ASTRONICS CORP 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Form 10-K for the year ended December 31, 2023.) OVERVIEW Astronics Corporation, through its subsidiaries, is a leading supplier of advanced technologies and products to the global aerospace and defense industries. Our products and services include advanced, high-performance electrical power generation and distribution systems, seat motion solutions, lighting and safety systems, avionics products, aircraft structures, systems certification, and automated test systems. Our Aerospace segment designs and manufactures products for the global aerospace industry. Product lines include lighting and safety systems, electrical power generation, distribution and seat motion systems, aircraft structures, avionics products, systems certification, and other products. Our primary Aerospace customers are the airframe manufacturers (“OEM”) that build aircraft for the commercial transport, military, and general aviation markets, suppliers to those OEMs, aircraft operators such as airlines, suppliers to the aircraft operators, and branches of the U.S. Department of Defense (“USDOD”). Our Test Systems segment designs, develops, manufactures, and maintains automated test systems that support the aerospace and defense and mass transit industries as well as training and simulation devices for both commercial and military applications. In the Test Systems segment, Astronics’ products are sold to a global customer base including OEMs and prime government contractors for both electronics and military products. Our strategy is to increase our value by developing technologies and capabilities, either internally or through acquisition, and using those capabilities to provide innovative solutions to our targeted markets where our technology can be beneficial. Important factors affecting our growth and profitability are the 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 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. Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term. We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions. 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 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 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. 21 Table of Contents 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 liquidity requirements and minimum fixed charge coverage ratio requirements. 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. Our ability to satisfy the financial covenants under our credit agreements 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 or labor strikes affecting OEMs or subsidiaries of the Company, 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. Factors such as increased energy costs, the availability of certain raw materials for aircraft manufacturers, embargoes on flights from Russian airlines, sanctions on Russian companies, and the stability of Ukrainian customers could impact the global economy and aviation sector. On February 13, 2019, the Company completed a divestiture of its semiconductor test business within the Test Systems segment. The transaction included two elements of contingent earnouts. In March 2023, the Company agreed with the final earnout calculation for the calendar 2022 semiconductor test business earnout for $3.4 million. The Company recorded the gain and received the payment in the first quarter of 2023. CONSOLIDATED RESULTS OF OPERATIONS Six Months Ended Three Months Ended ($ in thousands) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Sales $ 383,188 $ 330,992 $ 198,114 $ 174,454 Gross Profit (sales less cost of products sold) $ 75,545 $ 60,205 $ 41,354 $ 32,695 Gross Margin 19.7 % 18.2 % 20.9 % 18.7 % Selling, General and Administrative Expenses $ 66,329 $ 60,179 $ 33,804 $ 30,299 SG&A Expenses as a Percentage of Sales 17.3 % 18.2 % 17.1 % 17.4 % Net Gain on Sale of Business $ — $ (3,427) $ — $ — Interest Expense, Net $ 11,615 $ 11,390 $ 5,856 $ 5,920 Effective Tax Rate 49.7 % (133.6) % (21.8) % (207.5) % Net (Loss) Income $ (1,645) $ (16,414) $ 1,533 $ (11,999) A discussion by segment can be found in “Segment Results of Operations” in this MD&A. CONSOLIDATED SECOND QUARTER RESULTS Consolidated sales were up $23.7 million, or 13.6%. Aerospace sales increased $18.6 million and Test Systems sales increased $5.1 million. Consolidated cost of products sold in the second quarter of 2024 was $156.8 million, compared with $141.8 million in the prior-year period. The increase was primarily due to higher sales volume, coupled with $2.0 million in bonus expense as the Company’s incentive programs resumed in 2024. Selling, general and administrative (“SG&A”) expenses were $33.8 million in the second quarter of 2024 compared with $30.3 million in the prior-year period primarily due to increased wages and benefits, including an increase of bonus expense recorded in SG&A of $2.0 million. Consolidated net income was $1.5 million, or $0.04 per diluted share, measurably improved compared with net loss of $12.0 million, or $0.37 per diluted share, in the prior year. Tax benefit in the quarter was $0.3 million, compared with tax expense of $8.1 million in the prior year. 22 Table of Contents Bookings were $219.0 million in the quarter resulting in a book-to-bill ratio of 1.11:1. For the trailing twelve months, bookings totaled $783.6 million and the book-to-bill ratio was 1.06:1. Backlog at the end of the quarter was $633.4 million. CONSOLIDATED YEAR-TO-DATE RESULTS Consolidated sales were up $52.2 million, or 15.8%. Aerospace sales increased $46.6 million and Test Systems sales increased $5.6 million. The prior-year period Test Systems sales benefited from the reversal of a $5.8 million deferred revenue liability recorded with a previous acquisition. Consolidated cost of products sold in the first half of 2024 was $307.6 million, compared with $270.8 million in the prior-year period. The increase was primarily due to higher volume, coupled with $3.8 million in bonus expense recorded to cost of products sold as the Company’s incentive programs resumed in 2024. SG&A expenses were $66.3 million in the first half of 2024 compared with $60.2 million in the prior-year period primarily due to increased wages and benefits, including an increase in bonus expense recorded in SG&A of $3.9 million. In the prior year period, 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 $1.6 million, or $0.05 per diluted share, compared with net loss of $16.4 million, or $0.50 per diluted share, in the prior year. Tax benefit in the current period was $1.6 million, compared with tax expense of $9.4 million in the prior year. SEGMENT RESULTS OF OPERATIONS Operating profit, as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense, other corporate expenses and other non-operating sales and expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. Operating profit is reconciled to (loss) income before income taxes in Note 15 of the Notes to Consolidated Condensed Financial Statements included in this report. 23 Table of Contents AEROSPACE SEGMENT Six Months Ended Three Months Ended ($ in thousands) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Sales $ 340,623 $ 294,101 $ 176,948 $ 158,386 Less Inter-segment Sales (42) (122) (5) (4) Total Aerospace Sales $ 340,581 $ 293,979 $ 176,943 $ 158,382 Operating Profit $ 31,377 $ 17,806 $ 19,280 $ 13,719 Operating Margin 9.2 % 6.1 % 10.9 % 8.7 % Aerospace Sales by Market (In thousands) Commercial Transport $ 249,829 $ 206,292 $ 128,399 $ 112,079 Military Aircraft 41,860 27,648 24,781 13,584 General Aviation 38,566 44,463 19,015 25,015 Other 10,326 15,576 4,748 7,704 $ 340,581 $ 293,979 $ 176,943 $ 158,382 Aerospace Sales by Product Line (In thousands) Electrical Power & Motion $ 173,452 $ 121,400 $ 90,328 $ 67,946 Lighting & Safety 88,241 78,471 46,454 41,918 Avionics 54,565 60,664 28,971 30,923 Systems Certification 7,812 13,297 3,364 7,620 Structures 6,185 4,571 3,078 2,271 Other 10,326 15,576 4,748 7,704 $ 340,581 $ 293,979 $ 176,943 $ 158,382 (In thousands) June 29, 2024 December 31, 2023 Total Assets $ 504,462 $ 493,660 Backlog $ 554,592 $ 517,240 AEROSPACE SECOND QUARTER RESULTS Aerospace segment sales increased $18.6 million, or 11.7%, to $176.9 million. The improvement was driven by a 14.6% increase, or $16.3 million, in Commercial Transport sales. Sales to this market were $128.4 million, or 64.8% of consolidated sales in the quarter, compared with $112.1 million, or 64.3% of consolidated sales in the second quarter of 2023. Higher airline spending drove increased demand. Military Aircraft sales increased $11.2 million, or 82.4%, to $24.8 million, driven by progress on the FLRAA program as well as higher sales of lighting, safety and avionics products for military aircraft. General Aviation sales decreased $6.0 million, or 24.0%, to $19.0 million due to lower antenna and VVIP sales. Aerospace segment operating profit of $19.3 million grew 41% compared with operating profit of $13.7 million in the same period last year. As a percent of sales, operating margin expanded to 10.9%, or 220 basis points over the prior-year period. Operating margin expansion reflects the leverage gained on higher volume and improving production efficiencies. Operating profit in the second quarter of 2024 was impacted by a $3.0 million increase in litigation-related legal expenses and reserve adjustments related to an ongoing patent dispute and $2.9 million related to the resumption of the Company’s incentive programs. Aerospace bookings were $192.7 million for a book-to-bill ratio of 1.09:1. Backlog for the Aerospace segment was $554.6 million at quarter end. 24 Table of Contents AEROSPACE YEAR-TO-DATE RESULTS Aerospace segment sales increased $46.6 million, or 15.9%, to $340.6 million. The improvement was driven by a 21.1% increase, or $43.5 million, in commercial transport sales. Sales to this market were $249.8 million, or 65.2% of consolidated sales in the first half of 2024, compared with $206.3 million, or 62.3% of consolidated sales in the same period of 2023. Higher airline spending drove increased demand. Military Aircraft sales increased $14.2 million, or 51.4%, to $41.9 million, driven by progress on the FLRAA program as well as higher sales of lighting, safety and avionics products for military aircraft. General Aviation sales decreased $5.9 million, or 13.3%, to $38.6 million due to lower antenna and VVIP sales. Aerospace segment operating profit of $31.4 million grew 76% compared with operating profit of $17.8 million in the same period last year. As a percent of sales, operating margin expanded to 9.2%, or 315 basis points over the prior-year period. Operating margin expansion reflects the leverage gained on higher volume and improving production efficiencies. Operating profit in the first half of 2024 was impacted by a $4.9 million increase in litigation-related legal expenses and reserve adjustments related to an ongoing patent dispute and $5.3 million related to the resumption of the Company’s incentive programs. TEST SYSTEMS SEGMENT Six Months Ended Three Months Ended ($ in thousands) June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Sales $ 42,607 $ 37,013 $ 21,171 $ 16,072 Less Inter-segment Sales — — — — Total Test Systems Sales $ 42,607 $ 37,013 $ 21,171 $ 16,072 Operating Loss $ (8,415) $ (6,740) $ (5,336) $ (6,143) Operating Margin (19.8) % (18.2) % (25.2) % (38.2) % All Test Systems sales are to the Government and Defense Market. (In thousands) June 29, 2024 December 31, 2023 Total Assets $ 123,294 $ 122,681 Backlog $ 78,774 $ 75,036 TEST SYSTEMS SECOND QUARTER RESULTS Test Systems segment sales were $21.2 million, up $5.1 million. The improvement was driven by radio test sales following the award of the U.S. Army TS-4549/T contract, which contributed $7.2 million in sales during the quarter. However, sales were negatively impacted by $3.5 million due to a revision of estimated costs to complete certain long-term mass transit Test contracts. The revision resulted in reduced revenue recognized in the period due to lower estimates of the percentage of work completed on the programs. Test Systems segment operating loss was $5.3 million, compared to operating loss of $6.1 million in the second quarter of 2023. The positive margin realized on the Army contract was offset by $3.5 million related to the revision of estimated costs noted above. Additionally, Test Systems continues to be negatively affected by mix and under absorption of fixed costs due to current volume. In April 2024, the Test Systems segment implemented restructuring initiatives to align the workforce and management structure with near-term revenue expectations and operational needs resulting in $0.7 million in severance expense recognized during the second quarter. As part of the restructuring the Test business closed an operation in Kilgore, TX, simplifying its operations. We expect to realize annual savings of approximately $4 million from these activities, beginning in the third quarter. Bookings for the Test Systems segment in the quarter were $26.4 million, including a $15.5 million initial booking for the U.S. Army TS-4549/T radio test set program. The book-to-bill ratio of 1.25:1 for the quarter. Backlog was $78.8 million at the end of the second quarter of 2024 compared with a backlog of $73.6 million at the end of the previous quarter. 25 Table of Contents TEST SYSTEMS YEAR-TO-DATE RESULTS Test Systems segment sales were $42.6 million, up $5.6 million driven primarily by our U.S. Army and U.S. Marine Corps’ Radio Test programs. However, sales were negatively impacted by $3.5 million due to a revision of estimated costs to complete certain long-term mass transit Test contracts. The revision resulted in reduced revenue recognized in the period due to lower estimates of the percentage of work completed on the programs. The prior-year period sales benefited from the reversal of a $5.8 million deferred revenue liability recorded with a previous acquisition. Test Systems segment operating loss was $8.4 million, compared to operating loss of $6.7 million in the first half 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. The first half of 2024 benefited from the margin realized on the TS-4549/T sales and a $5.0 million decrease in litigation-related expenses, however Test Systems’ operating loss continues to be negatively affected by mix and under absorption of fixed costs due to low volume, the resumption of the Company’s incentive programs which was $1.1 million, and the revision of estimated costs on certain long-term mass transit contracts discussed above, which resulted in a $3.5 million reversal of revenue. LIQUIDITY AND CAPITAL RESOURCES Operating Activities: Cash used for operating activities totaled $4.2 million for the first six months of 2024, as compared with $21.2 million cash used for operating activities during the same period in 2023. Cash flow used for operating activities decreased 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 $3.4 million for the first six months of 2024 compared with $0.4 million in cash used for 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 to $22 million. Financing Activities: Cash provided by financing activities totaled $0.8 million for the first six months of 2024, as compared with cash provided by financing activities of $11.9 million during the same period in 2023. The Company made net borrowings under our credit facilities of $5.9 million in the first six months of 2024 compared with net borrowings of $19.0 million in the same period in 2023. The Company made cash payments related to the employee tax obligations related to the equity-based compensation and bonuses of $3.2 million and $0.6 million in the current year and prior year, respectively. The Company also benefited from a decrease in costs associated with amending and refinancing our credit facilities in the current year to date. The Company's long-term debt at June 29, 2024 and December 31, 2023 consisted of borrowings under its Sixth Amended and Restated Credit Agreement (the “ABL Revolving Credit Facility”) which was entered into on January 19, 2023. 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 was January 19, 2026. Under the terms of the ABL Revolving Credit Facility, the Company paid interest on the unpaid principal amount of the facility at a rate equal to SOFR (which was required to be at least 1.00%) plus 2.25% to 2.75%. The Company was required to pay a quarterly commitment fee under the ABL Revolving Credit Facility in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability. Under the provisions of the ABL Revolving Credit Facility, the Company has a cash dominion arrangement with the lead banking institution whereby eligible daily cash receipts are contractually utilized to pay down outstanding borrowings 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 was also required to maintain minimum excess availability of $10 million for the quarter ended June 29, 2024. On June 29, 2024, there was $97.4 million outstanding on the ABL Revolving Credit Facility and there remained $17.3 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 was secured primarily by fixed assets, real estate and intellectual property. The maturity date of the Term Loan Facility was the 26 Table of Contents earlier of the stated maturity date of the ABL Revolving Credit Facility or January 19, 2027, if the ABL Revolving Credit Facility was extended beyond that date. The Company paid interest under the Term Loan Facility at a rate equal to SOFR (which was required to be at least 2.50%) plus 8.75%. The Company was required to 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 was paid in June 2024. Amortization of the principal under the Term Loan Facility began 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. 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 $48.0 million in the second quarter of 2024, increasing thereafter. Mandatory prepayment of a portion of excess cash flow, as defined by the Term Loan Facility, was 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. The Company was subject to a minimum fixed charge coverage ratio of 1.10 to 1.00. Further, the Company was 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 June 29, 2024. The Company amended its existing ABL Revolving Credit Facility on July 11, 2024 by entering into the Seventh Amended and Restated Credit Agreement (the “Restated ABL Agreement”). The Restated ABL Agreement increased the maximum aggregate amount that the Company can borrow pursuant to the revolving credit line thereunder to $200 million from $115 million, with borrowings subject to a borrowing base determined primarily by inventory, accounts receivable, machinery and equipment and real estate. The Restated ABL Agreement extended the scheduled maturity date for the credit facility from January 19, 2026 to July 11, 2027. Under the terms of the Restated ABL Agreement, the Company will now pay interest on the unpaid principal amount of the credit facility at a rate equal to SOFR plus a term SOFR adjustment in the amount of 0.10% per annum (which collectively shall be at least 1.00%) plus an applicable margin ranging from 2.50% to 3.00% determined based upon the Company’s excess availability (as defined in the Restated ABL Agreement). The Company will pay a quarterly commitment fee under the Restated ABL Agreement on undrawn revolving credit commitments in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability under the credit facility. The Company also entered into a $55 million Term Loan Facility (the “Revised Term Loan Facility”) on July 11, 2024. The Revised Term Loan Facility is secured primarily by the Company’s intellectual property and equity interests of the Company’s subsidiaries. The maturity date of the Revised Term Loan Facility is July 11, 2027. The Company will pay interest under the Revised Term Loan Facility at a rate equal to SOFR plus a term SOFR adjustment in the amount of 0.10% per annum (which collectively shall be at least 1.00%) plus an applicable margin ranging from 5.50% to 6.75% determined based upon the Company’s consolidated leverage ratio (as defined in the Revised Term Loan Facility). The Company will pay a commitment fee to the lenders under the Revised Term Loan Facility in the amount of 2.0% of the total aggregate commitment. The Company is required to repay the principal amount of the term loans under the Revised Term Loan Facility in quarterly installments on the last day of each fiscal quarter in an amount equal to $137,500. The principal amount of the Revised Term Loan Facility will amortize at a rate of 1.00% (or approximately $550,000) per year. The Company is required to pay a call premium of $3.2 million in conjunction with the repayment of the original Term Loan Facility. Total payments of $1.3 million are payable over the next twelve months, including the annual amortization of the Revised Term Loan Facility and the final monthly $0.8 million payment due under the Term Loan Facility prior to its termination, and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of June 29, 2024. The interest rate on current maturities of long-debt is variable at SOFR plus 8.75% and was 14.2% at June 29, 2024 and December 31, 2023. The remaining balance of $79.7 million under the Term Loan Facility as of June 29, 2024, is recorded as long-term in the accompanying Consolidated Condensed Balance Sheet. The Company incurred $1.7 million in incremental debt issuance costs during the six months ended June 29, 2024, allocated between the original and Restated ABL Revolving Credit Facilities and the original and Revised Term Loan Facilities. 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 ($1.8 million as of June 29, 2024) are recorded within Other Assets and those associated with the Term Loan Facility ($4.5 million as of June 29, 2024) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet. 27 Table of Contents Certain of the Company’s subsidiaries are borrowers under the Restated ABL Agreement and the Revised Term Loan Facility and the assets of such subsidiaries also secure the obligations under the Restated Agreement and the Term Loan Facility. Pursuant to the Restated ABL Agreement and the Revised Term Loan Facility, the Company is subject to a minimum fixed charge coverage ratio of 1.10 to 1.00. The Company is also required to maintain minimum excess availability of the greater of 10% of the borrowing base under the Restated Agreement, or $15.0 million. 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. 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. 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 Company currently is obligated to use the net proceeds from any sale of shares of common stock pursuant to the ATM Program to pay down the outstanding principal amount of, and any unpaid interest on, the ABL Revolving Credit Facility. However, any principal amount paid down on our ABL Revolving Credit Facility using the proceeds of the ATM Program will be, subject to compliance with the requirements and conditions set forth in the ABL Revolving Credit Facility, available to be reborrowed by the Company and used for, among other items, working capital and general corporate purposes. If the outstanding principal amount balance of the ABL Revolving Credit Facility has been reduced to zero, then the Company intends to use the net proceeds of the ATM Program for general corporate purposes. During the three and six months ended June 29, 2024, the Company did not sell any shares of our common stock under the ATM Program. As of June 29, 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 $4.4 million. Net debt was $174.0 million, compared with $161.2 million at the end of 2023. The Company expects its cash flow from operations 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. The Company may also utilize available capacity under the Restated ABL Agreement. Our ability to maintain sufficient liquidity and comply with financial debt covenants is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing or access our existing financing, and our operations in the future and could allow our debt holders to demand payment of all outstanding amounts. OFF BALANCE SHEET ARRANGEMENTS We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition. BACKLOG The Company’s backlog on June 29, 2024 was $633.4 million compared with $592.3 million on December 31, 2023 and $611.1 million on July 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 except as set forth below. 28 Table of Contents The Company amended its existing ABL Revolving Credit Facility on July 11, 2024 by entering into the Seventh Amended and Restated Credit Agreement. The Restated ABL Agreement increased the maximum aggregate amount that the Company can borrow pursuant to the revolving credit line thereunder to $200 million from $115 million, with borrowings subject to a borrowing base determined primarily by inventory, accounts receivable, machinery and equipment and real estate. The Restated ABL Agreement extended the scheduled maturity date for the credit facility from January 19, 2026 to July 11, 2027. Under the terms of the Restated ABL Agreement, the Company will now pay interest on the unpaid principal amount of the credit facility at a rate equal to SOFR plus a term SOFR adjustment in the amount of 0.10% per annum (which collectively shall be at least 1.00%) plus an applicable margin ranging from 2.50% to 3.00% determined based upon the Company’s excess availability (as defined in the Restated ABL Agreement). The Company will pay a quarterly commitment fee under the Restated ABL Agreement on undrawn revolving credit commitments in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability under the credit facility. The Company also entered into a $55 million Term Loan Facility on July 11, 2024. The Revised Term Loan Facility is secured primarily by the Company’s intellectual property and equity interests of the Company’s subsidiaries. The maturity date of the Revised Term Loan Facility is July 11, 2027. The Company will pay interest under the Revised Term Loan Facility at a rate equal to SOFR plus a term SOFR adjustment in the amount of 0.10% per annum (which collectively shall be at least 1.00%) plus an applicable margin ranging from 5.50% to 6.75% determined based upon the Company’s consolidated leverage ratio (as defined in the Revised Term Loan Facility). The Company will pay a commitment fee to the lenders under the Revised Term Loan Facility in the amount of 2.0% of the total aggregate commitment. The Company is required to repay the principal amount of the term loans under the Revised Term Loan Facility in quarterly installments on the last day of each fiscal quarter in an amount equal to $137,500. The principal amount of the Revised Term Loan Facility will amortize at a rate of 1.00% (or approximately $550,000) per year. The Company repaid in full all outstanding indebtedness under the Term Loan Credit Agreement dated as of January 19, 2023. The payoff amount of approximately $84.5 million consisted of a repayment of the principal amount of approximately $80.3 million, plus accrued but unpaid interest, fees and expenses, including a call premium of 4.00% (or approximately $3.2 million) which satisfied all of the Company’s indebtedness obligations thereunder. The Company funded the repayment of its obligations under the previous agreement with borrowings under the Restated Agreement and the Revised Term Loan Facility. Refer to Note 7 of the Notes to Consolidated Condensed Financial Statements included in this report for additional information regarding the amended and expanded credit agreements. MARKET RISK Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $178.4 million as of June 29, 2024. A change of 1% in interest rates of all variable rate debt would impact annual net loss by approximately $1.8 million, before income taxes. Although the majority of our sales, expenses, and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates related primarily to the Euro and the Canadian dollar. The Company believes that the impact of changes in foreign currency exchange rates in 2024 has not been significant. The future impacts of the Russia and Ukraine conflict and the COVID-19 pandemic and their residual effects, including economic uncertainty, inflationary environment, and disruption within the global supply chain, labor markets, and aerospace industry, on our business remain uncertain. As we cannot anticipate the ultimate duration or scope of the Russia-Ukraine war and the COVID-19 pandemic, the ultimate financial impact on our results cannot be reasonably estimated but could be material. CRITICAL ACCOUNTING POLICIES Refer to Note 2 of the Notes to Consolidated Condensed Financial Statements included in this report for the Company’s critical accounting policies with respect to revenue recognition. For a complete discussion of the Company’s other critical accounting policies, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2023. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 1 of the Notes to Consolidated Condensed Financial Statements included in this report. 29 Table of Contents 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. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk The disclosure under the heading “Market Risk” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above is incorporated by reference into Item 3.