7 Table of Contents ASTRONICS CORPORATION Consolidated Condensed Statements of Shareholders’ Equity, Continued Three Months Ended April 1, 2023 With Comparative Figures for 2022 (Unaudited) (In thousands) Three Months Ended (Shares) April 1, 2023 April 2, 2022 Common Stock Beginning of Period 29,122 28,911 Net Issuance from Exercise of Stock Options 1 20 Net Issuance of Common Stock for RSU’s 83 42 Class B Stock Converted to Common Stock 67 36 End of Period 29,273 29,009 Convertible Class B Stock Beginning of Period 6,314 6,375 Net Issuance from Exercise of Stock Options — 24 Class B Stock Converted to Common Stock ( 67 ) ( 36 ) End of Period 6,247 6,363 Treasury Stock Beginning of Period 3,155 3,808 Shares Issued to Fund 401K Obligation ( 95 ) ( 325 ) End of Period 3,060 3,483 See notes to consolidated condensed financial statements. 8 Table of Contents ASTRONICS CORPORATION Notes to Consolidated Condensed Financial Statements April 1, 2023 (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 three months ended April 1, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The balance sheet at December 31, 2022 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 2022 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 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. 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. 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 2022 and into 2023 in our aerospace business, COVID-19 related disruptions are ongoing and continue to adversely challenge our markets. 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. 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 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. 9 Table of Contents Restricted Cash Under the provisions of the ABL Revolving Credit Facility (see Note 7), the Company has a lockbox arrangement with the banking institution for its accounts within the United States whereby daily lockbox receipts are contractually utilized to pay down outstanding balances on the Revolving Credit Facility debt. Lockbox balances that have not yet been applied to the Revolving Credit Facility are classified as restricted cash in the accompanying Consolidated Condensed Balance Sheets. The following table provides a reconciliation of cash and restricted cash included in Consolidated Condensed Balance Sheets to the amounts included in the Consolidated Condensed Statements of Cash Flows. (In thousands) April 1, 2023 April 2, 2022 Cash and Cash Equivalents $ 4,220 $ 24,015 Restricted cash 1,497 — Total Cash and Restricted Cash Shown in Statements of Cash Flows $ 5,717 $ 24,015 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 $ 2.3 million and $ 2.6 million at April 1, 2023 and December 31, 2022, respectively. The Company’s bad debt expense was insignificant during the three months ended April 1, 2023 and April 2, 2022. Total write-offs charged against the allowance were insignificant the three months ended April 1, 2023 and April 2, 2022. Total recoveries were $ 0.3 million in the three months ended April 1, 2023 and $ 0.2 million in the three months ended April 2, 2022. The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the COVID-19 pandemic or the Russian/Ukrainian conflict, 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 and associated supply chain disruptions. 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 $ 12.7 million and $ 12.2 million for the three months ended April 1, 2023 and April 2, 2022, respectively. These costs are included in cost of products sold. Valuation of Goodwill and Long-Lived Assets 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. 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 April 1, 2023 and April 2, 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 month periods then ended. Foreign Currency Translation The aggregate foreign currency transaction gain or loss included in operations was insignificant for the three months ended April 1, 2023 and April 2, 2022. Newly Adopted Accounting Pronouncement We consider the applicability and impact of all ASUs. Recent ASUs 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. 10 Table of Contents 2) Revenue On April 1, 2023, we had $ 578.5 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $ 498.7 million of our remaining performance obligations as revenue over the next twelve months and the balance thereafter. We recognized $ 14.1 million and $ 6.0 million during the three months ended April 1, 2023 and April 2, 2022, 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 three months ended April 1, 2023: (In thousands) Contract Assets Contract Liabilities Beginning Balance, January 1, 2023 $ 27,349 $ 33,209 Ending Balance, April 1, 2023 $ 30,299 $ 28,570 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 Condensed 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 April 1, 2023 and December 31, 2022, the Company capitalized $ 3.0 million and $ 2.5 million of costs, respectively. The following table presents our revenue disaggregated by Market Segments as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Aerospace Segment Commercial Transport $ 94,213 $ 64,089 Military Aircraft 14,064 14,976 General Aviation 19,448 15,867 Other 7,872 6,462 Aerospace Total 135,597 101,394 Test Systems Segment Government & Defense 20,941 14,782 Test Systems Total 20,941 14,782 Total $ 156,538 $ 116,176 11 Table of Contents The following table presents our revenue disaggregated by Product Lines as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Aerospace Segment Electrical Power & Motion $ 53,454 $ 44,467 Lighting & Safety 36,553 29,211 Avionics 29,741 18,875 Systems Certification 5,677 1,002 Structures 2,300 1,377 Other 7,872 6,462 Aerospace Total 135,597 101,394 Test Systems 20,941 14,782 Total $ 156,538 $ 116,176 3) Inventories Inventories consisted of the following: ( In thousands ) April 1, 2023 December 31, 2022 Finished Goods $ 32,527 $ 30,703 Work in Progress 30,298 29,895 Raw Material 137,119 127,385 $ 199,944 $ 187,983 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. 4) Property, Plant and Equipment Property, Plant and Equipment consisted of the following: (In thousands) April 1, 2023 December 31, 2022 Land $ 8,590 $ 8,578 Buildings and Improvements 71,188 73,744 Machinery and Equipment 123,976 123,071 Construction in Progress 6,295 6,415 210,049 211,808 Less Accumulated Depreciation 121,426 121,150 $ 88,623 $ 90,658 12 Table of Contents 5) Intangible Assets The following table summarizes acquired intangible assets as follows: April 1, 2023 December 31, 2022 (In thousands) Weighted Average Life Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Patents 11 years $ 2,146 $ 2,088 $ 2,146 $ 2,066 Non-compete Agreement 4 years 11,082 11,057 11,082 11,052 Trade Names 10 years 11,412 9,550 11,402 9,350 Completed and Unpatented Technology 9 years 47,872 35,970 47,855 34,877 Customer Relationships 15 years 142,166 80,316 142,133 77,996 Total Intangible Assets 12 years $ 214,678 $ 138,981 $ 214,618 $ 135,341 All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Amortization Expense $ 3,597 $ 3,765 Amortization expense for acquired intangible assets expected for 2023 and for each of the next five years is summarized as follows: (In thousands) 2023 $ 13,882 2024 $ 12,856 2025 $ 10,935 2026 $ 9,533 2027 $ 7,825 2028 $ 7,037 6) Goodwill The following table summarizes the changes in the carrying amount of goodwill for the three months ended April 1, 2023: (In thousands) December 31, 2022 Foreign Currency Translation April 1, 2023 Aerospace $ 36,534 $ — $ 36,534 Test Systems 21,635 — 21,635 $ 58,169 $ — $ 58,169 7) Long-term Debt and Notes Payable 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 13 Table of Contents 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. 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. 14 Table of Contents 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: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Balance at Beginning of Period $ 8,009 $ 8,183 Warranties Issued 780 785 Warranties Settled ( 1,337 ) ( 163 ) Reassessed Warranty Exposure ( 51 ) ( 756 ) Balance at End of Period $ 7,401 $ 8,049 9) Income Taxes The effective tax rates were approximately ( 41.3 )% and 161.7 % for the three months ended April 1, 2023 and April 2, 2022, 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 2023 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 and certain timing differences that are expected to reverse during 2023. In addition, the tax rate in the 2023 period was also impacted by state income taxes and the federal research and development credit expected for 2023. 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, 2022 and 2021, the Company determined that a portion of its deferred tax assets were not expected to be realizable in the future and the Company continues to maintain the valuation allowance against its deferred tax assets as of April 1, 2023. 10) Earnings Per Share Basic and diluted weighted-average shares outstanding are as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Weighted Average Shares - Basic 32,505 31,933 Net Effect of Dilutive Stock Options — — Weighted Average Shares - Diluted 32,505 31,933 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 826,000 shares as of April 1, 2023 and 848,000 shares as of April 2, 2022. Further, due to our net loss in the three month periods ended April 1, 2023 and April 2, 2022, 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 April 1, 2023 with treasury stock in lieu of cash. The earnings per share calculation for the quarter ended April 1, 2023 is inclusive of the approximately 0.1 million in 15 Table of Contents shares outstanding for the equivalent shares needed to fulfill the obligation using the closing share price as of April 1, 2023. 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 agreements, 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 three month periods ended April 1, 2023 and April 2, 2022, the Company reissued 95,000 and 325,000 treasury shares, respectively, associated with the funding of employer 401K contributions and recorded the difference between the average cost and the reissuance price, $ 1.5 million and $ 5.1 million, respectively, as a reduction to Retained earnings. Comprehensive Income and Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: (In thousands) April 1, 2023 December 31, 2022 Foreign Currency Translation Adjustments $ ( 7,111 ) $ ( 7,335 ) Retirement Liability Adjustment – Before Tax ( 4,288 ) ( 4,473 ) Tax Benefit of Retirement Liability Adjustment 2,282 2,282 Retirement Liability Adjustment – After Tax ( 2,006 ) ( 2,191 ) Accumulated Other Comprehensive Loss $ ( 9,117 ) $ ( 9,526 ) The components of other comprehensive income are as follows: Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Foreign Currency Translation Adjustments $ 224 $ ( 181 ) Retirement Liability Adjustments: Reclassifications to Selling, General and Administrative Expense: Amortization of Prior Service Cost 95 101 Amortization of Net Actuarial Losses 90 250 Retirement Liability Adjustment 185 351 Other Comprehensive Income $ 409 $ 170 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. Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Service Cost $ 26 $ 34 Interest Cost 325 209 Amortization of Prior Service Cost 95 97 Amortization of Net Actuarial Losses 90 239 Net Periodic Cost $ 536 $ 579 16 Table of Contents 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 months ended April 1, 2023 and April 2, 2022 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 Income, Net of Other Expense. 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 months ended April 1, 2023 and April 2, 2022, the Company had one customer in excess of 10% of consolidated sales. Sales to The Boeing Company (“Boeing”) accounted for 10.2 % and 13.4 % of sales in the three months ended April 1, 2023 and April 2, 2022, respectively. Accounts receivable from Boeing at April 1, 2023 were approximately $ 18.3 million. 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, 2022. The reserve for the German indirect claim and interest was approximately $ 18.0 million at April 1, 2023, which included an additional $ 0.2 million in interest accrued during the three months ended April 1, 2023, and $ 17.8 million at December 31, 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 April 1, 2023 and December 31, 2022. There were no significant developments in the German indirect claim during the quarter ended April 1, 2023. In the UK matter, as previously disclosed, Lufthansa has pleaded its case for monetary compensation, which will be determined at a separate trial, which is now set to take place in October 2024. Under English Law, Lufthansa had the option of pursuing a claim in relation to the defendants’ profits from their infringing activities or pursuing a claim in relation to Lufthansa's own lost profits. Lufthansa has now elected for the infringers’ profits as the measure of compensation. We have estimated damages and accrued interest for AES and its indemnified customers of approximately $ 7.2 million and $ 7.0 million at April 1, 2023 and December 31, 2022, respectively. This variance is due to currency fluctuation. Interest will accrue until final payment to Lufthansa. This amount is subject to change as additional data is received and evaluated, and as additional information regarding the nature of its claim is put forward by Lufthansa in advance of the damages trial. The damages trial is scheduled to be heard starting in October 2024, with payment likely due in late 2024 or early 2025. Therefore, the liability related to these matters is classified within Other Liabilities (non-current) in the Consolidated Condensed Balance Sheets at April 1, 2023 and December 31, 2022. As previously disclosed, in 2020, the Court held the French patent invalid for all asserted claims. There can consequently be no finding of infringement on first instance. Lufthansa has appealed this judgment. The appeal hearing took place on December 8, 2022, and on February 24, 2023, the court upheld the first instance judgment in favor of AES. On March 20, 2023, Lufthansa lodged an appeal before the French Supreme Court. The merits of this Supreme Court challenge remain to be filed and assessed. As loss exposure is not probable and estimable at this time, the Company has not recorded any liability with respect to the French matter as of April 2, 2023 or December 31, 2022. There were no other significant developments in any of these matters during the three months ended April 1, 2023. A liability for reimbursement of Lufthansa’s legal expenses associated with the UK matter was approximately $ 0.7 million at December 31, 2022 and $ 0.8 million at April 1, 2023 which 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 April 1, 2023 and December 31, 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 17 Table of Contents 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 remained. 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. Teradyne will not appeal the decision. The stay of litigation was lifted with respect to the remaining claims in August 2022 and discovery has resumed. Trial is scheduled for December 5, 2023. No amounts have been accrued for this matter in the April 1, 2023 or December 31, 2022 financial statements, as loss exposure was neither probable nor estimable at such times. 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. 15) Segment Information Below are the sales and operating profit by segment for the three months ended April 1, 2023 and April 2, 2022 and a reconciliation of segment operating profit to (loss) income before income taxes. Operating profit 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. Three Months Ended (In thousands) April 1, 2023 April 2, 2022 Sales: Aerospace $ 135,715 $ 101,394 Less Inter-segment Sales ( 118 ) — Total Aerospace Sales 135,597 101,394 Test Systems 20,941 14,798 Less Inter-segment Sales — ( 16 ) Total Test Systems Sales 20,941 14,782 Total Consolidated Sales $ 156,538 $ 116,176 Segment Measure of Operating Profit and Margins Aerospace $ 4,087 $ 3,050 3.0 % 3.0 % Test Systems ( 597 ) ( 1,787 ) ( 2.9 ) % ( 12.1 ) % Total Segment Measure of Operating Profit 3,490 1,263 2.2 % 1.1 % Deductions from Segment Measure of Operating Profit: Net Gain on Sale of Business ( 3,427 ) ( 11,284 ) Interest Expense, Net of Interest Income 5,470 1,631 Corporate Expenses and Other 4,572 5,892 (Loss) Income Before Income Taxes $ ( 3,125 ) $ 5,024 During the three months ended April 1, 2023, $ 5.8 million was recognized in sales related to the reversal of a deferred revenue liability assumed with an acquisition and associated with a customer program within our Test Systems Segment which is no longer expected to occur, which also benefits operating loss for the period. Absent that benefit, Test Systems’ operating loss was $ 6.4 million. In the quarter ended April 2, 2022, $ 6.0 million of the AMJP grant was recognized as an offset to the cost of products sold in the Aerospace segment. Corporate expenses and other for the quarter ended April 1, 2023 includes income of $ 1.8 million associated with the reversal of a liability related to an equity investment, as we will no longer be required to make 18 Table of Contents the associated payment. This amount is included in Other Income, Net of Other Expense in the Consolidated Condensed Statement of Operations. Total Assets: (In thousands) April 1, 2023 December 31, 2022 Aerospace $ 498,348 $ 481,416 Test Systems 103,778 111,513 Corporate 14,282 22,102 Total Assets $ 616,408 $ 615,031 16) Fair Value There were no financial assets or liabilities carried at fair value measured on a recurring basis at April 1, 2023 or December 31, 2022. There were no non-recurring fair value measurements performed in the three months ended April 1, 2023 and April 2, 2022. Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable and accounts 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) Subsequent Events 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 approximately $ 4 million to $ 5 million annually, beginning with the third quarter. The Company will incur $ 0.6 million in severance charges during the second quarter of 2023. 19 Table of Contents