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Item 2. Management’s Discussion and Analysis

2024-05-06 compared with 2023-11-09 · 93 added, 154 removed, 129 unchanged (66% of the section changed)

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

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

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

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

Important factors affecting our growth and profitability are the rate at which new aircraft are produced, government funding and timing of awards of military programs, our ability to have our products designed into new aircraft, and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft and supply chain and labor market pressures.

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

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

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

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

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

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

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

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

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

The main challenges that we continue to face include varying levels of supply chain pressures from the residual impacts of the COVID-19 pandemic, material availability and cost increases, labor availability and cost, and improving shareholder value through increasing profitability.

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

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

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

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

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

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

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

Delays in delivery schedules and incremental costs resulting from supply chain and labor rate pressures have in the past resulted, and could in the future also result in, lower profits.

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

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

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

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

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

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

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

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

Department of Transportation (“USDOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”).

The Company received $5.2 million in the first quarter of 2022.

The grant benefit was recognized ratably over the six-month performance period as a reduction to cost of products sold in proportion to the compensation expense that the award was intended to defray.

During the nine months ended October 1, 2022, the Company recognized $6.0 million of the award.

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

Our ability to satisfy the financial covenants in our ABL Revolving Credit Facility and Term Loan Facility is an item that our management team continues to closely monitor.

While the Company expects to remain in compliance with the required financial covenants for the duration of the agreements, any unexpected negative impacts to our business, including as a result of declines in aircraft production rates from expectations or production delays resulting from regulatory actions affecting OEMs, additional supply chain pressures, the timing of customer orders, and our ability to meet customer delivery schedules, or labor availability and cost pressures, could result in lower revenues and reduced financial profits, and, as a result thereof, our inability to satisfy the financial covenants in our ABL Revolving Credit Facility and Term Loan Facility.

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

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

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The transaction included two elements of contingent earnouts.

In March 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout for $11.3 million.

The Company recorded the gain and received the payment in the first quarter of 2022.

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

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

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

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

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

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

CONSOLIDATED RESULTS OF OPERATIONS

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) March 30, 2024 April 1, 2023

Sales $ 185,074 $ 156,538

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

CONSOLIDATED THIRD QUARTER RESULTS

CONSOLIDATED FIRST QUARTER RESULTS

Consolidated sales were up $28.5 million, or 18.2%.

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

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

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

Aerospace sales increased $28.0 million, or 20.7%, driven by increased demand in our Electrical Power & Motion product line.

Test Systems sales increased $0.5 million.

The prior-year period Test Systems sales benefited from the reversal of a $5.8 million deferred revenue liability assumed with an acquisition and associated with a customer program which is no longer expected to occur.

Consolidated cost of products sold in the first quarter of 2024 was $150.9 million, compared with $129.0 million in the prior-year period.

The increase was primarily due to higher volume.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CONSOLIDATED YEAR-TO-DATE RESULTS

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

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

Test Systems sales increased $4.0 million, due primarily to the reversal of a $5.8 million deferred revenue liability assumed with an acquisition and associated with a customer program which is no longer expected to occur, partially offset by lower defense revenue.

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

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

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

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

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

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

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

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

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

Tax expense was $5.6 million in the current period, primarily due to a valuation allowance applied against the deferred tax asset associated with research and development costs that are required to be capitalized for tax purposes.

Selling, general and administrative (“SG&A”) expenses were $32.5 million in the first quarter of 2024 compared with $29.9 million in the prior-year period primarily due to increased wages and benefits, a $1.9 million increase of incentive compensation expenses recorded in SG&A, and partially offset by a decrease of $0.8 million in litigation-related legal expenses.

In the first quarter of 2023, the Company recognized a $3.4 million gain from the final earnout payment for the 2019 sale of its semiconductor test business, as well as $1.8 million within Other Income associated with the reversal of a liability related to an equity investment.

Consolidated net loss was $3.2 million, or $0.09 per diluted share, compared with net loss of $4.4 million, or $0.14 per diluted share, in the prior year.

COVID-19 Impacts on Our Business

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic.

The spread of the COVID-19 pandemic disrupted businesses on a global scale, led to significant volatility in financial markets, and affected the aviation and industrial industries.

The impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by customer demand variability.

Although we saw a stable and growing backlog throughout 2022 and into 2023 in our aerospace business, disruptions are ongoing and continue to adversely challenge our commercial transport market.

While we remain bullish about the aerospace business, we believe the recovery to pre-pandemic activity, particularly in the widebody market, will take longer than originally anticipated at the outset of the pandemic.

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.

Tax benefit in the quarter was $1.4 million, compared with tax expense of $1.3 million in the prior year.

Bookings were $205.3 million in the quarter resulting in a book-to-bill ratio of 1.11:1.

For the trailing twelve months, bookings totaled $771.6 million and the book-to-bill ratio was 1.08:1.

Backlog at the end of the quarter was $612.5 million.

SEGMENT RESULTS OF OPERATIONS

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

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

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

Operating profit (loss) is reconciled to loss before income taxes in Note 16 of the Notes to Consolidated Condensed Financial Statements included in this report.

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

AEROSPACE SEGMENT

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) March 30, 2024 April 1, 2023

Sales $ 163,675 $ 135,715

Less Inter-segment Sales

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Total Aerospace Sales

$ 163,638 $ 135,597

Operating Profit (Loss) $ 10,342 $ (7,085) $ (7,464) $ (6,859)

Operating Profit $ 12,097 $ 4,087

Operating Margin 7.4 % 3.0 %

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$ 163,638 $ 135,597

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

(In thousands) March 30, 2024 December 31, 2023

$ 490,506 $ 493,660

$ 538,871 $ 517,240

AEROSPACE THIRD QUARTER RESULTS

AEROSPACE FIRST QUARTER RESULTS

Aerospace segment sales increased $28.0 million, or 20.7%, to $163.6 million.

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

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

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

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

The improvement was driven by a 28.9% increase, or $27.2 million, in commercial transport sales.

Sales to this market were $121.4 million, or 65.6% of consolidated

sales in the quarter, compared with $94.2 million, or 60.2% of consolidated sales in the first quarter of 2023.

Higher airline spending and higher OEM build rates drove increased demand.

Military aircraft sales increased $3.0 million, or 21.4%, to $17.1 million.

General Aviation sales increased $0.1 million, or 0.5%, to $19.6 million.

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

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

Aerospace segment operating profit of $12.1 million, or 7.4% of sales, compares with operating profit of $4.1 million, or 3.0% of sales, in the same period last year.

Operating margin expansion reflects the leverage gained on higher volume and improving production efficiencies.

Operating profit in the first quarter of 2024 was impacted by a $1.9 million increase in litigation-related legal expenses related to an ongoing patent dispute and the resumption of the Company’s bonus programs, which was $2.4 million.

Aerospace bookings were $185.3 million for a book-to-bill ratio of 1.13:1.

Backlog for the Aerospace segment was $538.9 million at quarter end.

AEROSPACE YEAR-TO-DATE RESULTS

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

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

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

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

Aerospace segment operating profit improved to $10.3 million compared with an operating loss of $7.1 million in the same period last year, which included an AMJP grant offset to cost of sales of $6.0 million.

The improvement in operating profit was driven by higher volume primarily in the commercial transport market, partially offset by the effects of material and labor inflation and the $11.1 million charges related to the customer bankruptcy.

TEST SYSTEMS SEGMENT

Nine Months Ended Three Months Ended

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

Three Months Ended

($ in thousands) March 30, 2024 April 1, 2023

Sales $ 21,436 $ 20,941

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(In thousands)

September 30, 2023 December 31, 2022

March 30, 2024 December 31, 2023

$ 126,008 $ 122,681

Backlog $ 73,586 $ 75,036

TEST SYSTEMS THIRD QUARTER RESULTS

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

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

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

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

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

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

TEST SYSTEMS YEAR-TO-DATE RESULTS

Test Systems segment sales were $57.8 million, up $4.0 million compared with the prior-year period primarily as a result of a reversal of a $5.8 million deferred revenue liability recorded with a previous acquisition.

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

Test Systems segment operating loss was $8.5 million compared with operating loss of $4.1 million in 2022.

Absent the non-operating sales adjustment resulting from the reversal of the deferred revenue liability, Test Systems operating loss for the current period was $14.3 million and was negatively affected by mix, under absorption of fixed costs due to volume and $6.3 million in increased litigation-related legal expenses.

TEST SYSTEMS FIRST QUARTER RESULTS

Test Systems segment sales were $21.4 million, up $0.5 million.

Test Systems segment operating loss was $3.1 million, compared to operating loss of $0.6 million in the first quarter of 2023.

Test Systems operating loss for the prior-year period benefited from the $5.8 million sales adjustment resulting from the reversal of the deferred revenue liability.

Test Systems’ operating loss continues to be negatively affected by mix and under absorption of fixed costs due to low volume.

The first quarter of 2024 included a $2.7 million decrease in litigation-related expenses partially offset by a $0.6 million increase in non-cash bonuses.

Given the continued delay in expected project awards, in April 2024 the Test Systems segment implemented additional restructuring initiatives to align the workforce and management structure with near-term revenue expectations and operational needs.

These initiatives are expected to provide annualized savings of approximately $4 million, beginning in the third quarter.

Severance is expected to approximate $1 million associated with these efforts.

Bookings for the Test Systems segment in the quarter were $20.0 million for a book-to-bill ratio of 0.93:1 for the quarter.

Backlog was $73.6 million at the end of the first quarter of 2024 compared with a backlog of $86.3 million at the end of the first quarter of 2023.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities:

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

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

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

Cash provided by operating activities totaled $2.0 million for the first three months of 2024, as compared with $19.2 million cash used for operating activities during the same period in 2023.

Cash flow from operating activities increased compared with the same period of 2023 primarily related to improvement in our financial results, coupled with accounts receivable and inventory using less cash as supply chain challenges have improved.

Investing Activities:

Cash used for investing activities was $2.6 million for the first nine months of 2023 compared with $17.7 million in cash provided by investing activities in the same period of 2022.

Investing cash flows in 2022 were positively impacted by the receipt of $10.7 million and $11.3 million related to the calendar 2020 and 2021 earnouts, respectively, from the sale of the semiconductor business compared to $3.4 million received in the current year related to the calendar 2022 earnout.

Cash used for investing activities was $1.6 million for the first three months of 2024 compared with $1.9 million in cash provided by investing activities in the same period of 2023.

Investing cash flows in 2023 were positively impacted by the receipt of $3.4 million received in the prior year related to the calendar 2022 earnout.

The Company expects capital spending in 2024 to be in the range of $17 million and $22 million.

Financing Activities:

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

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

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

Additional debt issuance costs of $1.1 million will be paid in the future, largely comprised of the remaining Term Loan commitment fee, which is discussed further below.

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

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

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

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

Cash used for financing activities totaled $5.0 million for the first three months of 2024, as compared with cash provided by financing activities of $9.2 million during the same period in 2023.

The Company made net borrowings under our credit facilities of $5.9 million in the first three months of 2024 compared with net proceeds of $14.1 million in the same period in 2023, partially offset by a decrease in costs associated with amending and refinancing our credit facilities.

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.

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

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

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

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

The Company 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 March 27, 2024, the Company executed an amendment to the ABL Revolving Credit Facility, extending a temporary increase to the maximum aggregate amount that the Company can borrow under the revolving credit line by $5 million from $115 million to $120 million until May 15, 2024, at which time the limit is to return 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 Condensed 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 30, 2024, and $10 million thereafter.

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

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

On March 30, 2024, there was $83.4 million outstanding on the ABL Revolving Credit Facility and there remained $36.3 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, provided the ABL Revolving Credit Facility is extended beyond that date.

The Company pays interest under the Term Loan Facility at a rate

equal to SOFR (which is required to be at least 2.50%) plus 8.75%.

The Company will pay a commitment fee under the Term Loan Facility of 5% of the total aggregate commitment, or $4.5 million, $1.8 million which was paid on the closing date, $1.8 million which was paid on June 20, 2023, and $0.9 million of which will be paid 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, increased to 0.542% per month for the period July 1, 2023, through September 1, 2023, and increased to 0.833% thereafter.

Total scheduled principal payments of approximately $9.0 million are payable over the next twelve months and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of September 30, 2023.

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

The remaining balance of $78.8 million on September 30, 2023, is recorded as long-term in the accompanying Consolidated Condensed Balance Sheet.

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

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

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

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 which was paid on the closing date, $1.8 million which was paid in June 2023 and $0.9 million, 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 over the next twelve months and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of March 30, 2024.

The interest rate on current maturities of long-debt is variable at SOFR plus 8.75% and was 14.2% at March 30, 2024.

The remaining balance of $74.3 million as of March 30, 2024, is recorded as long-term in the accompanying Consolidated Condensed Balance Sheet.

Pursuant to the ABL Revolving Credit Facility and the Term Loan Facility, as amended in March 2024, the Company was required to comply with a minimum trailing four quarter Adjusted EBITDA, as defined in the amended ABL Revolving Credit Facility and Term Loan Facility Agreements, of $45.3 million in the Company’s first quarter of 2024, increasing to $48.0 million in the second quarter of 2024, $67.1 million in the third quarter of 2024 and $70 million thereafter.

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 were 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 restrictions on additional indebtedness, share repurchases and dividend payments, and a limitation on capital expenditures.

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

The Company incurred $8.6 million in incremental debt issuance costs related to the new facilities, allocated between the ABL Revolving Credit Facility and the Term Loan Facility.

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 quarter ended March 30, 2024.

The Company incurred $0.8 million in incremental debt issuance costs related to the new facilities during the three months ended March 30, 2024, 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 ($2.2 million as of September 30, 2023) are recorded within other assets and those associated with the Term Loan Facility ($4.8 million as of September 30, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.

Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($1.8 million as of March 30, 2024) are recorded within Other Assets and those associated with the Term Loan Facility ($4.5 million as of March 30, 2024) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.

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

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Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, cross-default under other material debt agreements, and a going concern qualification for any reason other than loan maturity date give the agent the option to declare all such amounts immediately due and payable.

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

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

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

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

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

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

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

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

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

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

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

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

On June 5, 2023, the Company filed a shelf registration statement on Form S-3 with the SEC, which allows us to issue shares of common stock, preferred stock, warrants, subscription rights, purchase contracts and debt securities in one or more offerings up to an aggregate offering price of $150 million and on terms to be determined at the time of the offering.

On August 8, 2023, the Company initiated an at-the-market equity offering program (the “ATM Program”) for the sale from time to time of shares of the Company’s common stock, par value $0.01 per share having an aggregate offering price of up to $30 million.

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

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

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

During the three months ended March 30, 2024, the Company did not sell any shares of our common stock under the ATM Program.

As of March 30, 2024, 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.

Cash on hand at the end of the quarter was $6.6 million.

Net debt was $160.0 million, compared with $161.2 million at the end of 2023.

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

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

However, the Company may also evaluate various actions and alternatives to enhance its profitability and cash generation from operating activities, which could include manufacturing efficiency initiatives, cost-reduction measures, working with vendors and suppliers to reduce lead times and expedite shipment of critical components, and working with customers or other institutions to expedite receivable collections.

The Company expects its cash flow from operations will provide sufficient cash flows to fund operations.

The Company may also utilize available capacity under the ABL Revolving Credit Facility and sales proceeds from the ATM Program.

Our ability to maintain sufficient liquidity and comply with financial debt covenants is highly dependent upon achieving expected operating results.

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

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

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

The Company’s backlog on March 30, 2024 was $612.5 million compared with $592.3 million on December 31, 2023 and $558.6 million on April 1, 2023.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Our contractual obligations and commitments have not changed materially from the disclosures in our 2023 Annual Report on Form 10-K.

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

Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $166.6 million as of March 30, 2024.

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

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FORWARD-LOOKING STATEMENTS

Information included in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements.

Information included or incorporated by reference in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume,” and “assume,” and other words and terms of similar meaning, including their negative counterparts, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis