What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-07 · 112 added, 88 removed, 171 unchanged (54% of the section changed)

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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 and timing of awards 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.

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

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

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The nature of our Test Systems business is such that it pursues large, often multi-year, projects.

There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.

There can be significant periods between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.

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

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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.

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 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.

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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.

We will continue to address these challenges by working to improve operating efficiencies and focusing on executing 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.

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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 supply chain disruptions, 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 meet customer 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.

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 meet customer 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.

In September 2021 the Company was awarded a grant of up to $14.7 million from the U.S.

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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 was intended to defray.

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

During the nine months ended October 1, 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.

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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.

In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout for $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.

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

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

In November 2023, a non-core contract manufacturing customer reported within the Aerospace segment filed for bankruptcy under Chapter 11.

As a result, the Company recorded a full reserve of $7.5 million for outstanding accounts receivable and a $3.6 million reduction of dedicated inventory.

The reserves are non-cash in the current quarter and year to date, as the associated assets existed prior to 2023.

CONSOLIDATED RESULTS OF OPERATIONS

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

($ in thousands) September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022

Sales $ 493,914 $ 376,741 $ 162,922 $ 131,438

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Net Loss $ (33,397) $ (28,968) $ (16,983) $ (14,857)

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

CONSOLIDATED SECOND QUARTER RESULTS

Consolidated sales were up $45.3 million, or 35.1%, from the second quarter of 2022, and up 11.4% sequentially.

Aerospace sales increased $49.1 million over the comparator quarter, or 44.9%, driven by higher sales to the commercial transport market.

Test Systems sales decreased $3.8 million on lower defense revenue.

Consolidated cost of products sold in the second quarter of 2023 was $141.8 million, compared with $113.4 million in the prior-year period.

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

Selling, general and administrative (“SG&A”) expenses were $30.3 million in the second quarter of 2023 compared with $24.1 million in the prior-year period.

The current period was impacted by increased wages and benefits and litigation-related legal expenses of $4.9 million partially offset by a reduction in legal reserves of $1.3 million.

Interest expense was $5.9 million in the current period, compared with $1.7 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities.

Interest expense includes approximately $0.7 million of non-cash amortization of capitalized financing-related fees.

Income tax expense was $8.1 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 $12.0 million, or $0.37 per diluted share, compared with net loss of $11.0 million, or $0.34 per diluted share, in the prior year.

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

CONSOLIDATED THIRD QUARTER RESULTS

Consolidated sales were up $31.5 million, or 24.0%.

Aerospace sales increased $29.9 million, or 26.7%, driven primarily by higher sales to the commercial transport market.

Test Systems sales increased $1.6 million on higher defense revenue.

Consolidated cost of products sold in the third quarter of 2023 was $142.3 million, compared with $117.1 million in the prior-year period.

The increase was primarily due to higher volume.

In November 2023, a non-core contract manufacturing customer declared bankruptcy, and as a result, a non-cash $3.6 million reduction in inventory was recorded in the third quarter of 2023.

The customer was classified within the “Other” product category of the Aerospace segment.

Selling, general and administrative (“SG&A”) expenses were $35.1 million in the third quarter of 2023 compared with $28.7 million in the prior-year period.

The current period is negatively impacted by a $7.5 million reserve for accounts receivable associated with the customer bankruptcy previously discussed, litigation-related legal expenses and reserve adjustments of $3.3 million, and warranty expense of $2.1 million.

The prior year was negatively impacted by a $2.1 million customer accommodation settlement and $3.3 million in litigation-related legal expenses and reserve adjustments.

Interest expense was $6.0 million in the current period, compared with $2.5 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities which were refinanced in January of this year.

Interest expense included approximately $0.8 million of non-cash amortization of capitalized financing-related fees.

Tax benefit in the quarter was $3.8 million, primarily due to changes in the year-to-date and forecasted pre-tax results.

Consolidated net loss was $17.0 million, or $0.51 per diluted share, improved over net loss of $14.9 million, or $0.46 per diluted share, in the prior year.

The reserve for the customer bankruptcy on a per share basis was $0.33.

Bookings were $176.0 million in the quarter resulting in a book-to-bill ratio of 1.08:1.

The quarter closed with a record backlog of $611.1 million.

For the trailing twelve months, bookings totaled $723.3 million.

Backlog at the end of the quarter was $604.3 million and excludes $19.9 million of backlog associated with the customer bankruptcy referred to previously.

Approximately $505.3 million of backlog is expected to ship over the next twelve months.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales were up $85.7 million, or 34.9%, from the first half of 2022.

Consolidated sales were up $117.2 million, or 31.1%.

Aerospace sales increased $113.2 million, or 35.1%, driven by higher sales to the commercial transport market.

Test Systems sales increased $4.0 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, partially offset by lower defense revenue.

Consolidated cost of products sold in the first half of 2023 was $270.8 million, compared with $209.7 million in the prior-year period.

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

Consolidated cost of products sold in 2023 was $413.1 million, compared with $326.7 million in the prior-year period.

The increase was primarily due to higher volume and higher material and labor costs as well as a $3.6 million reduction in inventory associated with the bankruptcy of a customer.

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

SG&A expenses were $60.2 million in the first half of 2023 compared with $48.2 million in the prior-year period primarily due to increased wages and benefits and an increase of $7.3 million in litigation-related legal expenses partially offset by a reduction of legal reserves of $1.3 million.

SG&A expenses were $95.3 million in 2023 compared with $76.9 million in the prior-year period primarily due to increased wages and benefits, accounts receivable reserve of $7.5 million associated with the bankruptcy of a customer, and a net increase of $6.1 million in litigation-related legal expenses and reserve adjustments.

The 2022 period also reflects $2.6 million related to a customer accommodation dispute and a lease termination settlement.

In the current year period, the Company recognized 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 first half of 2023 included $1.8 million associated with the reversal of a liability related to an equity investment.

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

Interest expense was $17.4 million in the current period, compared with $5.8 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities.

Interest expense includes approximately $2.1 million of non-cash amortization of capitalized financing-related fees.

Income tax expense was $9.4 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.

Tax expense was $5.6 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 $33.4 million, or $1.02 per diluted share, compared with net loss of $29.0 million, or $0.90 per diluted share, in the prior year.

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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.

Although we saw a 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.

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AEROSPACE SEGMENT

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

($ in thousands) September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022

Sales $ 436,217 $ 322,871 $ 142,116 $ 112,177

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$ 436,083 $ 322,861 $ 142,104 $ 112,177

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

(In thousands) September 30, 2023 December 31, 2022

$ 497,054 $ 481,416

$ 513,881 $ 477,660

AEROSPACE SECOND QUARTER RESULTS

Aerospace segment sales increased $49.1 million, or 44.9%, to $158.4 million, and up 16.8% sequentially.

AEROSPACE THIRD QUARTER RESULTS

Aerospace segment sales increased $29.9 million, or 26.7%, to $142.1 million.

The increase was driven by a 29.8% increase, or $23.3 million, in commercial transport sales.

Sales to this market were $112.1 million, or 64.3% of consolidated sales in the quarter, compared with $69.2 million, or 53.6% of consolidated sales in the second quarter of 2022.

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

Sales to this market were $101.7 million, or 62.5% of consolidated sales in the

quarter, compared with $78.4 million, or 59.6% of consolidated sales in the third quarter of 2022.

Higher airline spending and increasing OEM build rates drove the increased demand.

Military aircraft sales increased $4.2 million, or 33.9%, to $16.7 million.

General Aviation sales increased $1.4 million, or 9.8%, to $16.2 million.

Aerospace segment operating profit improved to $13.7 million, or 8.7% of sales, compared with operating loss of $3.3 million in the same period last year.

The improved operating profit was driven by higher volume primarily in the commercial transport market.

Aerospace segment operating loss of $7.5 million, which includes the impact of $11.1 million in reserves related to accounts receivable and an inventory reduction, compares with operating loss of $6.9 million in the same period last year.

Aerospace bookings in the second quarter were $153.3 million, for a book-to-bill ratio of 1.08:1.

Backlog for the Aerospace segment was a record $522.6 million at quarter end.

Backlog for the Aerospace segment was $513.9 million at quarter end.

AEROSPACE YEAR-TO-DATE RESULTS

Aerospace segment sales increased $113.2 million, or 35.1%, to $436.1 million driven by a 45.5%, or $96.3 million increase in commercial transport sales.

Sales to this market were $206.3 million, or 62.3% of consolidated sales in the first half of 2023, compared with $133.3 million, or 54.3% of consolidated sales in the same period of 2022.

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

Sales to this market were $308.0 million, or 62.3% of consolidated sales in 2023, compared with $211.7 million, or 56.2% of consolidated sales in the same period of 2022.

Higher airline spending and increasing OEM build rates drove the increased demand.

General Aviation sales increased $11.9 million, or 24.4%, to $60.7 million.

Aerospace segment operating profit improved to $17.8 million compared with operating loss of $0.2 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 the first half of last year, aerospace operating profit improved $24.0 million on a sales increase of $83.3 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 segment operating profit improved to $10.3 million compared with an operating loss of $7.1 million in the same period last year, which included an AMJP grant offset to cost of sales of $6.0 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 and the $11.1 million charges related to the customer bankruptcy.

TEST SYSTEMS SEGMENT

Six Months Ended Three Months Ended

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

Nine Months Ended Three Months Ended

($ in thousands) September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022

Sales $ 57,831 $ 53,899 $ 20,818 $ 19,261

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(In thousands)

July 1, 2023 December 31, 2022

September 30, 2023 December 31, 2022

$ 117,648 $ 111,513

Backlog $ 90,405 $ 93,696

TEST SYSTEMS SECOND QUARTER RESULTS

Test Systems segment sales were $16.1 million, down $3.8 million primarily as a result of lower defense revenue.

Test Systems segment operating loss was $6.1 million compared with nearly break-even in the second quarter of 2022.

Test Systems operating loss for the current period was negatively affected by mix, under absorption of fixed costs due to volume and $2.2 million in increased litigation-related legal expenses.

In April 2023 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.

Bookings for the Test Systems segment in the quarter were $18.3 million and included the initial $9.6 million production order for the Handheld Radio Test Sets Program for the U.S.

Marine Corps.

Book-to-bill ratio was 1.14:1 for the quarter.

The Test Systems segment’s backlog at the end of the second quarter of 2023 was $88.5 million.

TEST SYSTEMS THIRD QUARTER RESULTS

Test Systems segment sales were $20.8 million, up $1.6 million primarily as a result of higher defense revenue.

Test Systems segment operating loss was $1.8 million, an improvement over operating loss of $2.3 million in the third quarter of 2022, despite a $1.5 million increase in litigation-related legal expenses.

The improvement reflects cost savings resulting from the second quarter 2023 realignment of staffing.

Test Systems’ operating loss for both periods was negatively affected by mix, and under absorption of fixed costs due to volume.

Bookings for the Test Systems segment were $22.7 million for a book-to-bill ratio of 1.09:1 for the quarter.

Backlog was $90.4 million at the end of the third quarter of 2023 compared with a backlog of $82.8 million at the end of the third quarter of 2022.

TEST SYSTEMS YEAR-TO-DATE RESULTS

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Absent that item, Test Systems sales decreased $1.9 million.

Test Systems segment operating loss was $6.7 million compared with operating loss of $1.8 million in the first half of 2022.

Test Systems segment operating loss was $8.5 million compared with operating loss of $4.1 million in 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 $14.3 million and was negatively affected by mix, under absorption of fixed costs due to volume and $6.3 million in increased litigation-related legal expenses.

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Operating Activities:

Cash used for operating activities totaled $21.2 million for the first six months of 2023, as compared with $10.3 million cash used for 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 accounts receivable due to higher sales and 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 six months of 2022 benefited from the receipt of income tax refunds and AMJP grant proceeds.

Cash used for operating activities totaled $22.3 million for the first nine months of 2023, as compared with $39.1 million cash used for operating activities during the same period in 2022.

Cash flow from operating activities increased compared with the same period of 2022 primarily related to accounts receivable and inventory using less cash as supply chain challenges have begun to improve.

Operating cash flows in the first nine months of 2022 benefited from the receipt of income tax refunds and AMJP grant proceeds.

Investing Activities:

Cash used for investing activities was $0.4 million for the first six months of 2023 compared with $19.5 million in cash provided by investing activities in the same period of 2022.

Cash used for investing activities was $2.6 million for the first nine months of 2023 compared with $17.7 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.

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Financing Activities:

Cash provided by financing activities totaled $11.9 million for the first six months of 2023, as compared with cash used for financing activities of $27.7 million during the same period in 2022.

The Company had net proceeds on our credit facilities of $19.0 million in the first six months of 2023 compared with net repayments of $27.0 million in the same period in 2022.

Cash provided by financing activities totaled $18.8 million for the first nine months of 2023, as compared with cash used for financing activities of $4.9 million during the same period in 2022.

The Company had net proceeds on our credit facilities of $9.7 million in the first nine months of 2023 compared with net repayments of $4.0 million in the same period in 2022.

During the current year period, the Company also paid $6.4 million in debt issuance costs associated with the January 2023 refinancing.

Additional debt issuance costs of $1.1 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 Company's long-term debt on 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.

On 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”).

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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.

On June 28, 2023, the Company amended the ABL Revolving Credit Facility, temporarily increasing the maximum aggregate amount that the Company can borrow under the revolving credit line by $5 million from $115 million to $120 million until October 31, 2023, at which time the limit returns to $115 million.

On October 31, 2023, the Company executed a second amendment to the ABL Revolving Credit facility to extend the temporary limit of $120 million until January 31, 2024.

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.

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

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.

At July 1, 2023, there was $93.7 million outstanding on the ABL Revolving Credit Facility and there remained $26.3 million available.

On September 30, 2023, there was $86.0 million outstanding on the ABL Revolving Credit Facility and there remained $33.7 million available, net of outstanding letters of credit.

The Company also entered into a $90 million asset-based credit agreement (the “Term Loan Facility”) on January 19, 2023.

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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 which was paid on June 20, 2023.

The remaining $0.9 million is due within the next twelve months and is classified in the accompanying Consolidated Condensed Balance Sheet within current maturities of long-term debt.

Amortization of the principal under the Term Loan Facility began 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 approximately $9.0 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 July 1, 2023.

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%.

Amortization of the principal under the Term Loan Facility began 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, increased to 0.542% per month for the period July 1, 2023, through September 1, 2023, and increased to 0.833% thereafter.

The weighted-average interest rate on current maturities of long-debt is 14.1%.

The remaining balance of $80.3 million at July 1, 2023 is recorded as long-term in the accompanying Consolidated Condensed Balance Sheet.

The remaining balance of $78.8 million on September 30, 2023, 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 $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.

The non-cash accounts receivable reserve recorded in the quarter was not required to be included in the calculation of EBITDA pursuant to our ABL Revolving Credit Facility and the Term Loan Facility.

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.

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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 July 1, 2023.

The Company is in compliance with all covenant requirements as of September 30, 2023.

The Company incurred $8.6 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.

Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($2.4 million as of July 1, 2023) are recorded within other assets and those associated with the Term Loan Facility ($5.3 million as of July 1, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.

Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($2.2 million as of September 30, 2023) are recorded within other assets and those associated with the Term Loan Facility ($4.8 million as of September 30, 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.

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Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, 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.

On June 5, 2023, the Company filed a shelf registration statement with the SEC, which allows us to issue shares of common stock, preferred stock, warrants, subscription rights, purchase contracts and debt securities in one or more offerings up to an aggregate offering price of $150 million and on terms to be determined at the time of the offering.

On August 8, 2023, the Company initiated an at-the-market equity offering program (the “ATM Program”) for the sale from time to time of shares of the Company’s common stock, par value $0.01 per share (“Common Stock”) having an aggregate offering price of up to $30.0 million.

Shares of Common Stock under the ATM Program are offered using Wells Fargo Securities, LLC and HSBC Securities (USA) Inc., as sales agents (the “Sales Agents” and each a “Sales Agent”), pursuant to the equity distribution agreement, dated August 8, 2023, by and among the Company and the Sales Agents (the “Equity Distribution Agreement”).

Under the terms of the Equity Distribution Agreement and subject to the instructions of the Company, the Sales Agents may sell shares of Common Stock by any lawful method deemed to be an “at-the-market offering” defined by Rule 415(a)(4) of the Securities Act of 1933, as amended, including without limitation sales made directly on the Nasdaq Global Select Market, on any other existing trading market for the shares of Common Stock, to or through a market maker or in negotiated transactions.

The timing and volume of any sales of shares of Common Stock under the ATM Program will depend on a variety of factors to be determined by the Company.

Sales may be made at market prices prevailing at the time of the sale, at prices related to prevailing market prices, or at negotiated prices and, as a result, sales prices may vary.

Under the terms of the Equity Distribution Agreement, the Sales Agents are entitled to compensation at a fixed commission rate of 1.5% of the gross proceeds from the sale of shares of Common Stock under the ATM Program.

During the three and nine months ended September 30, 2023, the Company sold 834,228 shares of our common stock under the ATM Program.

The Company generated $13.9 million in aggregate gross proceeds from sales under the ATM Program at an average sale price of $16.70 per share.

Aggregate net proceeds from the ATM Program were $13.6 million after deducting

related expenses, including commissions to the Sales Agents and issuance costs.

Of this amount, $13.1 million in net cash proceeds were received in the three and nine months ended September 30, 2023, with the remainder received in October 2023.

The Company currently is obligated to use the net proceeds from any sale of shares of Common Stock pursuant to the ATM Program to pay down the outstanding principal amount of, and any unpaid interest on, the ABL Revolving Credit Facility.

However, any principal amount paid down on our ABL Revolving Credit Facility using the proceeds of the ATM Program will be, subject to compliance with the requirements and conditions set forth in the ABL Revolving Credit Facility, available to be reborrowed by the Company and used for, among other items, working capital and general corporate purposes.

If the outstanding principal amount balance of the ABL Revolving Credit Facility has been reduced to zero, then the Company intends to use the net proceeds of the ATM Program for general corporate purposes.

As of September 30, 2023, the Company had remaining capacity under the ATM Program to sell shares of Common Stock having an aggregate offering price up to approximately $16.1 million.

Cash on hand at the end of the quarter was $7.7 million.

Net debt was $166.1 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.

The Company expects its sales growth, reductions in working capital and availability under its ABL Revolving Credit Facility will provide sufficient cash flows to fund operations.

The Company can also use its remaining availability under its ATM Program to generate additional liquidity as necessary.

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 or other institutions to expedite receivable collections.

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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.

During the three months ended July 1, 2023, we did not issue any securities pursuant to this registration statement, and $150 million remained available for future sales.

Astronics currently expects that the net proceeds of any such future offerings of securities pursuant to the shelf registration statement would be used for general corporate purposes, including, without limitation, organic strategic initiatives and reducing debt as well as general working capital needs.

OFF BALANCE SHEET ARRANGEMENTS

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

The Company’s backlog at July 1, 2023 was $611.1 million compared with $571.4 million at December 31, 2022 and $494.4 million at July 2, 2022.

The Company’s backlog on September 30, 2023 was $604.3 million compared with $571.4 million on December 31, 2022 and $547.1 million on October 1, 2022.

The backlog on September 30, 2023 excludes backlog associated with the customer bankruptcy referred to previously.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Our contractual obligations and commitments have not changed materially from the disclosures in our 2022 Annual Report on Form 10-K.

Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $183.0 million at July 1, 2023.

Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $173.7 million as of September 30, 2023.

A change of 1% in interest rates of all variable rate debt would impact annual net loss by approximately $1.7 million, before income taxes.

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dollars, we have exposure to changes in foreign currency exchange rates related primarily to the Euro and the Canadian dollar.

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

The Company believes that the impact of changes in foreign currency exchange rates in 2023 has 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.

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

CRITICAL ACCOUNTING POLICIES

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The disclosure under the heading “Market Risk” in Item 2.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” above is incorporated by reference into this Item 3.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” above is incorporated by reference into Item 3.

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