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 excess availability 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. Challenges affecting the commercial aviation industry or key participants can adversely impact the demand for our products and services, the timing of orders, deliveries and related payments and other factors. We are monitoring the production and other challenges at The Boeing Company, including the recent strike, and we continue to align with them on production expectations and assess potential impacts to our business. The impacts from the strike to our revenues, earnings and cash flows for the three and nine months ended September 28, 2024 have not been significant. 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. In October 2024, a customer reported within the Aerospace segment declared bankruptcy. As a result, the Company recorded a full reserve of $0.8 million for outstanding receivables, a reserve of $0.9 million for inventory and $0.5 million for impairment of fixed assets. The reserves are non-cash in the current quarter and year to date, as the associated assets existed prior to 2024. In the third quarter of 2023, a 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 $3.6 million for inventory in the prior year periods. CONSOLIDATED RESULTS OF OPERATIONS Nine Months Ended Three Months Ended ($ in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Sales $ 586,886 $ 493,914 $ 203,698 $ 162,922 Gross Profit (sales less cost of products sold) $ 118,288 $ 80,823 $ 42,743 $ 20,618 Gross Margin 20.2 % 16.4 % 21.0 % 12.7 % Selling, General and Administrative Expenses $ 100,698 $ 95,276 $ 34,369 $ 35,097 SG&A Expenses as a Percentage of Sales 17.2 % 19.3 % 16.9 % 21.5 % Net Gain on Sale of Business $ — $ (3,427) $ — $ — Loss on Extinguishment of Debt $ 6,987 $ — $ 6,987 $ — Interest Expense, Net $ 17,832 $ 17,381 $ 6,217 $ 5,991 Effective Tax Rate (58.5) % (19.9) % (126.9) % 18.4 % Net Loss $ (13,383) $ (33,397) $ (11,738) $ (16,983) A discussion by segment can be found in “Segment Results of Operations” in this MD&A. 22 Table of Contents CONSOLIDATED THIRD QUARTER RESULTS Consolidated sales were up $40.8 million, or 25.0%. Aerospace sales increased $35.5 million and Test Systems sales increased $5.3 million. Consolidated cost of products sold in the third quarter of 2024 was $161.0 million, compared with $142.3 million in the prior-year period. The increase was primarily due to higher sales volume coupled with $2.5 million for resumed incentive programs, a $3.5 million atypical warranty reserve related to a new product launch that requires a field modification and a $3.2 million increase in non-bankruptcy related inventory reserves, offset by a decrease in non-cash reserves associated with customer bankruptcies previously discussed of $2.7 million. Selling, general and administrative (“SG&A”) expenses were $34.4 million in the third quarter of 2024 compared with $35.1 million in the prior-year period. The current year was affected by increased wages and benefits, including $2.0 million for resumed incentive programs, and an increase of $1.9 million in litigation-related legal expenses and reserve adjustments in 2024. The prior year was negatively impacted by a $7.5 million reserve for accounts receivable compared to a $1.3 million reserve for accounts receivable and fixed asset impairments in the current quarter associated with customer bankruptcies previously discussed. Third quarter 2024 expenses included a $3.2 million call premium on the previous term loan and the write-off of $3.8 million of associated deferred financing costs. The $7.0 million total has been reflected as Loss on Extinguishment of Debt. Tax expense in the quarter was $6.6 million, primarily due to a valuation allowance applied against the deferred tax asset associated with research and development costs that are required to be capitalized for tax purposes. Consolidated net loss was $11.7 million, or $0.34 per diluted share, compared with net loss of $17.0 million, or $0.51 per diluted share, in the prior year. Bookings were $189.2 million in the quarter resulting in a book-to-bill ratio of 0.93:1. For the trailing twelve months, bookings totaled $795.5 million and the book-to-bill ratio was 1.02:1. Backlog at the end of the quarter was $611.9 million. CONSOLIDATED YEAR-TO-DATE RESULTS Consolidated sales were up $93.0 million, or 18.8%. Aerospace sales increased $82.1 million and Test Systems sales increased $10.9 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 2024 was $468.6 million, compared with $413.1 million in the prior-year period. The increase was primarily due to higher volume, coupled with $6.2 million for resumed incentive programs, a $3.5 million warranty reserve previously mentioned and a $3.4 million increase in non-bankruptcy related inventory reserves, offset by a decrease in non-cash reserves associated with customer bankruptcies previously discussed of $2.7 million. SG&A expenses were $100.7 million in the 2024 compared with $95.3 million in the prior-year period. The current year was affected by increased wages and benefits, including $5.9 million related for resumed incentive programs, and an increase of $1.9 million in litigation-related legal expenses and reserve adjustments in 2024. The increase in SG&A expenses was offset by a decrease in non-cash reserves associated with customer bankruptcies previously discussed of $6.2 million. The expenses in the current year include the $7.0 million Loss on Extinguishment of Debt described above. 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. Tax expense in the current period was $4.9 million, compared with tax expense of $5.6 million in the prior year. Consolidated net loss was $13.4 million, or $0.38 per diluted share, compared with net loss of $33.4 million, or $1.02 per diluted share, in the prior year. SEGMENT RESULTS OF OPERATIONS Operating profit (loss), as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense, other corporate expenses and other non-operating sales and expenses. Cost of products sold and other operating 23 Table of Contents expenses are directly identifiable to the respective segment. Operating profit (loss) is reconciled to loss before income taxes in Note 15 of the Notes to Consolidated Condensed Financial Statements included in this report. AEROSPACE SEGMENT Nine Months Ended Three Months Ended ($ in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Sales $ 518,187 $ 436,217 $ 177,564 $ 142,116 Less Inter-segment Sales (52) (134) (10) (12) Total Aerospace Sales $ 518,135 $ 436,083 $ 177,554 $ 142,104 Operating Profit (Loss) $ 45,628 $ 10,342 $ 14,251 $ (7,464) Operating Margin 8.8 % 2.4 % 8.0 % (5.3) % Aerospace Sales by Market (In thousands) Commercial Transport $ 383,679 $ 308,016 $ 133,850 $ 101,724 Military Aircraft 63,545 44,335 21,685 16,687 General Aviation 56,643 60,656 18,077 16,193 Other 14,268 23,076 3,942 7,500 $ 518,135 $ 436,083 $ 177,554 $ 142,104 Aerospace Sales by Product Line (In thousands) Electrical Power & Motion $ 263,919 $ 185,712 $ 90,467 $ 64,312 Lighting & Safety 135,162 116,967 46,921 38,496 Avionics 83,716 83,011 29,151 22,347 Systems Certification 12,272 19,832 4,460 6,535 Structures 8,798 7,485 2,613 2,914 Other 14,268 23,076 3,942 7,500 $ 518,135 $ 436,083 $ 177,554 $ 142,104 (In thousands) September 28, 2024 December 31, 2023 Total Assets $ 508,514 $ 493,660 Backlog $ 543,638 $ 511,540 The backlog on September 28, 2024 and December 31, 2023 excludes backlog associated with the customer bankruptcy referred to previously. AEROSPACE THIRD QUARTER RESULTS Aerospace segment sales increased $35.5 million, or 24.9%, to $177.6 million. The improvement was driven by a 31.6% increase, or $32.1 million, in Commercial Transport sales. Sales to this market were $133.9 million, or 65.8% of consolidated sales in the quarter, compared with $101.7 million, or 62.5% of consolidated sales in the third quarter of 2023. Growth was primarily related to increased demand by airlines for inflight entertainment & connectivity (“IFEC”) products which are in the Electrical Power & Motion and Avionics product groups. Military Aircraft sales increased $5.0 million, or 30.0%, to $21.7 million, driven by progress on the FLRAA program. General Aviation sales increased $1.9 million, or 11.6%, to $18.1 million due to higher VVIP sales. Other sales decreased $3.6 million as the Company is winding down its non-core contract manufacturing arrangements. Aerospace segment operating profit of $14.3 million was up $21.7 million compared with operating loss of $7.5 million in the same period last year. Operating margin was 8.0% reflecting the leverage gained on higher volume and improving production efficiencies. The segment’s operating profit in the third quarter of 2024 was impacted by $3.5 million in warranty expense related to the previously-mentioned field modification, $5.1 million in litigation-related legal expenses and reserve adjustments related to an 24 Table of Contents ongoing patent dispute, $3.9 million in inventory reserves, and $3.2 million in compensation expense related to the resumption of the Company’s incentive programs, and a non-cash reserve associated with a customer bankruptcy of $2.2 million. Aerospace bookings were $173.6 million for a book-to-bill ratio of 0.98:1. Backlog for the Aerospace segment was $543.6 million at quarter end and excludes $9.3 million of backlog that was associated with the customer bankruptcy referred to previously. AEROSPACE YEAR-TO-DATE RESULTS Aerospace segment sales increased $82.1 million, or 18.8%, to $518.1 million. The improvement was driven by a 24.6% increase, or $75.7 million, in Commercial Transport sales. Sales to this market were $383.7 million, or 65.4% of consolidated sales in 2024, compared with $308.0 million, or 62.3% of consolidated sales in the same period of 2023. Higher airline spending drove increased demand. Military Aircraft sales increased $19.2 million, or 43.3%, to $63.5 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 $4.0 million, or 6.6%, to $56.6 million due to lower antenna and VVIP sales. Other sales decreased $8.8 million as the Company is winding down its non-core contract manufacturing arrangements. Aerospace segment operating profit of $45.6 million was up $35.3 million compared with operating profit of $10.3 million in the same period last year. Operating margin improvement reflects the leverage gained on higher volume and improving production efficiencies. Operating profit in 2024 was impacted by a $4.2 million increase in warranty expense, which was primarily related to the previously-mentioned field modification, an $8.6 million increase in litigation-related legal expenses and reserve adjustments related to an ongoing patent dispute, a $3.9 million increase in inventory reserves and $8.5 million in compensation expense related to the resumption of the Company’s incentive programs, offset by a decrease in non-cash reserves associated with customer bankruptcies of $8.9 million. TEST SYSTEMS SEGMENT Nine Months Ended Three Months Ended ($ in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Sales $ 68,790 $ 57,831 $ 26,183 $ 20,818 Less Inter-segment Sales (39) — (39) — Total Test Systems Sales $ 68,751 $ 57,831 $ 26,144 $ 20,818 Operating Loss $ (8,428) $ (8,521) $ (13) $ (1,781) Operating Margin (12.3) % (14.7) % — % (8.6) % All Test Systems sales are to the Government and Defense Market. (In thousands) September 28, 2024 December 31, 2023 Total Assets $ 127,839 $ 122,681 Backlog $ 68,227 $ 75,036 TEST SYSTEMS THIRD QUARTER RESULTS Test Systems segment sales were $26.1 million, up $5.3 million. The improvement was driven by the U.S. Marine Corps’ Handheld Radio Test Sets (“HHRTS”) and the U.S. Army’s TS-4549/T programs, which contributed $5.3 million and $1.2 million, respectively, in sales during the quarter. Test Systems segment operating loss was near break-even, compared with operating loss of $1.8 million in the third quarter of 2023. The improvement was the result of lower litigation-related legal expenses, partially offset by additional compensation expense from the resumption of the Company’s incentive programs. Test Systems continues to be negatively affected by mix and under absorption of fixed costs at current volume levels. Additional restructuring initiatives were implemented in the 2024 fourth quarter. In October 2024, the Company offered a voluntary separation program which is currently expected to provide annualized savings of approximately $2 million, beginning in the first quarter of 2025. The Company expects to record severance expense of approximately $1 million in the fourth quarter of 2024 related to this initiative. 25 Table of Contents Bookings for the Test Systems segment in the quarter were $15.6 million. The book-to-bill ratio was 0.60:1 for the quarter. Backlog for the Test Systems segment was $68.2 million at quarter end. TEST SYSTEMS YEAR-TO-DATE RESULTS Test Systems segment sales were $68.8 million, up $10.9 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 $8.5 million in 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 nine months of 2024 benefited from the margin realized on the HHRTS and TS-4549/T sales and a $6.7 million decrease in litigation-related expenses, however Test Systems’ operating performance 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, 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 provided by operating activities totaled $4.1 million for the first nine months of 2024, as compared with $22.3 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 resulting from the improvement in our operating results, driven by higher sales. Investing Activities: Cash used for investing activities was $5.2 million for the first nine months of 2024 compared with $2.6 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 $9 million to $11 million. Financing Activities: Cash used for financing activities totaled $3.9 million for the first nine months of 2024, as compared with cash provided by financing activities of $18.8 million during the same period in 2023. The Company made net borrowings under our credit facilities of $8.5 million in the first nine months of 2024 compared with net borrowings of $9.7 million in the same period in 2023. The Company amended the existing revolving credit facility on July 11, 2024 by entering into the Seventh 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 pursuant to the revolving credit line at $200 million, with borrowings subject to a borrowing base determined primarily by inventory, accounts receivable, machinery and equipment and real estate. The maturity date of borrowings under the ABL Revolving Credit Facility is July 11, 2027. Under the terms of the ABL Revolving Credit Facility, the Company pays 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 ABL Revolving Credit Facility). The Company is required to pay a quarterly commitment fee under the ABL Revolving Credit Facility 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. On September 28, 2024, there was $126.0 million outstanding on the ABL Revolving Credit Facility and there remained $70.9 million available, net of outstanding letters of credit. The Company also entered into a $55 million Term Loan Facility on July 11, 2024. The 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 Term Loan Facility is July 11, 2027. The Company pays interest under the 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 Term Loan Facility). The Company paid a commitment fee to the lenders under the Term Loan Facility in the amount of 2.0% 26 Table of Contents of the total aggregate commitment. The Company is required to repay the principal amount of the term loans under the Term Loan Facility in quarterly installments on the last day of each fiscal quarter in an amount equal to $0.1 million. The principal amount of the Term Loan Facility amortizes at a rate of 1.00% (or approximately $0.6 million) per year. The Term Loan Facility is subject to a call premium of 3.00% if called prior to January 12, 2026, and 0.00% thereafter until the maturity date on July 11, 2027. The Company has the option to prepay the outstanding amounts under the Term Loan Facility up to $12.0 million without penalty. Total payments of $0.6 million are payable over the next twelve months, including the annual amortization of the Term Loan Facility, and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of September 28, 2024. The interest rate on current maturities of long-debt was 8.2% at September 28, 2024 and 14.2% at December 31, 2023. The remaining balance of $54.5 million under the Term Loan Facility as of September 28, 2024, is recorded as long-term in the accompanying Consolidated Condensed Balance Sheet. The Company repaid in full all outstanding indebtedness under the original term loan facility 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 ABL Revolving Credit Facility and the Term Loan Facility. The Company incurred $5.9 million in incremental debt issuance costs during the nine months ended September 28, 2024, allocated between the original and revised 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 ($2.8 million as of September 28, 2024) are recorded within Other Assets and those associated with the Term Loan Facility ($2.0 million as of September 28, 2024) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet. In the three and nine months ended September 28, 2024, the Company recorded a loss on extinguishment of the debt of approximately $7.0 million below Income from Operations, which was comprised of the $3.2 million prepayment fee on the previous term loan and a write-off of $3.8 million of unamortized deferred financing costs. The Company also had a write-off of deferred financing costs of approximately $0.5 million related to the exiting ABL lender in Interest Expense within the Consolidated Condensed Statements of Operations. Certain of the Company’s subsidiaries are borrowers under the ABL Revolving Credit Facility and the 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 ABL Revolving Credit Facility and the 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 ABL Revolving Credit Facility, or $15.0 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. 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. During the three and nine months ended September 28, 2024, the Company did not sell any shares of our 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 27 Table of Contents 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. As of September 28, 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 $6.4 million. Net debt was $174.6 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 ABL Revolving Credit Facility. 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. Lufthansa Technik AG (“Lufthansa”) filed actions in Germany, the United Kingdom (“UK”) and France. These matters are more fully discussed in Note 14 of our Consolidated Financial Statements in Part 1, Item 1, Financial Information of this report, and Risk Factors in Part 2, Item 1a, Other Information of this report. In the matter before the UK High Court of Justice, Lufthansa is seeking damages significantly higher than the amount which has been accrued as a liability by the Company. While we believe we have valid defenses and are vigorously defending all such litigation and proceedings, based upon the outcome of the damages trial this may have a material impact on the Company’s liquidity and cash flows in future periods, but the extent of the impact, if any, will not be known until the judgment is released. The Company is performing scenario planning to accommodate the range of potential outcomes. 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 September 28, 2024 was $611.9 million compared with $586.6 million on December 31, 2023 and $598.6 million on September 30, 2023. The backlog in each of the periods presented excludes backlog associated with the customer bankruptcy referred to previously. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations and commitments have not changed materially from the disclosures in our 2023 Annual Report on Form 10-K except as set forth below. The Company amended its existing ABL Revolving Credit Facility on July 11, 2024 by entering into the Seventh Amended and Restated Credit Agreement. The ABL Revolving Credit Facility 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 ABL Revolving Credit Facility extended the scheduled maturity date for the credit facility from January 19, 2026 to July 11, 2027. Under the terms of the ABL Revolving Credit Facility, 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 ABL Revolving Credit Facility). The Company will pay a quarterly commitment fee under the ABL Revolving Credit Facility 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%) 28 Table of Contents 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 $0.6 million) 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 $181.0 million as of September 28, 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 the recently resolved Boeing strike 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, the COVID-19 pandemic or the ramifications of the recently resolved Boeing strike, 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. 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. 29 Table of Contents 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.