ASTRONICS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Astronics Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Astronics Corporation (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 4, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Goodwill Description of the Matter As of December 31, 2023, the Company’s goodwill balance was $58.2 million. As discussed in Notes 1 and 7 of the consolidated financial statements, the Company tests goodwill for impairment 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. For each reporting unit, the Company performed a quantitative test using the discounted cash flow method to estimate fair value. The discounted cash flow method incorporates various assumptions, the most significant being projected sales growth rates, operating margins and cash flows, the terminal growth rate and the weighted-average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill impairment is measured as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. Auditing management’s assumptions was especially challenging due to the estimation required in determining the fair value of certain of the Company’s reporting units with goodwill. The fair value estimates for certain reporting units were sensitive to the significant assumptions of the sales growth rates and operating margins. These assumptions are affected by expectations about future market and economic conditions, particularly those in the aerospace industry. 34 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment testing process. This included the determination of the underlying significant assumptions described above, and the completeness and accuracy of the impairment analysis. To test the estimated fair value of the Company’s reporting units, we performed audit procedures with the assistance of our valuation professionals that included, among others, assessing the methodology used, testing the significant assumptions discussed above and testing the underlying data used in the impairment analysis. We performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We compared the significant assumptions used by management to current industry and economic trends, historical trends of the Company, and other relevant factors and assessed the historical accuracy of management’s estimates. We also involved our valuation professionals to assist in our evaluation of the weighted-average cost of capital used in the fair value estimates. In addition, we tested the reconciliation of the fair value of the Company’s reporting units to the market capitalization of the Company as of the annual impairment testing date. Revenue Recognition Description of the Matter For the year ended December 31, 2023, the Company’s sales totaled $689.2 million. As discussed in Note 2 to the consolidated financial statements, some of the Company’s contracts with customers contain multiple performance obligations. The majority of the Company’s revenue from contracts with customers is recognized at a point in time when the customer obtains control of the product, which is generally upon delivery and acceptance by the customer. For contracts with customers in which the Company satisfies its promise to the customer to provide a service or a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company recognizes revenue over time as it satisfies the performance obligation. Auditing management’s evaluation of contracts with customers was especially challenging due to the judgment required to analyze the terms and conditions of the Company’s various customer contracts given that such terms and conditions are nonstandard. This included the identification and determination of the performance obligations and assessment of whether a product has alternative use. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s revenue recognition process. We tested controls over management’s review of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time. We performed procedures to test the identification and determination of the performance obligations and the timing of revenue recognition which included, among others, reading a sample of executed contracts and purchase orders to understand the contract and performing an independent assessment of the identification of distinct performance obligations and whether a product has alternative use. We tested the completeness and accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1992. Buffalo, New York March 4, 2024 35 Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based upon the framework in Internal Control – Integrated Framework originally issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2023. Ernst & Young LLP, independent registered public accounting firm, has audited our Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting. By: /s/ Peter J. Gundermann March 4, 2024 Peter J. Gundermann President & Chief Executive Officer (Principal Executive Officer) /s/ David C. Burney March 4, 2024 David C. Burney Executive Vice President and Chief Financial Officer (Principal Financial Officer) 36 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Astronics Corporation Opinion on Internal Control Over Financial Reporting We have audited Astronics Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Astronics Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 4, 2024 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Buffalo, New York March 4, 2024 37 ASTRONICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In thousands, except per share data) 2023 2022 2021 Sales $ 689,206 $ 534,894 $ 444,908 Cost of Products Sold 568,410 463,354 379,545 Gross Profit 120,796 71,540 65,363 Selling, General and Administrative Expenses 127,467 101,584 99,051 Net Gain on Sale of Facility — — 5,014 Loss from Operations ( 6,671 ) ( 30,044 ) ( 28,674 ) Net Gain on Sale of Businesses 3,427 11,284 10,677 Other (Income) Expense, Net ( 261 ) 1,611 2,159 Interest Expense, Net of Interest Income 23,328 9,422 6,804 Loss Before Income Taxes ( 26,311 ) ( 29,793 ) ( 26,960 ) Provision for (Benefit from) Income Taxes 110 5,954 ( 1,382 ) Net Loss $ ( 26,421 ) $ ( 35,747 ) $ ( 25,578 ) Basic Loss Per Share $ ( 0.80 ) $ ( 1.11 ) $ ( 0.82 ) Diluted Loss Per Share $ ( 0.80 ) $ ( 1.11 ) $ ( 0.82 ) See notes to Consolidated Financial Statements. 38 ASTRONICS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended December 31, (In thousands) 2023 2022 2021 Net Loss $ ( 26,421 ) $ ( 35,747 ) $ ( 25,578 ) Other Comprehensive Income: Foreign Currency Translation Adjustments 984 ( 1,928 ) ( 939 ) Retirement Liability Adjustment – Net of Tax ( 884 ) 6,897 2,894 Total Other Comprehensive Income 100 4,969 1,955 Comprehensive Loss $ ( 26,321 ) $ ( 30,778 ) $ ( 23,623 ) See notes to Consolidated Financial Statements. 39 ASTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share and per share data) 2023 2022 ASSETS Current Assets: Cash and Cash Equivalents $ 4,756 $ 13,778 Restricted Cash 6,557 — Accounts Receivable, Net of Allowance for Estimated Credit Losses 172,108 147,790 Inventories 191,801 187,983 Prepaid Expenses and Other Current Assets 14,560 15,743 Total Current Assets 389,782 365,294 Property, Plant and Equipment, Net of Accumulated Depreciation 85,436 90,658 Operating Right-of-Use Assets 27,909 13,028 Other Assets 7,035 8,605 Intangible Assets, Net of Accumulated Amortization 65,420 79,277 Goodwill 58,210 58,169 Total Assets $ 633,792 $ 615,031 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Current Maturities of Long-term Debt $ 8,996 $ 4,500 Accounts Payable 61,134 64,193 Accrued Payroll and Employee Benefits 22,038 15,588 Accrued Income Taxes 3,045 6,410 Current Operating Lease Liabilities 5,069 4,441 Other Accrued Expenses 21,023 23,913 Customer Advanced Payments and Deferred Revenue 22,029 32,567 Total Current Liabilities 143,334 151,612 Long-term Debt 159,237 159,500 Supplemental Retirement Plan and Other Liabilities for Pension Benefits 29,290 26,604 Long-term Operating Lease Liabilities 24,376 9,942 Other Liabilities 26,730 25,583 Deferred Income Taxes 1,307 1,870 Total Liabilities 384,274 375,111 Shareholders’ Equity: Common Stock, $ .01 par value, Authorized 40,000,000 Shares 31,402,141 Shares Issued and 28,569,316 Outstanding at December 31, 2023 29,121,924 Shares Issued and 25,967,233 Outstanding at December 31, 2022 314 291 Convertible Class B Stock, $ .01 par value, Authorized 15,000,000 Shares 5,952,203 Shares Issued and Outstanding at December 31, 2023 6,314,430 Shares Issued and Outstanding at December 31, 2022 59 63 Additional Paid-in Capital 129,544 98,630 Accumulated Other Comprehensive Loss ( 9,426 ) ( 9,526 ) Retained Earnings 209,753 240,360 Treasury Stock, 2,832,825 Shares at December 31, 2023 3,154,691 Shares at December 31, 2022 ( 80,726 ) ( 89,898 ) Total Shareholders’ Equity 249,518 239,920 Total Liabilities and Shareholders’ Equity $ 633,792 $ 615,031 See notes to Consolidated Financial Statements. 40 ASTRONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, Cash Flows from Operating Activities 2023 2022 2021 Net Loss $ ( 26,421 ) $ ( 35,747 ) $ ( 25,578 ) Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities: Non-cash Items: Depreciation and Amortization 26,104 27,777 29,005 Amortization of Deferred Financing Fees 3,023 — — Provisions for Non-Cash Losses on Inventory and Receivables 16,003 3,415 3,942 Equity-based Compensation Expense 7,198 6,497 6,460 Deferred Tax Expense (Benefit) 146 19 ( 441 ) Operating Lease Non-cash Expense 5,088 6,028 5,198 Net Gain on Sales of Assets — — ( 5,083 ) Contingent Consideration Liability Fair Value Adjustment — — ( 2,200 ) Non-cash Accrued 401K Contribution 5,106 4,512 4,199 Non-cash Accrued Stock Bonus Expense 4,249 — — Net Gain on Sale of Business, Before Taxes ( 3,427 ) ( 11,284 ) ( 10,677 ) Non-cash Litigation Provision Adjustment ( 1,305 ) 500 8,374 Non-cash Deferred Liability Recovery ( 5,824 ) — — Other 1,913 3,086 4,179 Changes in Operating Assets and Liabilities: Accounts Receivable ( 31,872 ) ( 41,646 ) ( 14,832 ) Inventories ( 13,283 ) ( 34,058 ) ( 5,150 ) Accounts Payable ( 4,495 ) 27,843 8,610 Accrued Expenses 4,634 1,193 ( 5,344 ) Income Taxes ( 1,949 ) 16,134 156 Customer Advanced Payments and Deferred Revenue ( 4,835 ) 5,264 ( 235 ) Operating Lease Liabilities ( 4,880 ) ( 7,295 ) ( 6,036 ) Supplemental Retirement Plan Liabilities ( 408 ) ( 405 ) ( 404 ) Other Assets and Liabilities 1,285 ( 145 ) 327 Net Cash from Operating Activities ( 23,950 ) ( 28,312 ) ( 5,530 ) Cash Flows from Investing Activities Proceeds from Sale of Businesses and Assets 3,537 22,061 9,213 Capital Expenditures ( 7,643 ) ( 7,675 ) ( 6,034 ) Net Cash from Investing Activities $ ( 4,106 ) $ 14,386 $ 3,179 41 A STRONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (In thousands) Year Ended December 31, Cash Flows from Financing Activities 2023 2022 2021 Proceeds from Long-term Debt $ 139,732 $ 125,825 $ 20,000 Principal Payments on Long-term Debt ( 131,233 ) ( 124,825 ) ( 30,000 ) Stock Award and Employee Stock Purchase Plan (“ESPP”) activity 2,476 97 3,396 Proceeds from At-the-Market (“ATM”) Stock Sales 21,269 — — Finance Lease Principal Payments ( 47 ) ( 93 ) ( 901 ) Debt Acquisition Costs ( 6,762 ) ( 2,416 ) — Net Cash from Financing Activities 25,435 ( 1,412 ) ( 7,505 ) Effect of Exchange Rates on Cash 156 ( 641 ) ( 799 ) Decrease in Cash and Cash Equivalents and Restricted Cash ( 2,465 ) ( 15,979 ) ( 10,655 ) Cash and Cash Equivalents and Restricted Cash at Beginning of Year 13,778 29,757 40,412 Cash and Cash Equivalents and Restricted Cash at End of Year $ 11,313 $ 13,778 $ 29,757 Supplemental Disclosure of Cash Flow Information Interest Paid $ 17,689 $ 7,605 $ 5,951 Income Taxes Paid (Refunded), Net of (Refunds) Payments $ 1,964 $ ( 9,978 ) $ ( 1,250 ) See notes to Consolidated Financial Statements. 42 ASTRONICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Year Ended December 31, (In thousands) 2023 2022 2021 Common Stock Beginning of Year $ 291 $ 289 $ 278 Issuance of Common Stock Through At-the-Market Offering 14 — — Net Exercise of Stock Options, including ESPP 4 — 5 Net Issuance of Common Stock for Restricted Stock Units (“RSUs”) 1 1 1 Class B Stock Converted to Common Stock 4 1 5 End of Year $ 314 $ 291 $ 289 Convertible Class B Stock Beginning of Year $ 63 $ 64 $ 69 Class B Stock Converted to Common Stock ( 4 ) ( 1 ) ( 5 ) End of Year $ 59 $ 63 $ 64 Additional Paid in Capital Beginning of Year $ 98,630 $ 92,037 $ 82,187 Issuance of Common Stock Through ATM Offering, Net of Offering Costs 21,246 — — Net Exercise of Stock Options, including ESPP, and Equity-based Compensation Expense 10,309 6,897 10,029 Tax Withholding Related to Issuance of RSUs ( 641 ) ( 304 ) ( 179 ) End of Year $ 129,544 $ 98,630 $ 92,037 Accumulated Comprehensive Loss Beginning of Year $ ( 9,526 ) $ ( 14,495 ) $ ( 16,450 ) Foreign Currency Translation Adjustments 984 ( 1,928 ) ( 939 ) Retirement Liability Adjustment – Net of Taxes ( 884 ) 6,897 2,894 End of Year $ ( 9,426 ) $ ( 9,526 ) $ ( 14,495 ) Retained Earnings Beginning of Year $ 240,360 $ 287,225 $ 312,803 Net Loss ( 26,421 ) ( 35,747 ) ( 25,578 ) Reissuance of Treasury Shares for 401K Contribution ( 4,186 ) ( 11,118 ) — End of Year $ 209,753 $ 240,360 $ 287,225 Treasury Stock Beginning of Year $ ( 89,898 ) $ ( 108,516 ) $ ( 108,516 ) Shares Issued to Fund 401K Obligation 9,172 18,618 — End of Year $ ( 80,726 ) $ ( 89,898 ) $ ( 108,516 ) Total Shareholders’ Equity $ 249,518 $ 239,920 $ 256,604 See notes to Consolidated Financial Statements. ASTRONICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, CONTINUED Year Ended December 31, (Share data, in thousands) 2023 2022 2021 Common Stock Beginning of Year 29,122 28,911 27,825 Issuance of Common Stock Through ATM Offering 1,334 — — Net Issuance from Exercise of Stock Options, including ESPP 437 20 485 Net Issuance of Common Stock for RSUs 147 106 70 Class B Stock Converted to Common Stock 362 85 531 End of Year 31,402 29,122 28,911 Convertible Class B Stock Beginning of Year 6,314 6,375 6,877 Net Issuance of Restricted Stock — — 4 Net Issuance from Exercise of Stock Options — 24 25 Class B Stock Converted to Common Stock ( 362 ) ( 85 ) ( 531 ) End of Year 5,952 6,314 6,375 Treasury Stock Beginning of Year 3,155 3,808 3,808 Shares Issued to Fund 401K Obligation ( 322 ) ( 653 ) — End of Year 2,833 3,155 3,808 See notes to Consolidated Financial Statements. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES 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 seat 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 Ukraine and India. The Company has two reportable segments, Aerospace and Test Systems. The Aerospace segment designs and manufactures products for the global aerospace and defense industry. 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. See Note 21 for details of our divestiture related activities in 2023, 2022 and 2021. There was no acquisition activity in 2023, 2022 or 2021. Impact of the COVID-19 Pandemic Our business continues to face varying levels of supply chain pressures from the residual impacts of the COVID-19 pandemic. Domestic air travel has recovered from the impact of the COVID-19 pandemic, and international travel utilizing primarily widebody aircraft is close to pre-pandemic levels. 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 $ 7.3 million and $ 7.4 million under the grant in 2022 and 2021, respectively. 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 years ended December 31, 2022 and 2021, the Company recognized $ 6.0 million and $ 8.7 million of the award, respectively. Additionally, the Company qualified for government subsidies from the Canadian and French governments as a result of the COVID-19 pandemic’s impact on our foreign operations. The Canadian and French subsidies are income-based grants intended to reimburse the Company for certain employee wages. The grants are recognized as income over the periods in which the Company recognizes as expenses the costs the grants are intended to defray, primarily during 2021 with an immaterial amount recognized during 2022. The following table presents the COVID-19 related government assistance, including AMJP, recorded during the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, (In thousands) 2023 2022 2021 Reduction in Cost of Products Sold $ — $ 6,062 $ 10,682 Reduction in Selling, General and Administrative Expenses — 11 228 Total $ — $ 6,073 $ 10,910 Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations. There were no acquisitions in 2023, 2022 or 2021. 44 Cost of Products Sold, Research and Development and Selling, General and Administrative Expenses Cost of Products Sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead as well as all engineering and developmental costs. The Company is engaged in a variety of research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation. Research and development expenses amounted to $ 53.5 million in 2023, $ 48.3 million in 2022 and $ 43.3 million in 2021. These costs are included in Cost of Products Sold. SG&A expenses include costs primarily related to our sales, marketing and administrative departments. Interest expense is shown net of interest income. Interest income was insignificant for the years ended December 31, 2023, 2022 and 2021. Shipping and Handling Shipping and handling costs are included in Cost of Products Sold. Equity-Based Compensation The Company accounts for its stock options following Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“ASC Topic 718”). ASC Topic 718 requires all equity-based payments to employees, including grants of employee stock options and restricted stock units (“RSUs”), to be recognized in the statement of earnings based on the grant date fair value of the award. For awards with graded vesting, the Company uses a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense, based on vesting. The Company accounts for forfeitures as they occur. Under ASC Topic 718, stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Equity-based compensation expense is included in SG&A Expenses. Cash and Cash Equivalents All highly liquid instruments with a maturity of three months or less at the time of purchase are considered cash equivalents. Restricted Cash Under the provisions of the ABL Revolving Credit Facility (as defined and discussed below in Note 8), the Company has a cash dominion arrangement with the banking institution for its accounts within the United States whereby daily cash receipts are contractually utilized to pay down outstanding balances on the ABL Revolving Credit Facility. Account balances that have not yet been applied to the ABL Revolving Credit Facility are classified as restricted cash in the accompanying Consolidated Balance Sheets. The following table provides a reconciliation of cash and restricted cash included in Consolidated Balance Sheets to the amounts included in the Consolidated Statements of Cash Flows. December 31, (In thousands) 2023 2022 Cash and Cash Equivalents $ 4,756 $ 13,778 Restricted Cash 6,557 — Total Cash and Restricted Cash Shown in Statements of Cash Flows $ 11,313 $ 13,778 Accounts Receivable and Allowance for Estimated Credit Losses Accounts receivable are composed of trade and contract receivables recorded at either the invoiced amount or costs in excess of billings, are expected to be collected within one year, and do not bear interest. The Company records a valuation allowance to account for estimated credit losses. The estimate for 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. Balances are written off when determined to be uncollectible. Although the Company has historically not experienced significant credit losses, the Company’s exposure to credit losses may increase if its customers are adversely affected by global economic recessions, industry conditions, or other customer-specific factors. 45 Inventories We record our inventories at the lower of cost or net realizable value. We determine the cost basis of our inventory on a first-in, first-out or weighted average basis using a standard cost methodology that approximates actual cost. The Company records reserves to provide for excess, slow moving or obsolete inventory. In determining the appropriate reserve, the Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that the Company believes is no longer salable or whose value has diminished. Cloud Computing Arrangements The Company incurs costs to implement cloud computing arrangements that are hosted by third party vendors. Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase. Amortization is calculated on a straight-line basis over the contractual term of the cloud computing arrangement. Capitalized amounts related to such arrangements are recorded within Other Current Assets and other non-current assets in the Consolidated Balance Sheets and were insignificant as of December 31, 2023 and December 31, 2022. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation of property, plant and equipment (“PP&E”) is computed using the straight-line method for financial reporting purposes and using accelerated methods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 25 - 40 years; and machinery and equipment, 4 - 10 years. Leased buildings and associated leasehold improvements are amortized over the shorter of the terms of the lease or the estimated useful lives of the assets, with the amortization of such assets included within depreciation expense. The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts and the resulting gain or loss, as well as maintenance and repair expenses, is reflected within operating income. Replacements and improvements are capitalized. Depreciation expense was approximately $ 12.2 million, $ 12.0 million and $ 12.7 million in 2023, 2022 and 2021, respectively. Deferred Financing Costs The Company incurs debt issuance costs in connection with amending or entering into new credit facilities. These costs are amortized as an adjustment to interest expense over term of the credit facility on a straight-line basis, which approximates the effective interest method. Debt issuance amortization expense was approximately $ 3.0 million, $ 0.8 million and $ 0.4 million in 2023, 2022 and 2021, respectively. On January 19, 2023, the Company completed a financing transaction, which refinanced its previous revolving credit facility which was scheduled to mature in November 2023. The new financing consists of a $ 90 million asset-based term loan (the “Term Loan Facility”) and a $ 115 million asset-based revolving credit facility (the “ABL Revolving Credit Facility”). The Company incurred $ 8.8 million in debt issuance costs related to the new facilities, allocated between the ABL Revolving Credit Facility and the Term Loan Facility. Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($ 2.0 million as of December 31, 2023) are recorded within Other Assets and those associated with the Term Loan Facility ($ 4.3 million as of December 31, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets. The unamortized balance of deferred financing costs on our previous credit facility of $ 3.2 million is recorded within Other Assets on the Consolidated Balance Sheet at December 31, 2022. Long-Lived Assets Long-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if future undiscounted cash flows from operations are not expected to be sufficient to recover long-lived assets. The carrying amounts are then reduced to fair value, which is typically determined by using a discounted cash flow model. Assets held for sale are to be reported at lower of its carrying amount or fair value less cost to sell. Judgment is required in estimating the sales price of assets held for sale and the time required to sell the assets. These estimates are based upon available market data and operating cash flows of the assets held for sale. During the fourth quarter of 2021, we sold a facility resulting in a gain of $ 5.0 million. Refer to Note 21. 46 Goodwill 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. We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or selected reporting units. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative test. We may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units. Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected sales growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill impairment is measured as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. The 2023, 2022 and 2021 assessments indicated no impairment to the carrying value of goodwill in any of the Company’s reporting units and no impairment charges were recognized. Intangible Assets The estimated fair values of acquired intangibles are generally determined based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangible assets are recorded at fair value and are amortized over their estimated useful lives. Acquired intangible assets with an indefinite life are not amortized, but are reviewed for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the carrying amounts of those assets are below their estimated fair values. Impairment is tested under ASC Topic 350, Intangibles - Goodwill and Other, as amended by Accounting Standards Update (“ASU”) 2012-2. Financial Instruments The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and long-term debt. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company does not hold or issue financial instruments for trading purposes. Due to their short-term nature, the carrying values of cash and equivalents, restricted cash, 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. From time to time, the Company makes long-term, strategic equity investments in companies to promote business and strategic objectives. These investments as classified within other assets in the Consolidated Balance Sheets. For investments requiring equity method accounting, we recognize our share of the investee’s earnings or losses within Other Expense, Net of Other Income in the Consolidated Statements of Operations. For investments not requiring equity method accounting, if the investment has no readily determinable fair value, we have elected the practicability exception of ASU 2016-01, under which the investment is measured at cost, less impairment, plus or minus observable price changes from orderly transactions of an identical or similar investment of the same issuer. We recognized 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 an associated payment. This amount is included in Other Expense, Net of Other Income in the Consolidated Statement of Operations as of December 31, 2023. Our ownership percentage in this company was diluted during 2023, thus our equity investment was converted to the cost method. Deferred Tax Asset Valuation Allowance 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. After considering the losses in recent periods and cumulative pre-tax losses in the three-year period ending with the current year, the Company determined that projections of future taxable income could not be relied upon as a source of income to realize its deferred tax assets. However, the Company is relying on a significant portion of its existing deferred tax liabilities for the realizability of deferred tax assets. As a result, the Company has valuation allowances against its deferred tax assets of 47 approximately $ 65.6 million, $ 57.4 million, and $ 43.5 million during the years ended December 31, 2023, 2022 and 2021, respectively, for the portion of deferred tax asset not realizable by the Company’s existing deferred tax liabilities. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of sales and expenses during the reporting periods in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation The Company accounts for its foreign currency translation in accordance with ASC Topic 830, Foreign Currency Translation . The aggregate transaction gains and losses included in operations were insignificant in 2023, 2022 and 2021. Dividends The Company has no t paid any cash dividends in the three-year period ended December 31, 2023. Loss Contingencies Loss contingencies may from time to time arise from situations such as claims and other legal actions. Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. In all other instances, legal fees are expensed as incurred. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. In recording liabilities for probable losses, management is required to make estimates and judgments regarding the amount or range of the probable loss. Management continually assesses the adequacy of estimated loss contingencies and, if necessary, adjusts the amounts recorded as better information becomes known. 48 Newly Adopted and Recent Accounting Pronouncements Recent Accounting Pronouncements Not Yet Adopted Standard Description Financial Statement Effect or Other Significant Matters ASU No. 2023-06 Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative This ASU amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company will monitor the removal of various requirements from the current regulations in order to determine when to adopt the related amendments, but does not anticipate the adoption of the new guidance will have a material impact on the Company’s Consolidated Financial Statements. ASU No. 2023-07 Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosure The standard includes updates to the disclosure requirements for a public entity’s reportable segments and provides more detailed information about a reportable segment’s expenses. The new standard is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with retrospective application required. The Company is currently evaluating the impact of adopting this guidance. We expect adoption to result in additional disclosures in the notes to our Consolidated Financial Statements. ASU No. 2023-09 Income Taxes (Topic 740), Improvements to Income Tax Disclosures The amendments in this update require enhanced disclosures within the annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclosure of both percentages and dollar amounts, and disaggregation of the reconciling items by nature when they meet a quantitative threshold. The update also includes enhanced disclosure requirements for income taxes paid. The new standard is effective for annual periods beginning after December 15, 2024; early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance. We expect adoption to result in additional disclosures in the notes to our Consolidated Financial Statements. We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable or had or are expected to have minimal impact on our financial statements and related disclosures. NOTE 2 — REVENUE Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or services. Sales shown on the Company’s Consolidated Statements of Operations are from contracts with customers. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 90 days after the performance obligation has been satisfied; or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of receipt of consideration, the Company has determined that the Company’s contracts generally do not include a significant financing component. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer. The Company has elected the practical expedient available under ASC 340-40-25-4 to immediately expense the incremental cost of obtaining a contract when the expected benefit of those costs is less than one year. As of December 31, 2023 and 2022, the Company did not have material incremental costs on any open contracts with an original expected duration of greater than one year. The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Inventories in the accompanying Consolidated Balance Sheets. Should 49 future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. The Company has capitalized $ 4.7 million and $ 2.5 million of costs as of December 31, 2023 and 2022, respectively. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Thus, the contract’s transaction price is the revenue recognized when or as that performance obligation is satisfied. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus margin approach, under which expected costs are forecast to satisfy a performance obligation and then an appropriate margin is added for that distinct good or service. Shipping and handling activities that occur after the customer has obtained control of the good are considered fulfillment activities, not performance obligations. Some of our contracts offer price discounts or free units after a specified volume has been purchased. The Company evaluates these options to determine whether they provide a material right to the customer, representing a separate performance obligation. If the option provides a material right to the customer, revenue is allocated to these rights and recognized when those future goods or services are transferred, or when the option expires. Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as new contracts. The effect of modifications has been reflected when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. The majority of the Company’s revenue from contracts with customers is recognized at a point in time, when the customer obtains control of the promised product. In general, the customer has obtained control when they have legal title, significant risks and rewards of ownership of the asset, and the Company has a present right to payment for the product. These contracts may provide credits or incentives, which may be accounted for as variable consideration. Variable consideration is estimated at the most likely amount to predict the consideration to which the Company will be entitled, and only to the extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal when estimating the amount of revenue to recognize. Variable consideration is treated as a change to the sales transaction price and based on an assessment of all information (i.e., historical, current and forecasted) that is reasonably available to the Company, and estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Most of our contracts do not contain rights to return product; where this right does exist, it is evaluated as possible variable consideration. For contracts that are subject to the requirement to accrue anticipated losses, the Company recognizes the entire anticipated loss in the period that the loss becomes probable. For contracts with customers in which the Company promises to provide a product to the customer that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. The Company also recognizes revenue from service contracts (including service-type warranties) over time. The Company recognizes revenue over time during the term of the agreement as the customer is simultaneously receiving and consuming the benefits provided throughout the Company’s performance. The Company typically recognizes revenue over time using a cost-to-cost method, where revenues are recognized proportionally as costs are incurred, or on a straight-line basis throughout the contract period. On December 31, 2023, we had $ 592.3 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $ 526.5 million of our remaining performance obligations as revenue in 2024. Costs in excess of billings includes unbilled amounts resulting from revenues under contracts with customers that are satisfied over time and when the cost-to-cost measurement method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net 50 realizable value. Costs in excess of billings are classified as current assets, within Accounts Receivable, Net of Allowance for Estimated Credit Losses on our Consolidated Balance Sheets. Billings in excess of cost includes billings in excess of revenue recognized as well as other elements of deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are reported in our Consolidated Balance Sheets classified as current liabilities, within Customer Advance Payments and Deferred Revenue, and non-current liabilities, within Other Liabilities. To determine the revenue recognized in the period from the beginning balance of billings in excess of cost, the contract liability as of the beginning of the period is recognized as revenue on a contract-by-contract basis when the Company satisfies the performance obligation related to the individual contract. Once the beginning contract liability balance for an individual contract has been fully recognized as revenue, any additional payments received in the period are recognized as revenue once the related costs have been incurred. We recognized $ 27.6 million and $ 14.8 million during the year ended December 31, 2023 and 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 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: (In thousands) Contract Assets Contract Liabilities Beginning Balance, January 1, 2023 $ 27,349 $ 33,209 Ending Balance, December 31, 2023 $ 46,321 $ 22,888 The increase in contract assets reflects the net impact of new revenue recognized in excess of billings exceeding billing of previously unbilled revenue during the period. The decrease in contract liabilities reflects the net impact of revenue recognized in excess of new customer advances or deferred revenues recorded, as well as a $ 5.8 million 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, resulting in revenue recognized during the year ended December 31, 2023. The following table presents our revenue disaggregated by Market Segments as of December 31 as follows: (In thousands) 2023 2022 2021 Aerospace Segment Commercial Transport $ 432,199 $ 314,564 $ 201,990 Military Aircraft 61,617 54,534 70,312 General Aviation 80,842 63,395 56,673 Other 30,172 28,703 36,263 Aerospace Total 604,830 461,196 365,238 Test Systems Segment Government & Defense 84,376 73,698 79,670 Test Systems Total 84,376 73,698 79,670 Total $ 689,206 $ 534,894 $ 444,908 51 The following table presents our revenue disaggregated by Product Lines as of December 31 as follows: (In thousands) 2023 2022 2021 Aerospace Segment Electrical Power & Motion $ 268,049 $ 187,446 $ 141,746 Lighting & Safety 157,434 124,347 103,749 Avionics 113,117 97,234 64,901 Systems Certification 26,255 17,222 13,050 Structures 9,803 6,244 5,529 Other 30,172 28,703 36,263 Aerospace Total 604,830 461,196 365,238 Test Systems 84,376 73,698 79,670 Total $ 689,206 $ 534,894 $ 444,908 NOTE 3 — ACCOUNTS RECEIVABLE Accounts receivable at December 31 consists of: (In thousands) 2023 2022 Trade Accounts Receivable $ 134,980 $ 123,071 Unbilled Recoverable Costs and Accrued Profits 46,321 27,349 Total Receivables, Gross 181,301 150,420 Less Allowance for Estimated Credit Losses ( 9,193 ) ( 2,630 ) Total Receivables, Net $ 172,108 $ 147,790 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. The following table provides a rollforward of the allowance for estimated credit losses that is deducted from accounts receivable to present the net amount expected to be collected at December 31: (In thousands) Balance at December 31, 2021 $ 3,183 Bad Debt Expense, Net of Recoveries 565 Write-off Charges Against the Allowance and Other Adjustments ( 1,118 ) Balance at December 31, 2022 2,630 Bad Debt Expense, Net of Recoveries 7,772 Write-off Charges Against the Allowance and Other Adjustments ( 1,209 ) Balance at December 31, 2023 $ 9,193 52 NOTE 4 — INVENTORIES Inventories at December 31 are as follows: (In thousands) 2023 2022 Finished Goods $ 29,013 $ 30,703 Work in Progress 32,118 29,895 Raw Material 130,670 127,385 Total Inventories $ 191,801 $ 187,983 At December 31, 2023, the Company’s reserve for inventory valuation was $ 38.5 million, or 16.7 % of gross inventory. At December 31, 2022, the Company’s reserve for inventory valuation was $ 36.8 million, or 16.4 % of gross inventory. 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 $ 3.6 million for dedicated inventory. NOTE 5 — PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment at December 31 are as follows: (In thousands) 2023 2022 Land $ 8,606 $ 8,578 Building and Improvements 71,480 73,744 Machinery and Equipment 126,725 123,071 Construction in Progress 4,219 6,415 Total Property, Plant and Equipment, Gross 211,030 211,808 Less Accumulated Depreciation 125,594 121,150 Total Property, Plant and Equipment, Net $ 85,436 $ 90,658 NOTE 6 — INTANGIBLE ASSETS The following table summarizes acquired intangible assets at December 31 as follows: 2023 2022 (In thousands) Weighted Average Life Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Patents 11 years $ 2,146 $ 2,146 $ 2,146 $ 2,066 Non-compete Agreement 4 years 11,082 11,072 11,082 11,052 Trade Names 10 years 11,426 9,973 11,402 9,350 Completed and Unpatented Technology 9 years 47,896 38,961 47,855 34,877 Customer Relationships 15 years 142,208 87,186 142,133 77,996 Total Intangible Assets 12 years $ 214,758 $ 149,338 $ 214,618 $ 135,341 Amortization is computed on the straight line method for financial reporting purposes. Amortization expense for intangibles was $ 13.9 million, $ 14.9 million and $ 15.4 million for 2023, 2022 and 2021, respectively. Based upon acquired intangible assets at December 31, 2023, amortization expense for each of the next five years is estimated to be: (In thousands) 2024 $ 12,856 2025 $ 10,935 2026 $ 9,533 2027 $ 7,825 2028 $ 7,037 53 NOTE 7 — GOODWILL The following table summarizes the changes in the carrying amount of goodwill at December 31 as follows: (In thousands) Aerospace Test Systems Total Balance at December 31, 2021 $ 36,648 $ 21,634 $ 58,282 Foreign Currency Translations and Other ( 114 ) 1 ( 113 ) Balance at December 31, 2022 36,534 21,635 58,169 Foreign Currency Translations and Other 41 — 41 Balance at December 31, 2023 $ 36,575 $ 21,635 $ 58,210 Goodwill, Gross $ 157,276 $ 21,635 $ 178,911 Accumulated Impairment Losses ( 120,701 ) — ( 120,701 ) Goodwill, Net $ 36,575 $ 21,635 $ 58,210 The Company’s four reporting units with goodwill as of the first day of our fourth quarters of 2023, 2022 and 2021 were subject to the annual goodwill impairment test. Based on our quantitative assessments of our reporting units performed during our annual goodwill impairment tests, the Company concluded that no impairment to the carrying value of goodwill in any of the Company’s reporting units was indicated and no impairment charges were recognized in 2023, 2022 and 2021. NOTE 8 — LONG-TERM DEBT The Company amended the existing revolving credit facility 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 pays 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 must 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 was to return to $ 115 million. On October 31, 2023, the Company executed a second amendment to extend the temporary limit of $ 120 million until January 31, 2024, at which time the limit returned to $ 115 million. 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 and any cash balances subject to the dominion arrangement collateralize the outstanding borrowings under the ABL Revolving Credit Facility. Eligible cash balances 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. On December 31, 2023, there was $ 87.0 million outstanding on the ABL Revolving Credit Facility and there remained $ 32.7 million available, net of outstanding letters of credit (though subject to the minimum liquidity requirement). 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, if 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 must pay a commitment fee under the Term Loan Facility of 5 % of the total aggregate commitment, or $ 4.5 million, $ 1.8 million of which was paid on the closing date, $ 1.8 million of which was paid on June 19, 2023 and $ 0.9 million of which is due in the second quarter of 2024. 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, 0.542 % per month for the period July 1, 2023 through September 1, 2023 and 0.833 % monthly thereafter. Total scheduled principal payments of $ 9.0 million are payable in 2024 and as such, have been classified as current in the accompanying Consolidated Balance Sheets as of December 31, 2023. The interest rate on current maturities of long-term debt is variable at SOFR plus 8.75 %, and was 14.2 % at December 31, 2023. The remaining balance of $ 76.5 million as of December 31, 2023, is recorded as long-term in the accompanying Consolidated Balance Sheets. 54 Pursuant to the ABL Revolving Credit Facility and the Term Loan Facility, the Company was required to comply with a minimum trailing four quarter Adjusted EBITDA, as defined in the ABL Revolving Credit Facility and Term Loan Facility Agreements, of $ 51.7 million in the Company’s fourth quarter of 2023, increasing to $ 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 associated with the customer bankruptcy recorded in 2023 was not required to be included in the calculation of EBITDA pursuant to our ABL Revolving Credit Facility and the Term Loan Facility. 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. No such amounts are payable for the year ended December 31, 2023. 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 excess cash flow repayment provisions, restrictions on additional indebtedness, share repurchases and dividend payments, and a limitation on capital expenditures. The Company was in compliance with debt covenants under the ABL Revolving Credit Facility and Term Loan Facility as of and for the year ended December 31, 2023. The Company incurred $ 8.8 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 ($ 2.0 million as of December 31, 2023) are recorded within Other Assets and those associated with the Term Loan Facility ($ 4.3 million as of December 31, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets. 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. Refer to Item 1A, Risk Factors, for further discussion. NOTE 9 — WARRANTY 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, which is included in Other Accrued Expenses on the Consolidated Balance Sheets, is summarized as follows: (In thousands) 2023 2022 2021 Balance at Beginning of the Year $ 8,009 $ 8,183 $ 7,018 Warranties Issued 6,260 3,407 6,083 Reassessed Warranty Exposure ( 397 ) ( 65 ) ( 1,474 ) Warranties Settled ( 4,121 ) ( 3,516 ) ( 3,444 ) Balance at End of the Year $ 9,751 $ 8,009 $ 8,183 NOTE 10 — LEASES The Company has operating and finance leases for leased office and manufacturing facilities and equipment leases. We have concluded that when an agreement grants us the right to substantially all of the economic benefits associated with an identified asset, and we are able to direct the use of that asset throughout the term of the agreement, we have a lease. We lease certain 55 office equipment under finance leases, and we lease certain production facilities, office equipment and vehicles under operating leases. Some of our leases include options to extend or terminate the leases and these options have been included in the relevant lease term to the extent that they are reasonably certain to be exercised. If the lease arrangement also contains non-lease components, the Company elected the practical expedient not to separate any combine d lease and non-lease components for all lease contracts. For our real estate leases, the payments used in the calculation of a new lease liability include fixed payments and variable payments (if the variable payments are based on an index) over the remaining lease term. Variable lease payments based on indices have been included in the related right-of-use assets and lease liabilities on our Consolidated Balance Sheets, while variable lease payments based on usage of the underlying asset have been excluded and are expensed in the period they are incurred, as they do not represent present rights or obligations. Variable lease components for leases relate primarily to common area maintenance charges and other separately billed lessor services, sales and real estate taxes. Any new additional operating and financing lease liabilities and corresponding right-of-use (“ROU”) assets are based on the present value of the remaining minimum rental payments. The Company’s operating lease liability increased approximately $ 19.9 million as a result of acquiring ROU assets from new leases entered into during the year ended December 31, 2023. In determining the incremental borrowing rate, we have considered borrowing data for secured debt obtained from our lending institution. The following is a summary of the Company’s ROU assets and lease liabilities at December 31: (In thousands) 2023 2022 Operating Leases: Operating Right-of-Use Assets, Gross $ 43,528 $ 29,466 Less Accumulated Right-of-Use Asset Impairment 53 1,710 Less Accumulated Amortization 15,566 14,728 Operating Right-of-Use Assets, Net $ 27,909 $ 13,028 Short-term Operating Lease Liabilities $ 5,069 $ 4,441 Long-term Operating Lease Liabilities 24,376 9,942 Operating Lease Liabilities $ 29,445 $ 14,383 Finance Leases: Finance Right-of-Use Assets, Gross $ 274 $ 231 Less Accumulated Amortization 80 138 Finance Right-of-Use Assets, Net — Included in Other Assets $ 194 $ 93 Short-term Finance Lease Liabilities — Included in Other Accrued Expenses $ 97 $ 29 Long-term Finance Lease Liabilities — Included in Other Liabilities 104 67 Finance Lease Liabilities $ 201 $ 96 The following is a summary of the Company’s total lease costs as of December 31: (In thousands) 2023 2022 Finance Lease Cost: Amortization of ROU Assets $ 54 $ 94 Interest on Lease Liabilities 9 4 Total Finance Lease Cost 63 98 Operating Lease Cost 6,352 6,627 Impairment Charge of Operating Lease ROU Asset 53 — Variable Lease Cost 2,240 1,757 Short-term Lease Cost (excluding month-to-month) 251 602 Less Sublease and Rental Income ( 548 ) ( 1,329 ) Total Operating Lease Cost 8,348 7,657 Total Net Lease Cost $ 8,411 $ 7,755 56 The following is a summary of cash paid for amounts included in the measurement of lease liabilities as of December 31: (In thousands) 2023 2022 Operating Cash Flow for Finance Leases $ 9 $ 4 Operating Cash Flow for Operating Leases $ 6,180 $ 7,873 Financing Cash Flow for Finance Leases $ 47 $ 93 As permitted by ASC 842, leases with expected durations of less than 12 months from inception (i.e. short-term leases) were excluded from the Company’s calculation of its lease liability and ROU asset. The weighted-average remaining term for the Company’s operating and financing leases are approximately 8 years and 2 years, respectively. The weighted-average discount rates for the Company’s operating and financing leases are approximately 5.7 % and 5.8 %, respectively. The following is a summary of the Company’s maturity of lease liabilities: (In thousands) Operating Leases Financing Leases 2024 $ 6,511 $ 122 2025 5,728 62 2026 4,303 20 2027 3,579 7 2028 3,404 — Thereafter 13,183 — Total Lease Payments 36,708 211 Less: Interest 7,263 10 Total Lease Liability $ 29,445 $ 201 NOTE 11 — INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not more likely than not to be realized. The provision for (benefit from) income taxes at December 31 consists of the following: (In thousands) 2023 2022 2021 Current U.S. Federal $ ( 2,573 ) $ 5,338 $ ( 1,713 ) State 937 ( 153 ) ( 667 ) Foreign 1,600 750 1,439 Current ( 36 ) 5,935 ( 941 ) Deferred U.S. Federal ( 336 ) 113 ( 237 ) State 583 ( 239 ) ( 87 ) Foreign ( 101 ) 145 ( 117 ) Deferred 146 19 ( 441 ) Total $ 110 $ 5,954 $ ( 1,382 ) 57 The effective tax rates differ from the statutory federal income tax rate as follows: 2023 2022 2021 Statutory Federal Income Tax Rate 21.0 % 21.0 % 21.0 % Permanent Items Stock Compensation Expense ( 1.4 ) % ( 2.2 ) % ( 2.1 ) % Contingent Consideration Liability Fair Value Adjustment — % — % 1.7 % Other ( 1.4 ) % ( 0.3 ) % ( 0.7 ) % Foreign Tax Rate Differential ( 0.4 ) % ( 2.8 ) % ( 2.7 ) % State Income Tax, Net of Federal Income Tax Effect ( 4.6 ) % 1.0 % 2.2 % Research and Development Tax Credits 14.1 % 7.7 % 12.8 % Change in Valuation Allowance ( 26.1 ) % ( 44.6 ) % ( 29.8 ) % Net GILTI and FDII Tax (Benefit) Expense ( 1.0 ) % 1.8 % — % Foreign Tax Credit for Dividend Withholding — % ( 1.5 ) % 1.7 % Tax Rate Change on 2020 Federal Net Operating Loss (NOL) Carryback — % — % 0.9 % Other ( 0.6 ) % ( 0.1 ) % 0.1 % Effective Tax Rate ( 0.4 ) % ( 20.0 ) % 5.1 % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as tax attributes. Significant components of the Company’s deferred tax assets and liabilities at December 31, are as follows: (In thousands) 2023 2022 Deferred Tax Assets: Asset Reserves $ 19,609 $ 17,680 Deferred Compensation 6,968 6,798 Section 163(j) - Interest Expense Limitation 1,777 — State Investment and Research and Development Tax Credit Carryforwards, Net of Federal Tax 1,430 1,128 Customer Advanced Payments and Deferred Revenue 870 1,917 Net Operating Loss Carryforwards and Other 11,178 11,307 Goodwill and Intangible Assets 1,001 1,277 ASC 606 Revenue Recognition 92 197 Research & Development Costs 25,659 19,892 Lease Liabilities 6,952 3,201 Other 5,308 6,135 Total Gross Deferred Tax Assets 80,844 69,532 Valuation Allowance ( 65,640 ) ( 57,369 ) Deferred Tax Assets 15,204 12,163 Deferred Tax Liabilities: Depreciation 8,593 8,886 ASC 606 Revenue Recognition - Section 481(a) Adjustment 227 525 Lease Assets 6,595 2,905 Earnout Income Accrual 99 — Other 997 1,005 Deferred Tax Liabilities 16,511 13,321 Net Deferred Tax Liabilities $ ( 1,307 ) $ ( 1,158 ) 58 The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31: (In thousands) 2023 2022 Other Assets — Long-term $ — $ 712 Deferred Tax Liabilities — Long-term ( 1,307 ) ( 1,870 ) Net Deferred Tax Liabilities $ ( 1,307 ) $ ( 1,158 ) 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. After considering the losses in recent periods and cumulative pre-tax losses in the three-year period ending with the current year, the Company determined that projections of future taxable income could not be relied upon as a source of income to realize its deferred tax assets. However, the Company is relying on a significant portion of its existing deferred tax liabilities for the realizability of deferred tax assets. As a result, the Company has valuation allowances against its deferred tax assets of approximately $ 65.6 million, $ 57.4 million, and $ 43.5 million during the years ended December 31, 2023, 2022 and 2021, respectively, for the portion of deferred tax asset not realizable by the Company’s existing deferred tax liabilities. Beginning January 1, 2022, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the option to deduct research and development expenditures in the current year and now requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the TCJA, deferred tax assets related to capitalized research expenses increased by approximately $ 5.8 million and $ 19.9 million during the years ended December 31, 2023 and 2022, respectively. The Company maintains a full valuation allowance against this deferred tax asset. At December 31, 2023, gross federal net operating losses amounted to approximately $ 1.9 million, which are subject to annual limitations under Internal Revenue Code Section 382. Of these net operating losses, $ 1.5 million expire in 2038 and the remaining $ 0.4 million will carryforward indefinitely. The Company maintains a full valuation allowance against this deferred tax asset. At December 31, 2023, gross state net operating loss carryforwards amounted to approximately $ 138.6 million. These state net operating loss carryforwards begin to expire at various dates from 2023 through 2043. The Company maintains a full valuation allowance against this deferred tax asset. At December 31, 2023, state income tax credit carryforwards amounted to approximately $ 0.9 million and begin to expire at various dates from 2023 to 2040. Additionally, the Company has approximately $ 0.2 million of foreign tax credits that it can carry forward through 2027 and approximately $ 0.5 million of research and development tax credits that it can carry forward through 2043. The Company maintains a full valuation allowance against these credits. The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest and penalties associated with that liability would be recorded as income tax expense. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, is as follows: (in thousands) 2023 2022 2021 Balance at Beginning of the Year $ 443 $ 1,412 $ 1,890 Decreases as a Result of Tax Positions Taken in Prior Years ( 343 ) ( 969 ) ( 478 ) Balance at End of the Year $ 100 $ 443 $ 1,412 There are no material penalties or interest liabilities accrued as of December 31, 2023, 2022, or 2021, nor are any material penalties or interest costs included in expense for each of the years ended December 31, 2023, 2022 and 2021. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2019 through 2023 for federal purposes and 2017 through 2023 for state purposes. Pretax income (loss) from the Company’s foreign subsidiaries amounted to approximately $ 6.5 million, $ 0.1 million and $( 3.3 ) million for 2023, 2022 and 2021, respectively. The balance of pretax earnings or loss for each of those years were domestic. Historically, we have asserted that the unremitted earnings of our foreign subsidiaries were indefinitely reinvested. However, for the years ended December 31, 2023 and 2022, we determined that we can no longer assert indefinite reinvestment on 59 approximately $ 1.9 million and $ 3.4 million of the unremitted earnings of Luminescent Systems Canada Inc, respectively. As a result, we have recorded a deferred tax liability of approximately $ 0.1 million and $ 0.2 million at December 31, 2023 and 2022, respectively, related to local country withholding taxes that are expected to be incurred upon ultimate repatriation of such earnings. All other foreign unremitted earnings, which total approximately $ 13.6 million, continue to be indefinitely reinvested. We continue to be permanently reinvested in outside basis differences other than unremitted earnings as we have no plans to liquidate or sell any foreign subsidiaries. In addition, we have not provided deferred taxes on any outside basis differences of our domestic subsidiaries as we have the ability and intent to recover these basis differences in a tax-free manner. It is not practicable to determine the amount of unrecognized deferred tax related to these basis differences. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income based laws, some of which were enacted as part of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Some of the key changes include eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize NOLs to offset taxable income in 2018, 2019 and 2020, allowing NOLs originating in 2018, 2019 and 2020 to be carried back five years, enhanced interest deductibility, and retroactively clarifying the immediate recovery of qualified improvement property costs rather than over a 39-year recovery period. During the year ended December 31, 2021, the Company recorded a tax benefit relating to the NOL carryback provisions and the technical correction for qualified improvement property provided for in the CARES Act of approximately $ 0.3 million. No tax benefit was recorded for the years ending December 31, 2023 and 2022. The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022. Key provisions under the IRA include a 15% corporate alternative minimum tax imposed on certain large corporations and the extension and expansion of clean energy tax incentives. There were no impacts related to the IRA recorded for the years ending December 31, 2023 and 2022. Under an Organization for Economic Co-operation and Development Inclusive Framework, countries that agreed to enact a two-pillar solution aim to address the challenges arising from the digitalization of the world economy (Pillar Two). Pillar Two sets out global minimum Effective Tax Rate (ETR) rules to ensure that large multinational businesses with consolidated revenue over €750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. Rules under Pillar Two are expected to be enacted beginning January 1, 2024. The Company will continue to monitor the impact of Pillar Two; however, the Pillar Two is currently not applicable as the Company does not meet the threshold of having consolidated revenue over €750 million. NOTE 12 — PROFIT SHARING/401K PLAN The Company offers eligible domestic full-time employees participation in a safe harbor 401K plan. The plan provides for an annual company contribution. In addition, employees may contribute a portion of their salary to the plan. In response to the impact of the COVID-19 pandemic, Company contributions were temporarily suspended beginning in the second quarter of 2020. The Company contributions were reinstated in the fourth quarter of 2021. The plan may be amended or terminated at any time. Total charges to income before income taxes for this plan was approximately $ 5.3 million, $ 4.7 million and $ 4.3 million in 2023, 2022 and 2021, respectively. The Company has funded the 2022 and 2023 contributions to date with treasury stock in lieu of cash and will fund the remaining 2023 contribution with treasury stock in the first quarter of 2024. NOTE 13 — RETIREMENT PLANS 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 accumulated benefit obligation of the plans as of December 31, 2023 and 2022 amounts to $ 22.0 million and $ 20.5 million, respectively. The plans provide for benefits based upon average annual compensation and years of service and, in the case of SERP, there are offsets for social security and profit sharing benefits. It is the Company’s intent to fund the plans as plan benefits become payable, since no assets exist at December 31, 2023 or 2022 for either of the plans. The Company accounts for the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in accordance with the recognition and disclosure provisions of ASC Topic 715, Compensation, Retirement Benefits , which requires the Company to recognize the funded status in its balance sheet, with a corresponding adjustment to Accumulated Other Comprehensive Income (“AOCI”), net of tax. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the 60 same periods will be recognized as a component of AOCI. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in AOCI. Unrecognized prior service costs of $ 0.6 million ($ 1.2 million net of $ 0.6 million in taxes) and unrecognized actuarial losses of $ 2.0 million ($ 3.6 million net of $ 1.6 million in taxes) are included in AOCI at December 31, 2023 and have not yet been recognized in net periodic pension cost. The reconciliation of the beginning and ending balances of the projected benefit obligation of the plans for the years ended December 31 is as follows: (In thousands) 2023 2022 Funded Status Projected Benefit Obligation Beginning of the Year — January 1 $ 26,210 $ 30,503 Service Cost 105 138 Interest Cost 1,302 834 Actuarial Loss (Gain) 1,529 ( 4,917 ) Benefits Paid ( 348 ) ( 348 ) End of the Year — December 31 $ 28,798 $ 26,210 In 2023, the net actuarial loss of $ 1.5 million is due to the change in the salary scale and the decrease of 21 basis points in the discount rate used to measure the benefit obligation as of December 31, 2023 compared to the prior year. The assumptions used to calculate the projected benefit obligation as of December 31 are as follows: 2023 2022 Discount Rate 4.79 % 5.00 % Future Average Compensation Increases 3.00 % 2.00 % - 3.00 % The plans are unfunded at December 31, 2023 and are recognized in the accompanying Consolidated Balance Sheets as a current accrued pension liability of $ 0.3 million and a long-term accrued pension liability of $ 28.4 million. The service cost component of net periodic benefit cost is included in SG&A expenses, and all other net periodic benefit costs components (such as interest cost, prior service cost amortization and actuarial gain/loss amortization) are reported outside of operating income, within Other (Income) Expense, Net in the accompanying Consolidated Statements of Operations. The following table summarizes the components of the net periodic cost for the years ended December 31: (In thousands) 2023 2022 2021 Net Periodic Cost Service Cost — Benefits Earned During Period $ 105 $ 138 $ 195 Interest Cost 1,302 834 764 Amortization of Prior Service Cost 386 386 386 Amortization of Losses 358 949 1,292 Net Periodic Cost $ 2,151 $ 2,307 $ 2,637 The assumptions used to determine the net periodic cost are as follows: 2023 2022 2021 Discount Rate 5.00 % 2.75 % 2.42 % Future Average Compensation Increases 2.00 % - 3.00 % 2.00 % - 3.00 % 2.00 % - 3.00 % Benefit payments expected in each of the next five years are as follows: 2024 - $ 0.7 million, 2025 - $ 0.6 million, 2026 - $ 0.6 million, 2027 - $ 0.9 million, and 2028 - $ 1.9 million. Benefits expected to be paid in the aggregate between 2029 and 2033 are $ 11.1 million. Given that the plans are unfunded, these amounts are what the Company expects to contribute to the plans in each respective year. 61 Participants in the SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The measurement date for determining the plan obligation and cost is December 31. The accumulated postretirement benefit obligation is $ 0.8 million at December 31, 2023 and 2022. The plan is recognized in the accompanying Consolidated Balance Sheets as a current accrued pension liability of less than $ 0.1 million and a long-term accrued pension liability of $ 0.8 million. The net periodic cost for the years ended December 31, 2023, 2022 and 2021 was not material. The Company is a participating employer in a trustee-managed multiemployer defined benefit pension plan for employees who participate in collective bargaining agreements. The plan generally provides retirement benefits to employees based on years of service to the Company. Contributions are based on the hours worked and are expensed on a current basis. The plan is 99.2 % funded as of January 1, 2023. The Company’s contributions to the plan were $ 0.7 million in 2023, $ 0.5 million in 2022 and $ 0.4 million in 2021. These contributions represent less than 1 % of total contributions to the plan. NOTE 14 — SHAREHOLDERS’ EQUITY Share Buyback Program 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. The Company has the capacity under the currently authorized program to repurchase additional shares of its common stock with a maximum dollar value of $ 41.5 million. Under its current credit agreement, and as described further in Note 8, the Company is currently restricted from further stock repurchases under this program. At-the-Market Equity 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”). During the year ended December 31, 2023, the Company sold 1,334,228 shares of our Common Stock under the ATM Program. The Company generated $ 21.8 million in aggregate gross proceeds from sales under the ATM Program at an average sale price of $ 16.31 per share of Common Stock. Aggregate net proceeds from the ATM Program were $ 21.3 million after deducting related expenses, including commissions to the Sales Agents and issuance costs. As of December 31, 2023, the Company had remaining capacity under the ATM Program to sell shares of Common Stock having an aggregate offering price up to approximately $ 8.2 million. Reserved Common Stock At December 31, 2023, approximately 9.7 million shares of Common Stock were reserved for issuance upon conversion of the Class B stock, exercise of stock options, issuance of restricted stock and purchases under the Employee Stock Purchase Plan. Class B Stock is identical to Common Stock, except Class B Stock has ten votes per share, is automatically converted to Common Stock on a one -for-one basis when sold or transferred other than via gift, devise or bequest and cannot receive dividends unless an equal or greater amount of dividends is declared on Common Stock. Comprehensive Loss and Accumulated Other Comprehensive Loss Comprehensive income or loss consists of net income or loss and the after-tax impact of retirement liability adjustments. No income tax effect is recorded for currency translation adjustments. The components of accumulated other comprehensive loss are as follows: (In thousands) 2023 2022 Foreign Currency Translation Adjustments $ ( 6,351 ) $ ( 7,335 ) Retirement Liability Adjustment – Before Tax ( 5,357 ) ( 4,473 ) Tax Benefit 2,282 2,282 Retirement Liability Adjustment – After Tax ( 3,075 ) ( 2,191 ) Accumulated Other Comprehensive Loss $ ( 9,426 ) $ ( 9,526 ) 62 In 2023, 2022 and 2021, no tax benefit was recognized as the Company had recorded a full valuation allowance on the deferred tax asset associated with the retirement liability. The components of other comprehensive income are as follows: (In thousands) 2023 2022 2021 Foreign Currency Translation Adjustments $ 984 $ ( 1,928 ) $ ( 939 ) Retirement Liability Adjustment ( 884 ) 6,897 2,894 Other Comprehensive Income $ 100 $ 4,969 $ 1,955 NOTE 15 — LOSS PER SHARE Loss per share computations are based upon the following table: (In thousands, except per share data) 2023 2022 2021 Net Loss $ ( 26,421 ) $ ( 35,747 ) $ ( 25,578 ) Basic Earnings Weighted Average Shares 33,104 32,164 31,061 Net Effect of Dilutive Stock Options — — — Diluted Earnings Weighted Average Shares 33,104 32,164 31,061 Basic Loss Per Share $ ( 0.80 ) $ ( 1.11 ) $ ( 0.82 ) Diluted Loss Per Share $ ( 0.80 ) $ ( 1.11 ) $ ( 0.82 ) 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 Company incurred a net loss for the years ended December 31, 2023, 2022, and 2021, therefore all outstanding stock options and unvested restricted stock units are excluded from the computation of diluted loss per share because the effect of their inclusion would be antidilutive. The number of common shares excluded from the computation was approximately 0.8 million shares for the year ended December 31, 2023, 1.4 million shares for the year ended December 31, 2022, and 1.4 million shares for the year ended December 31, 2021. The Company has funded substantially all of its 2022 and 2023 401K contributions, and will fund the remaining 2023 401K contributions outstanding with treasury stock in lieu of cash. The earnings per share computations for the years ended December 31, 2023 and 2022 are each inclusive of approximately 0.1 million in shares outstanding for the equivalent shares needed to fulfill the respective period’s 401K obligation using the closing share price as of December 31, 2023 and 2022. Actual shares issued may differ based on the share price on the settlement date. NOTE 16 — EQUITY COMPENSATION The Company has equity compensation plans that authorize the issuance of restricted stock units or options for shares of Common Stock to directors, officers and key employees. Equity-based compensation is designed to reward long-term contributions to the Company and provide incentives for recipients to join and to remain with the Company. The exercise price of stock options, determined by a committee of the Board of Directors, is equal to the fair market value of the Common Stock on the grant date. Options become exercisable over periods not exceeding ten years , and must be exercised within ten years from the grant date. The Company’s practice has been to issue new shares upon the exercise of the options. The Company established its Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key employees, and to align management’s interest with those of the shareholders. At December 31, 2023, the Company had options outstanding for 587,482 shares under the plans. The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with those of the shareholders. At December 31, 2023, the Company had options outstanding for 31,906 shares under the plans. During 2017, the Company established the Long Term Incentive Plan for the purpose of attracting and retaining directors, executive officers and key employees, and to align management’s interest with those of the shareholders. The Long Term Incentive Plan contemplates the use of a mix of equity award types. For stock options, the exercise price is equal to the share price on the date of grant. Upon inception, the remaining options available for future grant under the 2011 Incentive Stock Option Plan and the Directors Stock Option Plans were rolled in the Long Term Incentive Plan, and no further grants may be 63 made out of those plans. At December 31, 2023, the Company had stock options and RSUs outstanding that covered 1,445,256 shares under the Long Term Incentive Plan, and there were 835,076 shares available for future grant under this plan. Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options or RSUs granted to outside directors vest six months from the date of grant and options granted to officers and key employees straight line vest over a three - to five-year period from the date of grant. RSUs granted to officers and key employees generally cliff vest three years from the date of grant. The following table provides compensation expense information based on the fair value of stock options and RSUs for the years ended December 31 as follows: (In thousands) 2023 2022 2021 Equity-based Compensation Expense $ 7,198 $ 6,497 $ 6,460 Tax Benefit ( 1,259 ) ( 1,068 ) ( 924 ) Equity-based Compensation Expense, Net of Tax $ 5,939 $ 5,429 $ 5,536 Tax benefit excludes the impact of valuation allowances recorded against deferred tax assets. Stock Options 2023 2022 2021 Weighted Average Fair Value of the Options Granted $ 8.39 $ 5.97 $ 7.05 The weighted average fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: 2023 2022 2021 Risk-free Interest Rate 4.20 % - 4.33 % 3.48 % - 3.62 % 0.45 % - 1.52 % Dividend Yield — % — % — % Volatility Factor 0.58 0.61 0.58 Expected Life in Years 3 - 7 years 5 - 9 years 5 - 10 years To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock and considers currently available information to determine if future volatility is expected to differ over the expected terms of the options granted. The risk-free rate is based on the U.S. Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms. A summary of the Company’s stock option activity and related information for the year ended December 31 is as follows: 2023 (Aggregate intrinsic value in thousands) Options Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at January 1 1,376,718 $ 20.37 $ — Options Granted 125,400 $ 15.15 $ — Options Exercised ( 6,570 ) $ 12.64 $ — Options Forfeited / Expired ( 84,564 ) $ 28.23 $ — Outstanding at December 31 1,410,984 $ 19.47 $ — Exercisable at December 31 860,637 $ 23.42 $ — The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the closing stock price of the Company’s Common Stock which would have been received by the option holders had all option holders exercised their options as of that date. The closing stock price of the Company’s Common Stock was $ 17.42 , $ 10.30 and $ 12.00 as of December 31, 2023, 2022 and 2021, respectively. As the stock price of $ 17.42 was below the weighted average exercise price, intrinsic value is zero. 64 The weighted average fair value of options vested during 2023, 2022 and 2021 was $ 11.53 , $ 12.89 and $ 14.58 , respectively. The total fair value of options that vested during the year amounted to $ 3.0 million, $ 2.4 million and $ 1.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. At December 31, 2023, total compensation costs related to non-vested option awards not yet recognized amounts to $ 3.6 million and will be recognized over a weighted average period of approximately 2 years. The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 2023: Outstanding Exercisable Exercise Price Range Shares Weighted Average Remaining Life in Years Weighted Average Exercise Price Shares Weighted Average Remaining Life in Years Weighted Average Exercise Price $ 9.74 – $ 15.15 870,050 8.3 $ 12.08 347,364 8.0 $ 11.58 $ 22.93 – $ 35.82 536,370 3.9 $ 31.23 508,709 3.8 $ 31.30 $ 45.89 – $ 45.89 4,564 1.2 $ 45.89 4,564 1.2 $ 45.89 1,410,984 6.6 $ 19.47 860,637 5.5 $ 23.42 Restricted Stock Units The fair value of each RSU granted is equal to the fair market value of the Company’s Common Stock on the date of grant. The RSUs granted to employees generally cliff vest three years from the date of grant, while RSUs granted to directors cliff vest six months from the date of grant. 2023 RSU Shares Weighted Average Grant Date Fair Value Unvested at January 1 578,214 $ 15.85 Granted 293,704 $ 14.79 Vested ( 190,135 ) $ 17.81 Forfeited ( 28,123 ) $ 16.75 Unvested at December 31 653,660 $ 14.77 Included in total equity-based compensation expense for the year ended December 31, 2023 was $ 4.0 million related to RSUs. At December 31, 2023, total compensation costs related to non-vested awards not yet recognized amounts to $ 3.5 million and will be recognized over a weighted average period of approximately 2 years. Employee Stock Purchase Plan In addition to the stock options and RSUs discussed above, the Company has established the Employee Stock Purchase Plan to encourage employees to invest in the Company. The plan provides employees the opportunity to invest up to the IRS annual maximum of approximately $ 25,000 in the Company’s common stock at a price equal to 85 % of the fair market value of the Company’s common stock, determined each October 1. Employees are allowed to enroll annually. Employees indicate the number of shares they wish to obtain through the program and their intention to pay for the shares through payroll deductions over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annual cycle, and all money withheld from the employees’ pay is returned. If an employee remains enrolled in the program, enough money will have been withheld from the employees’ pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2023, employees had subscribed to purchase 235,140 shares at $ 13.50 per share. The weighted average fair value of the options was approximately $ 4.94 , $ 2.39 and $ 5.00 for options granted during the year ended December 31, 2023, 2022 and 2021, respectively. 65 The fair value for the options granted under the Employee Stock Purchase Plan was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: 2023 2022 2021 Risk-free Interest Rate 5.49 % 4.01 % 0.09 % Dividend Yield — % — % — % Volatility Factor 0.56 0.50 0.71 Expected Life in Years 1.0 1.0 1.0 NOTE 17 — FAIR VALUE ASC Topic 820, Fair Value Measurements and Disclosures , (“ASC Topic 820”) defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC Topic 820 defines fair value based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or liability. ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. On a Recurring Basis: A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. On October 4, 2019, the Company acquired the stock of the primary operating subsidiaries as well as certain other assets from mass transit and defense market test solution provider, Diagnosys Test Systems Limited. The purchase consideration included an earnout estimated at a fair value of $ 2.5 million at the time of acquisition. The terms of the Diagnosys acquisition allow for a potential earnout of up to an additional $ 13.0 million over the three years post-acquisition based on achievement of new order levels of over $ 72.0 million during that period. The fair value assigned to the earnout was determined using the real options method, which requires Level 3 inputs such as new order forecasts, discount rate, volatility factors, and other market variables to assess the probability of Diagnosys achieving certain order levels over the period. Based on actual and forecasted new orders, the fair value was zero as of December 31, 2021, with the contingent consideration liability fair value adjustment of $ 2.2 million recorded within SG&A expenses in the Consolidated Statements of Operations in the year ended December 31, 2021. The earnout period has expired and no amounts were paid or are payable related to this earnout. There were no other financial assets or liabilities carried at fair value measured on a recurring basis at December 31, 2023 or 2022. On a Non-recurring Basis: 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 of the asset or asset group (which are Level 3 inputs) with the asset of asset group’s 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. There were no impairment charges related to long-lived assets in 2023, 2022 or 2021 and no long-lived assets are required to be measured at fair value for purposes of the long-lived asset recoverability test. 66 Due to their short-term nature, the carrying value of cash and equivalents, restricted cash, 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. NOTE 18 — SELECTED QUARTERLY FINANCIAL INFORMATION The following table summarizes selected quarterly financial information for 2023 and 2022: Quarter Ended (Unaudited) December 31, December 31, (In thousands, except for per share data) 2023 2022 Sales $ 195,292 $ 158,153 Gross Profit (Sales Less Cost of Products Sold) $ 39,973 $ 21,510 Income (Loss) Before Income Taxes $ 1,534 $ ( 7,208 ) Net Income (Loss) $ 6,976 $ ( 6,779 ) Basic Earnings (Loss) Per Share $ 0.20 $ ( 0.21 ) Diluted Earnings (Loss) Per Share $ 0.20 $ ( 0.21 ) Non-cash stock bonus expense increased $ 4.2 million in the fourth quarter of 2023 compared to zero in the prior year, $ 1.5 million was recorded to Cost of Products Sold and $ 2.8 million was recorded as SG&A expense. In 2019, a former customer filed a lawsuit alleging damages associated with defective product. Mediation of the matter was held in November 2022 and the Company was indemnified by other parties for approximately $ 1.5 million and recorded a gain as an offset to SG&A expense in the fourth quarter of 2022. These increases in SG&A were more than offset by increased gross profit compared to the prior year fourth quarter resulting from the higher sales volume. NOTE 19 — LEGAL PROCEEDINGS Lufthansa On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserted that a subsidiary of the Company, AES, sold, marketed, and brought into use in Germany a power supply system that infringes upon a German patent held by Lufthansa. Lufthansa sought an order requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers in Germany since November 26, 2003, and compensation for damages related to direct sales of the allegedly infringing power supply system in Germany (referred to as “direct sales”). AES modified the outlet units at the end of 2014 and the overwhelming majority of the modified outlet units sold from 2015 do not infringe the patent of Lufthansa. In February 2015, the Regional State Court of Mannheim, Germany held that the patent was infringed. The judgment did not require AES to recall products that are already installed in aircraft or had been sold to other end users. The Company appealed to the Higher Regional Court of Karlsruhe. On November 15, 2016, the Higher Regional Court of Karlsruhe upheld the lower court’s decision. The Company sought permission to appeal to the German Federal Supreme Court. By judgment of March 26, 2019, the German Federal Supreme Court dismissed AES's appeal. With this decision, the above-mentioned proceedings are complete. In July 2017, Lufthansa filed an action in the Regional State Court of Mannheim for payment of damages caused by AES’s direct sales of the product into Germany. A first instance decision in this matter was handed down on December 6, 2019. According to this ruling, Lufthansa was awarded damages in the amount of approximately $ 3.2 million plus interest. In 2020, AES made payment of $ 4.7 million, inclusive of interest, in satisfaction of the first instance judgment. On July 12, 2023, the Higher Regional Court of Karlsruhe in Germany reduced the Company’s liability for direct damages on appeal from approximately $ 3.2 million plus interest to approximately $ 2.8 million plus interest. Additionally, in its judgment, the Court reduced the interest rate on damages from 5 % (as held by the Regional Court of Mannheim) to 4 %. Accordingly, the Company reclaimed overpaid damages and interest from LHT in the amount of approximately $ 1.2 million. This was recorded as an offset to Selling, General and Administrative expenses in the third quarter of 2023, upon receipt of the refund. Both Lufthansa and AES have filed requests with the German Federal Supreme Court to be granted leave to file appeals against this decision. 67 On December 29, 2017, Lufthansa filed another infringement action against AES in the Regional State Court of Mannheim claiming that sales by AES to its international customers have infringed Lufthansa's patent if AES's customers later shipped the products to Germany (referred to as “indirect sales”). This action, therefore, addresses sales other than those covered by the action filed on December 29, 2010, discussed above. No amount of claimed damages has been specified by Lufthansa. A first instance decision in this matter was issued on December 6, 2019. The Court found that indirect sales (as defined above) by AES to international customers infringe the patent under the conditions specified in the judgment and that the sale of components of the EmPower system to Germany constitutes an indirect patent infringement. The Court rejected Lufthansa's claim that AES is also liable for damages for the sale of modified products. This means that AES is not liable for damages based on the sale of modified outlet units that removed the infringing feature. AES and Lufthansa both appealed this decision. On July 12, 2023, the Higher Regional Court of Karlsruhe essentially upheld the first instance ruling. According to the Higher Regional Court of Karlsruhe ruling, AES is responsible for payment of damages for indirect sales of patent-infringing EmPower in-seat power supply systems in the period from December 29, 2007 to May 22, 2018. However, because the outlet units were modified at the end of 2014, the period for which AES is liable for damages in connection with indirect sales into Germany substantially finished at the end of 2014. Both Lufthansa and AES have filed requests with the German Federal Supreme Court to be granted leave to file appeals against this decision. After the accounting, Lufthansa is expected to enforce its claim for damages in separate court proceedings. These proceedings would most likely be tried before the Mannheim Court again, which makes it probable that the Mannheim Court will determine the damages for the indirect sales based on the same principles as in the direct sales proceedings (unless the latter ruling of the Mannheim Court is reversed on appeal). Based on the information available and the determination of the damages in the direct sales claim discussed above, we estimated that the Company’s total exposure related to these matters that was probable and that could be reasonably estimated at December 31, 2019, was approximately $ 11.6 million plus accrued interest. Accrued interest on the indirect damages reserve was estimated using the same interest rate as the direct damages. Given the reduction in the direct damages interest rate as discussed above, we recorded a reduction to the indirect damages reserve of $ 1.3 million in the year ended December 31, 2023, as an offset to Selling, General and Administrative Expenses. Approximately $ 0.7 million, $ 0.6 million and $ 0.6 million was recorded within Selling, General and Administrative Expenses in the Company’s Consolidated Statements of Operations for each of 2023, 2022 and 2021, respectively, for additional interest accrued during such periods. In connection with the indirect sales claims, we currently believe it is unlikely that the appeals process will be completed and any damages and related interest will be paid before December 31, 2024. Therefore, the liability related to this matter (inclusive of accrued interest), totaling $ 17.1 million and $ 17.8 million, is classified within other liabilities (non-current) in the Consolidated Balance Sheets at December 31, 2023 and 2022, respectively. This amount may be adjusted depending on the decision of the Court on the direct sales damages appeal referred to previously. In December 2017, Lufthansa filed patent infringement cases in the United Kingdom (“UK”) and in France. The Lufthansa patent expired in May 2018. In those cases, Lufthansa accuses AES and certain of its customers of having manufactured, used, sold and offered for sale a power supply system, and offered and supplied parts for a power supply system that infringed upon a Lufthansa patent in those respective countries. In the normal course of its supply arrangements, AES has indemnified its customers from liability arising from such matters, and as such will bear responsibility for any monetary damages arising from such claims. On December 4, 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. Lufthansa lodged an appeal before the French Supreme Court; the French Supreme Court will review the Court of Appeal of Paris reasoning around the nullification of one of the claims of the patent. AES filed a brief with the French Supreme Court on January 22, 2024 in response to Lufthansa’s appeal and awaits guidance on further briefing or a decision from the Court. 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 December 31, 2023 or 2022. In the UK matter, the Court held the UK patent valid and 3 out of 4 asserted claims infringed in June 2020. In contrast to the decisions in Germany, the UK Court found that the modified components infringed a valid claim of the patent, and accordingly, the period for which AES or its customers would be liable for damages in connection with direct sales into the UK extends until the expiration of the patent in May 2018. While AES appealed the ruling, the Court dismissed the appeal on all grounds. The damages trial is scheduled for October 2024. The case for monetary compensation will require extensive data gathering and analysis which is ongoing. This analysis includes evaluating whether any units sold into the UK were subsequently shipped into 68 Germany, where they would be subject to the indirect sales claim discussed above. If this is the case, compensation may be assessed in either the UK, or in the indirect sales matter in Germany, but not in both matters. Lufthansa has elected to pursue a claim in relation to the defendants’ profits from their infringing activities. We have estimated compensation of approximately $ 6.2 million, plus accrued interest, for AES and its indemnified customers. Interest will accrue until final payment to Lufthansa. A reserve of $ 7.3 million was recorded within Selling, General & Administrative expenses in the accompanying Consolidated Statement of Operations for the year ended December 31, 2021. This amount is subject to change as additional data is received and evaluated, and as additional information regarding the damages methodology is claimed 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 early 2025. Therefore, the liability related to this matter, totaling $ 7.4 million and $ 7.0 million, is classified within other liabilities (non-current) in the Consolidated Balance Sheets at December 31, 2023 and 2022, respectively. The variance is due to currency fluctuation. Separate from any such damages Lufthansa may seek in connection with the UK infringement decision discussed above, as a result of the first instance judgement in their favor, Lufthansa was entitled to reimbursement from AES of a proportion of its legal expenditures in the UK case. An interim reimbursement was paid to Lufthansa in August 2020. As a result of the appeal decision, Lufthansa will be entitled to reimbursement from AES of a larger proportion of its first instance legal expenditures, as well as a portion of its legal expenditures associated with the appeal. We recorded an estimated liability of approximately $ 1.0 million in our Consolidated Balance Sheets at December 31, 2021. The associated expense is recorded within Selling, General & Administrative Expenses in the Consolidated Statement of Operations for the year then ended. A payment of $ 0.3 million was made in 2022. It is likely the remaining amount will be payable within the next twelve months, and as such, the liability of $ 0.7 million has been classified as a current liability in the accompanying Consolidated Balance Sheets within other accrued expenses at December 31, 2023. Each of the German, France and UK claims are separate and distinct. Validity and infringement of the Lufthansa patent in each country is a matter for the courts in each of these countries, whose laws differ from each other. In addition, the principles of calculating damages in each jurisdiction differ substantially. Therefore, the Company has assessed each matter separately and cannot apply the same calculation methodology as in the German direct and indirect matters. However, it is reasonably possible that additional damages and interest could be incurred if the appellate court in France was to rule in favor of Lufthansa, or if damages in the UK matter are calculated on a different basis than our estimate or using information not currently available. Other On March 23, 2020, Teradyne, Inc. filed a complaint against the Company and its subsidiary, Astronics Test Systems (“ATS”) (together, “the Defendants”) in the United States District Court for the Central District of California alleging patent and copyright infringement, and certain other related claims. The Defendants moved to dismiss certain claims from the case. On November 6, 2020, the Court dismissed the Company from the case, and also dismissed a number of claims, though the patent and copyright infringement claims 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. The PTAB issued its decision on July 20, 2022, in which it invalidated all of Teradyne’s patent claims. Teradyne did not appeal the decision. On June 5, 2023, the parties attended a court-ordered mediation but did not reach a settlement. After the mediation, Teradyne agreed to drop its remaining state law claims in exchange for ATS dropping one of its defenses, leaving only its copyright claim. On December 7, 2023, the District Court granted ATS’s motion for summary judgment on its affirmative defense of fair use. The Court subsequently entered final judgment in favor of ATS on December 14, 2023. Teradyne filed a Notice of Appeal to the Ninth Circuit Court of Appeals on January 12, 2024. Teradyne’s opening brief on its appeal is currently scheduled to be due on April 9, 2024 with ATS’s answering brief due on May 9, 2024, though those dates may be extended. No amounts have been accrued for this matter in the December 31, 2023 or 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. Accrued legal fees were $ 7.9 million as of December 31, 2023 and were insignificant as of December 31, 2022. 69 NOTE 20 — SEGMENTS Segment information and reconciliations to consolidated amounts for the years ended December 31 are as follows: (In thousands) 2023 2022 2021 Sales: Aerospace $ 605,001 $ 461,206 $ 365,261 Less Inter-segment Sales ( 171 ) ( 10 ) ( 23 ) Total Aerospace Sales 604,830 461,196 365,238 Test Systems 84,376 73,717 80,027 Less Inter-segment Sales — ( 19 ) ( 357 ) Test Systems 84,376 73,698 79,670 Total Consolidated Sales $ 689,206 $ 534,894 $ 444,908 Operating Income (Loss) and Margins: Aerospace $ 24,629 $ ( 1,883 ) $ ( 8,614 ) 4.1 % ( 0.4 ) % ( 2.4 ) % Test Systems ( 8,745 ) ( 8,118 ) ( 3,765 ) ( 10.4 ) % ( 11.0 ) % ( 4.7 ) % Total Operating Income (Loss) $ 15,884 $ ( 10,001 ) $ ( 12,379 ) 2.3 % ( 1.9 ) % ( 2.8 ) % Additions to (Deductions from) Operating Profit: Net Gain on Sale of Businesses $ 3,427 $ 11,284 $ 10,677 Interest Expense, Net of Interest Income ( 23,328 ) ( 9,422 ) ( 6,804 ) Corporate and Other Expenses, Net ( 22,294 ) ( 21,654 ) ( 18,454 ) Loss before Income Taxes $ ( 26,311 ) $ ( 29,793 ) $ ( 26,960 ) Depreciation and Amortization: Aerospace $ 20,801 $ 22,384 $ 23,349 Test Systems 5,068 4,341 5,022 Corporate 235 1,052 634 Total Depreciation and Amortization $ 26,104 $ 27,777 $ 29,005 Assets: Aerospace $ 493,660 $ 481,416 Test Systems 122,681 111,513 Corporate 17,451 22,102 Total Assets $ 633,792 $ 615,031 Capital Expenditures: Aerospace $ 5,003 $ 4,289 $ 4,932 Test Systems 2,640 3,299 1,082 Corporate — 87 20 Total Capital Expenditures $ 7,643 $ 7,675 $ 6,034 Operating income (loss) is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. During the year ended December 31, 2023, a $ 3.6 million inventory reserve and a $ 7.5 million allowance for estimated credit losses associated with a bankrupt customer was recorded as an expense, negatively impacting Aerospace Operating Income. During the year ended December 31, 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 Test Systems’ operating loss for the year. Corporate expenses and other for the year ended December 31, 2023, includes income of $ 1.8 million associated with the reversal of a liability related to an equity 70 investment, as we are no longer required to make the associated payment. This amount is included in Other Income, Net. In the year ended December 31, 2022, $ 6.0 million of the AMJP grant was recognized as an offset to the cost of products sold in the Aerospace segment. The following table summarizes the Company’s sales into the following geographic regions for the years ended December 31: (In thousands) 2023 2022 2021 United States $ 518,096 $ 419,431 $ 350,428 North America (excluding United States) 14,878 9,222 6,990 Asia 26,165 21,242 21,089 Europe 123,682 78,625 62,138 South America 2,071 3,629 1,082 Other 4,314 2,745 3,181 Total $ 689,206 $ 534,894 $ 444,908 The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31: (In thousands) 2023 2022 United States $ 77,939 $ 82,317 France 6,417 6,974 India 487 653 Canada 593 714 Total $ 85,436 $ 90,658 Sales recorded by the Company’s foreign operations were $ 69.3 million, $ 50.0 million and $ 36.6 million in 2023, 2022 and 2021, respectively. Net income (loss) from foreign operations was $ 5.3 million, $( 0.2 ) million and $( 3.8 ) million in 2023, 2022 and 2021, respectively. Net assets held outside of the U.S. total $ 39.1 million and $ 36.6 million at December 31, 2023 and 2022, respectively. The exchange gain (loss) included in determining net income (loss) was insignificant in 2023, 2022 and 2021. Cumulative translation adjustments amounted to $ 6.4 million and $ 7.3 million at December 31, 2023 and 2022, respectively. The Company has a significant concentration of business with The Boeing Company (“Boeing”). Sales to Boeing are primarily in the Aerospace segment. The following is information relating to the activity with this customer: 2023 2022 2021 Percent of Consolidated Sales Boeing 11.0 % 11.0 % 10.0 % (In thousands) 2023 2022 Accounts Receivable at December 31, Boeing $ 17,314 $ 16,860 NOTE 21 — DIVESTITURE ACTIVITIES Semiconductor Test Business On February 13, 2019, the Company completed a divestiture of its semiconductor business within the Test Systems segment. The total proceeds of the divestiture included two elements of contingent earnouts. The “First Earnout” is calculated based on a multiple of all future sales of existing and certain future derivative products to existing and future customers in each annual period from 2019 through 2022. The First Earnout may not exceed $ 35.0 million in total. The “Second Earnout” is calculated based on a multiple of future sales related to an existing product and program with an existing customer exceeding an annual threshold for each annual period from 2019 through 2022. The Second Earnout is not capped. For the Second Earnout, if the applicable sales in an annual period do not exceed the annual threshold, no amounts will be paid relative to such annual period; the sales in such annual period do not carry over to the next annual period. Due to the degree of uncertainty associated with estimating the future sales levels of the divested business and its underlying programs, and the lack of reliable predictive market information, the Company has elected an accounting policy to recognize such earnout proceeds, if received, as additional gain on sale when such proceeds are realized or realizable. We consider the proceeds realizable when we have received 71 communication from the purchaser of its calculation of the earnout and the parties reach agreement on the calculation. No amounts were payable to the Company under either earnout for the calendar 2019 earnout. The Company agreed to an earnout payment of $ 10.7 million for the calendar 2020 earnout, which was recorded in the fourth quarter of 2021 as Other Income and was paid to the Company in early January 2022. In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $ 11.3 million. The Company recorded the gain and received the payment in the first quarter of 2022. 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. Other Disposal Activity On October 6, 2021, as part of a planned consolidation effort, the Company sold one of its Aerospace buildings for $ 9.2 million. Net cash proceeds were approximately $ 8.8 million. A gain on sale of approximately $ 5.0 million was recorded in the Consolidated Statements of Operations as a Net Gain on Sale of Facility in the year ended December 31, 2021. The operation has been integrated into another facility. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 72