Astronics Corp 10-Q for FY2023 Q2
Astronics Corp (ATRO)
10-Q
2023-08-07
For: 2023-07-01
View Original
Added on
April 07, 2026
About this 10-Q
Astronics Corp filed this 10-Q on August 7, 2023, covering the quarter ended July 1, 2023 (FY2023 Q2).
Headline figures
Quarter ended July 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $174.45M
- up 35.1% from $129.13M a year earlier
- Net loss
- $12M
- compared with a net loss of $11.01M a year earlier
- Diluted EPS
- -$0.37
- compared with -$0.34 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended July 1, 2023
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the transition period from to
Commission File Number 0-7087
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | ||||
(Address of principal executive offices) | (Zip code) | ||||
(716 ) 805-1599
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer”, a “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | ☒ | Emerging growth company | ||||||||||||||
Non-accelerated filer | ☐ | Smaller Reporting Company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of July 31, 2023, 32,536,299 shares of common stock were outstanding consisting of 26,514,253 shares of common stock ($.01 par value) and 6,022,046 shares of Class B common stock ($.01 par value).
TABLE OF CONTENTS
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Item 1 | |||||||||||||||||||||||||||||||||||||||||
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Item 5 | |||||||||||||||||||||||||||||||||||||||||
Item 6 | |||||||||||||||||||||||||||||||||||||||||
2
Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
July 1, 2023 with Comparative Figures for December 31, 2022
(Unaudited)
(In thousands)
| July 1, 2023 | December 31, 2022 | ||||||||||
| Current Assets: | |||||||||||
Cash and Cash Equivalents | $ | $ | |||||||||
| Restricted Cash | |||||||||||
Accounts Receivable, Net of Allowance for Estimated Credit Losses | |||||||||||
Inventories | |||||||||||
Prepaid Expenses and Other Current Assets | |||||||||||
Total Current Assets | |||||||||||
| Property, Plant and Equipment, Net of Accumulated Depreciation | |||||||||||
| Operating Right-of-Use Assets | |||||||||||
| Other Assets | |||||||||||
| Intangible Assets, Net of Accumulated Amortization | |||||||||||
| Goodwill | |||||||||||
Total Assets | $ | $ | |||||||||
| Current Liabilities: | |||||||||||
Current Maturities of Long-term Debt | $ | $ | |||||||||
Accounts Payable | |||||||||||
| Current Operating Lease Liabilities | |||||||||||
Accrued Expenses and Other Current Liabilities | |||||||||||
Customer Advance Payments and Deferred Revenue | |||||||||||
Total Current Liabilities | |||||||||||
| Long-term Debt | |||||||||||
| Long-term Operating Lease Liabilities | |||||||||||
| Other Liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Shareholders’ Equity: | |||||||||||
Common Stock | |||||||||||
| Accumulated Other Comprehensive Loss | ( | ( | |||||||||
Other Shareholders’ Equity | |||||||||||
Total Shareholders’ Equity | |||||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | |||||||||
See notes to consolidated condensed financial statements.
3
ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and Six Months Ended July 1, 2023 With Comparative Figures for 2022
(Unaudited)
(In thousands, except per share data)
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of Products Sold | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Selling, General and Administrative Expenses | |||||||||||||||||||||||
| Income (Loss) from Operations | ( | ( | |||||||||||||||||||||
| Net Gain on Sale of Business | ( | ( | |||||||||||||||||||||
| Other (Income), Net of Other Expense | ( | ||||||||||||||||||||||
| Interest Expense, Net of Interest Income | |||||||||||||||||||||||
| Loss Before Income Taxes | ( | ( | ( | ( | |||||||||||||||||||
| Provision for Income Taxes | |||||||||||||||||||||||
| Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss Per Share: | |||||||||||||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See notes to consolidated condensed financial statements.
4
ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Loss
Three and Six Months Ended July 1, 2023 With Comparative Figures for 2022
(Unaudited)
(In thousands)
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||
Foreign Currency Translation Adjustments | ( | ( | |||||||||||||||||||||
Retirement Liability Adjustment – Net of Tax | |||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | ( | ( | |||||||||||||||||||||
| Comprehensive Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See notes to consolidated condensed financial statements.
5
ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Six Months Ended July 1, 2023 With Comparative Figures for 2022
See notes to consolidated condensed financial statements.
| Six Months Ended | |||||||||||
(Unaudited, In thousands) | July 1, 2023 | July 2, 2022 | |||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net Loss | $ | ( | $ | ( | |||||||
| Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities: | |||||||||||
| Depreciation and Amortization | |||||||||||
| Amortization of Deferred Financing Fees | |||||||||||
| Provisions for Non-Cash Losses on Inventory and Receivables | |||||||||||
| Equity-based Compensation Expense | |||||||||||
| Operating Lease Non-Cash Expense | |||||||||||
| Non-Cash Accrued 401K Contribution | |||||||||||
| Net Gain on Sale of Business, Before Taxes | ( | ( | |||||||||
| Non-Cash Deferred Liability Recovery | ( | ||||||||||
| Other | ( | ||||||||||
| Changes in Operating Assets and Liabilities Providing (Using) Cash: | |||||||||||
| Accounts Receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Accounts Payable | |||||||||||
| Accrued Expenses | ( | ||||||||||
| Other Current Assets and Liabilities | ( | ||||||||||
| Customer Advance Payments and Deferred Revenue | ( | ||||||||||
| Income Taxes | |||||||||||
| Operating Lease Liabilities | ( | ( | |||||||||
| Supplemental Retirement Plan and Other Liabilities | ( | ( | |||||||||
| Net Cash Used by Operating Activities | ( | ( | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Proceeds from Sale of Business and Assets | |||||||||||
| Capital Expenditures | ( | ( | |||||||||
| Net Cash (Used) Provided by Investing Activities | ( | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from Long-term Debt | |||||||||||
| Principal Payments on Long-term Debt | ( | ( | |||||||||
| Stock Award Activity | ( | ||||||||||
| Finance Lease Principal Payments | ( | ( | |||||||||
| Debt Acquisition Costs | ( | ( | |||||||||
| Net Cash Provided (Used) by Financing Activities | ( | ||||||||||
| Effect of Exchange Rates on Cash | ( | ||||||||||
| Decrease in Cash and Cash Equivalents and Restricted Cash | ( | ( | |||||||||
| Cash and Cash Equivalents and Restricted Cash at Beginning of Period | |||||||||||
| Cash and Cash Equivalents and Restricted Cash at End of Period | $ | $ | |||||||||
6
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders’ Equity
Three and Six Months Ended July 1, 2023 With Comparative Figures for 2022
(Unaudited)
(In thousands)
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||
| Beginning of Period | $ | $ | $ | $ | |||||||||||||||||||
| Net Issuance of Common Stock for Restricted Stock Units (“RSU’s”) | — | — | |||||||||||||||||||||
| Class B Stock Converted to Common Stock | — | — | |||||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Convertible Class B Stock | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Class B Stock Converted to Common Stock | ( | — | ( | — | |||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Additional Paid in Capital | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Net Exercise of Stock Options and Equity-based Compensation Expense | |||||||||||||||||||||||
| Tax Withholding Related to Issuance of RSU’s | ( | ( | — | ( | |||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Accumulated Comprehensive Loss | |||||||||||||||||||||||
| Beginning of Period | ( | ( | ( | ( | |||||||||||||||||||
| Foreign Currency Translation Adjustments | ( | ( | |||||||||||||||||||||
| Retirement Liability Adjustment – Net of Taxes | |||||||||||||||||||||||
| End of Period | ( | ( | ( | ( | |||||||||||||||||||
| Retained Earnings | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Net Loss | ( | ( | ( | ( | |||||||||||||||||||
| Reissuance of Treasury Shares for 401K Contribution | ( | ( | ( | ( | |||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Treasury Stock | |||||||||||||||||||||||
| Beginning of Period | ( | ( | ( | ( | |||||||||||||||||||
| Shares Issued to Fund 401K Obligation | |||||||||||||||||||||||
| End of Period | ( | ( | ( | ( | |||||||||||||||||||
| Total Shareholders’ Equity | $ | $ | $ | $ | |||||||||||||||||||
See notes to consolidated condensed financial statements.
7
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders’ Equity, Continued
Three and Six Months Ended July 1, 2023 With Comparative Figures for 2022
(Unaudited)
(In thousands)
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| (Shares) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Common Stock | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Net Issuance from Exercise of Stock Options | — | — | |||||||||||||||||||||
| Net Issuance of Common Stock for RSU’s | |||||||||||||||||||||||
| Class B Stock Converted to Common Stock | |||||||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Convertible Class B Stock | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Net Issuance from Exercise of Stock Options | — | — | — | ||||||||||||||||||||
| Class B Stock Converted to Common Stock | ( | ( | ( | ( | |||||||||||||||||||
| End of Period | |||||||||||||||||||||||
| Treasury Stock | |||||||||||||||||||||||
| Beginning of Period | |||||||||||||||||||||||
| Shares Issued to Fund 401K Obligation | ( | ( | ( | ( | |||||||||||||||||||
| End of Period | |||||||||||||||||||||||
See notes to consolidated condensed financial statements.
8
ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
July 1, 2023
(Unaudited)
1) Basis of Presentation
Operating Results
The results of operations for any interim period are not necessarily indicative of results for the full year. In addition, the COVID-19 pandemic and supply chain disruptions have increased the volatility we experience in our financial results in recent periods and this could continue in future interim and annual periods. Operating results for the six months ended July 1, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s 2022 annual report on Form 10-K.
Description of the Business
Astronics Corporation (“Astronics” or the “Company”) is a leading provider of advanced technologies to the global aerospace, defense and electronics industries. Our products and services include advanced, high-performance electrical power generation, distribution and motion systems, lighting and safety systems, avionics products, systems and certification, aircraft structures and automated test systems.
We have principal operations in the United States (“U.S.”), Canada, France and England, as well as engineering offices in Ukraine and India.
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 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $11.3 million. The Company recorded the gain and received the payment in the first quarter of 2022. In March 2023, the Company agreed with the final earnout calculation for the calendar 2022 earnout in the amount of $3.4 million. The Company recorded the gain and received the payment in the first quarter of 2023.
In April 2023, the Test Systems segment implemented restructuring initiatives to align the workforce and management structure with near-term revenue expectations and operational needs. The Company incurred $0.6 million in severance charges during the second quarter of 2023 recorded as selling, general and administrative expenses, of which $0.3 million remain unpaid as of July 1, 2023.
Impact of the COVID-19 Pandemic
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 continue to place labor and supply chain pressures on our business and we have been impacted by customer demand variability. Although we saw stable and growing backlog during 2022 and into 2023 in our aerospace business, supply chain-related disruptions are ongoing and continue to adversely challenge our markets. 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.
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
9
first quarter of 2022. The grant benefit was recognized ratably over the performance period as a reduction to cost of products sold in proportion to the compensation expense that the award was intended to defray. During the six months ended July 2, 2022, the Company recognized $6.0 million of the award.
| (In thousands) | July 1, 2023 | July 2, 2022 | ||||||||||||
| Cash and Cash Equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Total Cash and Restricted Cash Shown in Statements of Cash Flows | $ | $ | ||||||||||||
Research and Development Expenses
Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation. Research and development expenses amounted to $12.7 million and $12.6 million for three months ended and $25.4 million and $24.8 million for the six months ended July 1, 2023 and July 2, 2022, respectively. These costs are included in cost of products sold.
Valuation of Goodwill and Long-Lived Assets
The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Long-lived assets are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value.
As of July 1, 2023 and July 2, 2022, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed in the six month periods then ended.
Foreign Currency Translation
The aggregate foreign currency transaction gain or loss included in operations was insignificant for the three and six months ended July 1, 2023 and July 2, 2022.
10
Newly Adopted Accounting Pronouncement
We consider the applicability and impact of all ASUs. Recent ASUs were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.
2) Revenue
On July 1, 2023, we had $611.1 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $502.0 million of our remaining performance obligations as revenue over the next twelve months and the balance thereafter.
We recognized $10.6 million and $8.9 million during the three months ended and $19.5 million and $11.2 million during the six months ended July 1, 2023 and July 2, 2022, respectively, in revenues that were included in the contract liability balance at the beginning of the period.
The Company's contract assets and contract liabilities consist primarily of costs and profits in excess of billings and billings in excess of cost and profits, respectively. The following table presents the beginning and ending balances of contract assets and contract liabilities during the six months ended July 1, 2023:
| (In thousands) | Contract Assets | Contract Liabilities | ||||||||||||
Beginning Balance, January 1, 2023 | $ | $ | ||||||||||||
Ending Balance, July 1, 2023 | $ | $ | ||||||||||||
The Company recognizes an asset for certain, material costs to fulfill a contract if it is determined that the costs relate directly to a contract or an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. Such costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods to which the asset relates. Start-up costs are expensed as incurred. Capitalized fulfillment costs are included in Work in Progress within Inventories in the accompanying Consolidated Condensed Balance Sheets. Should future orders not materialize or it is determined the costs are no longer probable of recovery, the capitalized costs are written off. As of July 1, 2023 and December 31, 2022, the Company capitalized $3.4 million and $2.5 million of costs, respectively.
| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Aerospace Segment | ||||||||||||||||||||||||||
Commercial Transport | $ | $ | $ | $ | ||||||||||||||||||||||
Military Aircraft | ||||||||||||||||||||||||||
General Aviation | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
| Aerospace Total | ||||||||||||||||||||||||||
| Test Systems Segment | ||||||||||||||||||||||||||
Government & Defense | ||||||||||||||||||||||||||
| Test Systems Total | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
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| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Aerospace Segment | ||||||||||||||||||||||||||
Electrical Power & Motion | $ | $ | $ | $ | ||||||||||||||||||||||
Lighting & Safety | ||||||||||||||||||||||||||
Avionics | ||||||||||||||||||||||||||
Systems Certification | ||||||||||||||||||||||||||
Structures | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
| Aerospace Total | ||||||||||||||||||||||||||
| Test Systems | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
3) Inventories
(In thousands) | July 1, 2023 | December 31, 2022 | |||||||||
Finished Goods | $ | $ | |||||||||
Work in Progress | |||||||||||
Raw Material | |||||||||||
| $ | $ | ||||||||||
4) Property, Plant and Equipment
(In thousands) | July 1, 2023 | December 31, 2022 | |||||||||
Land | $ | $ | |||||||||
Buildings and Improvements | |||||||||||
Machinery and Equipment | |||||||||||
Construction in Progress | |||||||||||
Less Accumulated Depreciation | |||||||||||
| $ | $ | ||||||||||
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5) Intangible Assets
| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
| (In thousands) | Weighted Average Life | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||||
| Patents | $ | $ | $ | $ | |||||||||||||||||||||||||
| Non-compete Agreement | |||||||||||||||||||||||||||||
| Trade Names | |||||||||||||||||||||||||||||
| Completed and Unpatented Technology | |||||||||||||||||||||||||||||
| Customer Relationships | |||||||||||||||||||||||||||||
| Total Intangible Assets | $ | $ | $ | $ | |||||||||||||||||||||||||
| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||
(In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
Amortization Expense | $ | $ | $ | $ | ||||||||||||||||||||||
Amortization expense for acquired intangible assets expected for 2023 and for each of the next five years is summarized as follows:
(In thousands) | |||||
| 2023 | $ | ||||
| 2024 | $ | ||||
| 2025 | $ | ||||
| 2026 | $ | ||||
| 2027 | $ | ||||
| 2028 | $ | ||||
6) Goodwill
| (In thousands) | December 31, 2022 | Foreign Currency Translation | July 1, 2023 | ||||||||||||||||||||||||||
| Aerospace | $ | $ | $ | ||||||||||||||||||||||||||
| Test Systems | |||||||||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||||||||
7) Long-term Debt and Notes Payable
The Company's long-term debt at December 31, 2022 consisted of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”). The maturity date of the loans under the Agreement was November 30, 2023. At December 31, 2022, there was $164.0 million outstanding on the Agreement and there remained $6.0 million available.
The Company amended the Agreement on January 19, 2023 by entering into the Sixth Amended and Restated Credit Agreement (the “ABL Revolving Credit Facility”). The ABL Revolving Credit Facility set the maximum aggregate amount that the Company can borrow under the revolving credit line at $115 million, with borrowings subject to a borrowing base determined primarily by certain domestic inventory and accounts receivable. The maturity date of borrowings under the ABL Revolving Credit Facility is January 19, 2026. Under the terms of the ABL Revolving Credit Facility, the Company pays interest on the unpaid principal amount of the facility at a rate equal to SOFR (which is required to be at least 1.00 %) plus 2.25 % to 2.75 %. The Company 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.
13
On June 28, 2023, the Company amended the ABL Revolving Credit Facility, temporarily increasing the maximum aggregate amount that the Company can borrow under the revolving credit line by $5 million from $115 million to $120 million until October 31, 2023, at which time the limit returns to $115 million. Under the provisions of the ABL Revolving Credit Facility, the Company has a cash dominion arrangement with the lead banking institution whereby eligible daily cash receipts are contractually utilized to pay down outstanding borrowings. Eligible cash receipts that have not yet been applied to outstanding debt balance are classified as restricted cash in the accompanying consolidated balance sheets. The Company is also required to maintain minimum liquidity of $20 million through the date of delivery of the compliance certificate for the quarter ended March 31, 2024, and $10 million thereafter. At July 1, 2023, there was $93.7 million outstanding on the ABL Revolving Credit Facility and there remained $26.3 million available.
The Company also entered into a $90 million asset-based credit agreement (the “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, increasing to 0.542 % per month for the period July 1, 2023 through September 1, 2023 then increasing to 0.833 % thereafter. Total scheduled principal payments of approximately $9.0 million are payable over the next twelve months and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of July 1, 2023. The weighted-average interest rate on current maturities of long-debt is 13.1 %. The remaining balance of $80.3 million at July 1, 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. 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. 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 July 1, 2023.
The Company incurred $9.0 million in incremental debt issuance costs related to the new facilities, allocated between the ABL Revolving Credit Facility and the Term Loan Facility. All costs are amortized to interest expense over the term of the respective agreement. Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($2.4 million as of July 1, 2023) are recorded within other assets and those associated with the Term Loan Facility ($5.3 million as of July 1, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.
Certain of the Company’s subsidiaries are borrowers or guarantors under the ABL Revolving Credit Facility and the Term Loan Facility.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the credit facilities automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, cross default under other material debt agreements, and a going concern qualification for any reason other than loan maturity date give the agent the option to declare all such amounts immediately due and payable.
The Company expects its sales growth and reductions in working capital will provide sufficient cash flows to fund operations. However, the Company may also evaluate various actions and alternatives to enhance its profitability and cash generation from operating activities, which could include manufacturing efficiency initiatives, cost-reduction measures, working with vendors and suppliers to reduce lead times and expedite shipment of critical components, and working with customers or other institutions to expedite receivable collections.
14
8) Product Warranties
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from to sixty months . The Company determines warranty reserves needed by product line based on experience and current facts and circumstances.
| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Balance at Beginning of Period | $ | $ | $ | $ | ||||||||||||||||||||||
| Warranties Issued | ||||||||||||||||||||||||||
| Warranties Settled | ( | ( | ( | ( | ||||||||||||||||||||||
| Reassessed Warranty Exposure | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance at End of Period | $ | $ | $ | $ | ||||||||||||||||||||||
9) Leases
10) Income Taxes
The effective tax rates were approximately (207.5 )% and (6.4 )% for the three months ended and (133.6 )% and (165.0 )% for the six months ended July 1, 2023 and July 2, 2022, respectively. Beginning with the 2022 tax year, certain research and development costs are required to be capitalized and amortized over sixty months for income tax purposes. The tax rate in the 2023 period was impacted by a valuation allowance applied against the deferred tax asset associated with the research and development costs that are expected to be capitalized and was partially offset by the removal of valuation allowances related to net operating losses and certain timing differences that are expected to reverse during 2023. In addition, the tax rate in the 2023 period was also impacted by state income taxes and the federal research and development credit expected for 2023.
The Company records a valuation allowance against the deferred tax assets if and to the extent it is more likely than not that the Company will not recover the deferred tax assets. In evaluating the need for a valuation allowance, the Company weighs all relevant positive and negative evidence, and considers among other factors, historical financial performance, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, and tax planning strategies. Losses in recent periods and cumulative pre-tax losses in the three year period ending with the current year, combined with the significant uncertainty brought about by the COVID-19 pandemic, is collectively considered significant negative evidence under ASC 740 when assessing whether an entity can use projected income as a basis for concluding that deferred tax assets are realizable on a more-likely than not basis. For purposes of assessing the recoverability of deferred tax assets, the Company determined that it could not include future projected earnings in the analysis due to recent history of losses and therefore had insufficient objective positive evidence that the Company will generate sufficient future taxable income to overcome the negative evidence of cumulative losses. Accordingly, during the years ended December 31, 2022 and 2021, the Company determined that a portion of its deferred tax assets were not expected to be realizable in the future and the Company continues to maintain the valuation allowance against its deferred tax assets as of July 1, 2023.
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11) Earnings Per Share
| Six Months Ended | Three Months Ended | |||||||||||||||||||||||||
(In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Weighted Average Shares - Basic | ||||||||||||||||||||||||||
| Net Effect of Dilutive Stock Options | ||||||||||||||||||||||||||
| Weighted Average Shares - Diluted | ||||||||||||||||||||||||||
Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation of diluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares covered by out-of-the-money stock options was approximately 594,000 shares as of July 1, 2023 and 1,338,000 shares as of July 2, 2022. Further, due to our net loss in the three and six month periods ended July 1, 2023 and July 2, 2022, the assumed exercise of stock compensation had an antidilutive effect and therefore was excluded from the computation of diluted loss per share.
Currently, the Company expects to fund the 401K contribution for the quarter ended July 1, 2023 with treasury stock in lieu of cash. The earnings per share calculation for the quarter ended July 1, 2023 is inclusive of the approximately 0.1 million in shares outstanding for the equivalent shares needed to fulfill the obligation using the closing share price as of July 1, 2023. Actual shares issued may differ based on the sale price on the settlement date.
12) Shareholders' Equity
Share Buyback and Reissuance
The Company’s Board of Directors from time to time authorizes the repurchase of common stock, which allows the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. Common shares repurchased by the Company are recorded at cost as treasury shares and result in a reduction of equity. Under its current credit agreements, the Company is currently restricted from further stock repurchases.
When treasury shares are reissued, the Company determines the cost using an average cost method. The difference between the average cost of the treasury shares and reissuance price is included in Retained earnings. During the six month periods ended July 1, 2023 and July 2, 2022, the Company reissued 164,000 and 421,000 treasury shares, respectively, associated with the funding of employer 401K contributions and recorded the difference between the average cost and the reissuance price, $2.2 million and $6.8 million, respectively, as a reduction to Retained earnings.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
| (In thousands) | July 1, 2023 | December 31, 2022 | |||||||||
| Foreign Currency Translation Adjustments | $ | ( | $ | ( | |||||||
| Retirement Liability Adjustment – Before Tax | ( | ( | |||||||||
| Tax Benefit of Retirement Liability Adjustment | |||||||||||
| Retirement Liability Adjustment – After Tax | ( | ( | |||||||||
| Accumulated Other Comprehensive Loss | $ | ( | $ | ( | |||||||
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| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Retirement Liability Adjustments: | |||||||||||||||||||||||
| Reclassifications to Selling, General and Administrative Expense: | |||||||||||||||||||||||
Amortization of Prior Service Cost | |||||||||||||||||||||||
Amortization of Net Actuarial Losses | |||||||||||||||||||||||
| Retirement Liability Adjustment | |||||||||||||||||||||||
| Other Comprehensive Income (Loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
13) Supplemental Retirement Plan and Related Post Retirement Benefits
The Company has two non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain current and retired executive officers. The following table sets forth information regarding the net periodic pension cost for the plans.
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Service Cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest Cost | |||||||||||||||||||||||
| Amortization of Prior Service Cost | |||||||||||||||||||||||
| Amortization of Net Actuarial Losses | |||||||||||||||||||||||
| Net Periodic Cost | $ | $ | $ | $ | |||||||||||||||||||
Participants in the SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The Company also has a defined benefit plan related to its subsidiary in France. The net periodic cost for both plans for the three and six months ended July 1, 2023 and July 2, 2022 is immaterial.
The service cost component of net periodic benefit costs above is recorded in Selling, General and Administrative Expenses within the Consolidated Condensed Statements of Operations, while the remaining components are recorded in Other Income, Net of Other Expense.
14) Sales to Major Customers
15) Legal Proceedings
Lufthansa
One of the Company’s subsidiaries is involved in numerous patent infringement actions brought by Lufthansa Technik AG (“Lufthansa”) in Germany, the United Kingdom (“UK”) and France. The Company is vigorously defending all such litigation and proceedings. Additional information about these legal proceedings can be found in Note 19 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. On July 12, 2023, the Higher Regional Court of Karlsruhe in Germany (the “German Court”) reduced the Company’s liability for direct damages. Additionally, accrued interest on direct damages had previously been assessed at 5 %. As part of the July 12, 2023 ruling, the German Court reduced that interest rate to 4 %. Accordingly, the Company can reclaim overpaid damages and interest from Lufthansa in the amount of approximately $1.2 million. We will record this gain in the third quarter of 2023 as an offset to Selling, General and Administrative Expenses.
The reserve for the German indirect claim and interest was approximately $17.8 million at December 31, 2022 and $16.8 million at July 1, 2023. Accrued interest on the indirect damages reserve was estimated using the same interest rate as the
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direct damages. Given the reduction in the direct damages interest rate as discussed above, we recorded a reduction to the indirect damages reserve of $1.3 million in the quarter ended July 1, 2023, which was recorded as an offset to Selling, General and Administrative Expenses. The Company currently believes it is unlikely that the damages in the indirect proceedings and related interest will be paid within the next twelve months. Therefore, the liability related to these matters is classified within Other Liabilities (non-current) in the Consolidated Condensed Balance Sheets at July 1, 2023 and December 31, 2022.
In the matter before the UK High Court of Justice, as previously disclosed, Lufthansa has pleaded its case for monetary compensation, which will be determined at a separate trial, which is now set to take place in October 2024. Lufthansa has elected to pursue a claim in relation to the defendants’ profits from their infringing activities. We have estimated damages and accrued interest for AES and its indemnified customers of approximately $7.3 million and $7.0 million at July 1, 2023 and December 31, 2022, respectively. This variance is due to currency fluctuation and interest accrued. Interest will accrue until final payment to Lufthansa. This amount is subject to change as additional data is received and evaluated, and as additional information regarding the nature of its claim is put forward by Lufthansa in advance of the damages trial. The damages trial is scheduled to be heard starting in October 2024, with payment likely due in late 2024 or early 2025. The Company currently believes it is unlikely that the appeals process will be completed or the damages and related interest will be paid within the next twelve months. Therefore, the liability related to these matters is classified within Other Liabilities (non-current) in the Consolidated Condensed Balance Sheets at July 1, 2023 and December 31, 2022.
As previously disclosed, in 2020, Lufthansa filed a patent infringement action on December 29, 2017 before the Paris Court of First Instance. The Court held the French patent invalid for all asserted claims. There can consequently be no finding of infringement on first instance. Lufthansa has appealed this judgment. The appeal hearing took place on December 8, 2022, and on February 24, 2023, the Paris Court of Appeal upheld the first instance judgment in favor of AES. On March 20, 2023, Lufthansa lodged an appeal before the French Supreme Court. The merits of this French Supreme Court challenge remain to be filed and assessed. As loss exposure is not probable and estimable at this time, the Company has not recorded any liability with respect to the French matter as of July 1, 2023 or December 31, 2022.
There were no other significant developments in any of these matters during the six months ended July 1, 2023.
A liability for reimbursement of Lufthansa’s legal expenses associated with the UK matter was approximately $0.7 million at December 31, 2022 and $0.8 million at July 1, 2023 which is expected to be paid within the next twelve months and, as such, is classified in Accrued Expenses and Other Current Liabilities in the accompanying Consolidated Condensed Balance Sheet as of July 1, 2023.
Other
On March 23, 2020, Teradyne, Inc. filed a complaint against the Company and its subsidiary, Astronics Test Systems (“ATS”) (together, “the Defendants”) in the United States District Court for the Central District of California alleging patent infringement of its digital instruments providing over-voltage detection and protection and copyright infringement of test equipment software, specifically emulating software using Teradyne’s declarations, and certain other related claims. The Defendants moved to dismiss certain claims from the case. On November 6, 2020, the Court dismissed the Company from the case, and also dismissed a number of claims, though the patent and copyright infringement claims remained. The case proceeded to discovery. In addition, on December 21, 2020, ATS filed a petition for inter partes review (“IPR”) with the US Patent Trial and Appeal Board (“PTAB”), seeking to invalidate the subject patent, and on July 21, 2021, the PTAB instituted IPR. ATS requested and, on August 26, 2021, the District Court granted, a stay of litigation during the IPR proceeding. Oral arguments on the IPR were held on April 21, 2022. The PTAB issued its decision on July 20, 2022, in which it invalidated all of Teradyne’s patent claims. Teradyne will not appeal the decision. The stay of litigation was lifted with respect to the remaining claims in August 2022. Discovery has been completed. On June 5, 2023, the parties attended a court-ordered mediation, but did not reach a settlement. After the mediation, Teradyne dropped its remaining state law claims, leaving only its copyright claim. The parties are currently engaged in summary judgment briefing with a hearing on the motions scheduled for September 14, 2023. If the case is not disposed of on summary judgment, a trial will be held. Trial is currently scheduled for December 5, 2023. No
Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our financial condition or results of operations.
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16) Segment Information
Below are the sales and operating profit (loss) by segment for the three and six months ended July 1, 2023 and July 2, 2022 and a reconciliation of segment operating profit (loss) to loss before income taxes. Operating profit (loss) is net sales less cost of products sold and other operating expenses excluding interest and corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment.
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| (In thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Aerospace | $ | $ | $ | $ | |||||||||||||||||||
| Less Inter-segment Sales | ( | ( | ( | ( | |||||||||||||||||||
| Total Aerospace Sales | |||||||||||||||||||||||
| Test Systems | |||||||||||||||||||||||
| Less Inter-segment Sales | ( | ( | |||||||||||||||||||||
| Total Test Systems Sales | |||||||||||||||||||||||
| Total Consolidated Sales | $ | $ | $ | $ | |||||||||||||||||||
| Segment Measure of Operating Profit (Loss) and Margins | |||||||||||||||||||||||
Aerospace | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| % | ( | % | % | ( | % | ||||||||||||||||||
Test Systems | ( | ( | ( | ( | |||||||||||||||||||
| ( | % | ( | % | ( | % | ( | % | ||||||||||||||||
| Total Segment Measure of Operating Profit (Loss) | ( | ( | |||||||||||||||||||||
| % | ( | % | % | ( | % | ||||||||||||||||||
| Deductions from Segment Measure of Operating Profit (Loss): | |||||||||||||||||||||||
| Net Gain on Sale of Business | ( | ( | |||||||||||||||||||||
Interest Expense, Net of Interest Income | |||||||||||||||||||||||
Corporate Expenses and Other | |||||||||||||||||||||||
| Loss Before Income Taxes | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
During the six months ended July 1, 2023, $5.8 million was recognized in sales related to the reversal of a deferred revenue liability assumed with an acquisition and associated with a customer program within our Test Systems Segment which is no longer expected to occur, which also benefits operating loss for the period. Absent that benefit, Test Systems’ operating loss was $12.6 million. Corporate expenses and other for the six months ended July 1, 2023 includes income of $1.8 million associated with the reversal of a liability related to an equity investment, as we will no longer be required to make the associated payment. This amount is included in Other Income, Net of Other Expense in the Consolidated Condensed Statement of Operations. In the six months ended July 2, 2022, $6.0 million of the AMJP grant was recognized as an offset to the cost of products sold in the Aerospace segment.
Total Assets:
(In thousands) | July 1, 2023 | December 31, 2022 | ||||||||||||
Aerospace | $ | $ | ||||||||||||
Test Systems | ||||||||||||||
Corporate | ||||||||||||||
Total Assets | $ | $ | ||||||||||||
17) Fair Value
19
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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, 2022.)
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 ongoing impacts of the COVID-19 pandemic and the timing and extent of recovery (as discussed more fully below), supply chain and labor market pressures, the rate at which new aircraft are produced, government funding and timing of awards of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy. Once one of our products is designed into a new aircraft, the spare parts business 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 of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period. Test Systems segment customers include the USDOD, prime contractors to the USDOD, mass transit operators and prime contractors to mass transit operators.
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.
Challenges which continue to face us include the ongoing COVID-19 pandemic and its continued impact on the aerospace industry, supply chain pressures including material availability and cost increases, labor availability and cost, inflationary pressures, and improving shareholder value through increasing profitability. Increasing profitability is dependent on many things, primarily sales growth, both acquired and organic, and the Company’s ability to pass cost increases along to customers and control operating expenses and to identify means of creating improved productivity. 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. 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. We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.
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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. 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 during 2023.
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 six months ended July 2, 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. 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 2022, the Company agreed with the earnout calculation for the calendar 2021 earnout in the amount of $11.3 million. The Company recorded the gain and received the payment in the first quarter of 2022. In March 2023, the Company agreed with the final earnout calculation for the calendar 2022 earnout in the amount of $3.4 million. The Company recorded the gain and received the payment in the first quarter of 2023.
CONSOLIDATED RESULTS OF OPERATIONS
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Sales | $ | 330,992 | $ | 245,303 | $ | 174,454 | $ | 129,127 | |||||||||||||||
| Gross Profit (sales less cost of products sold) | $ | 60,205 | $ | 35,642 | $ | 32,695 | $ | 15,709 | |||||||||||||||
| Gross Margin | 18.2 | % | 14.5 | % | 18.7 | % | 12.2 | % | |||||||||||||||
| Selling, General and Administrative Expenses | $ | 60,179 | $ | 48,205 | $ | 30,299 | $ | 24,105 | |||||||||||||||
| SG&A Expenses as a Percentage of Sales | 18.2 | % | 19.7 | % | 17.4 | % | 18.7 | % | |||||||||||||||
| Net Gain on Sale of Business | $ | (3,427) | $ | (11,284) | $ | — | $ | — | |||||||||||||||
| Interest Expense, Net | $ | 11,390 | $ | 3,293 | $ | 5,920 | $ | 1,662 | |||||||||||||||
| Effective Tax Rate | (133.6) | % | (165.0) | % | (207.5) | % | (6.4) | % | |||||||||||||||
| Net Loss | $ | (16,414) | $ | (14,111) | $ | (11,999) | $ | (11,010) | |||||||||||||||
A discussion by segment can be found at “Segment Results of Operations” in this MD&A.
CONSOLIDATED SECOND QUARTER RESULTS
Consolidated sales were up $45.3 million, or 35.1%, from the second quarter of 2022, and up 11.4% sequentially. Aerospace sales increased $49.1 million over the comparator quarter, or 44.9%, driven by higher sales to the commercial transport market. Test Systems sales decreased $3.8 million on lower defense revenue.
22
Consolidated cost of products sold in the second quarter of 2023 was $141.8 million, compared with $113.4 million in the prior-year period. The increase was primarily due to higher volume and higher material and labor costs.
Selling, general and administrative (“SG&A”) expenses were $30.3 million in the second quarter of 2023 compared with $24.1 million in the prior-year period. The current period was impacted by increased wages and benefits and litigation-related legal expenses of $4.9 million partially offset by a reduction in legal reserves of $1.3 million.
Interest expense was $5.9 million in the current period, compared with $1.7 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities. Interest expense includes approximately $0.7 million of non-cash amortization of capitalized financing-related fees.
Income tax expense was $8.1 million in the current period, primarily due to a valuation allowance applied against the deferred tax asset associated with research and development costs that are required to be capitalized for tax purposes.
Consolidated net loss was $12.0 million, or $0.37 per diluted share, compared with net loss of $11.0 million, or $0.34 per diluted share, in the prior year.
Bookings were $207.1 million in the quarter resulting in a book-to-bill ratio of 1.19:1. The quarter closed with a record backlog of $611.1 million.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated sales were up $85.7 million, or 34.9%, from the first half of 2022. Aerospace sales increased $83.3 million, or 39.5%, driven by higher sales to the commercial transport market. Test Systems sales increased $2.4 million, due primarily to the reversal of a $5.8 million deferred revenue liability assumed with an acquisition and associated with a customer program which is no longer expected to occur, partially offset by lower defense revenue.
Consolidated cost of products sold in the first half of 2023 was $270.8 million, compared with $209.7 million in the prior-year period. The increase was primarily due to higher volume and higher material and labor costs. The prior-year period benefited the AMJP Program grant which provided a $6.0 million offset to cost of products sold.
SG&A expenses were $60.2 million in the first half of 2023 compared with $48.2 million in the prior-year period primarily due to increased wages and benefits and an increase of $7.3 million in litigation-related legal expenses partially offset by a reduction of legal reserves of $1.3 million.
In the current year period, the Company recognized a final earnout of $3.4 million for the 2019 sale of its semiconductor test business, compared with $11.3 million recognized in the prior-year period. Other income in the first half of 2023 included $1.8 million associated with the reversal of a liability related to an equity investment.
Interest expense was $11.4 million in the current period, compared with $3.3 million in the prior-year period, primarily driven by higher interest rates on the Company’s new credit facilities. Interest expense includes approximately $1.4 million of non-cash amortization of capitalized financing-related fees.
Income tax expense was $9.4 million in the current period, primarily due to a valuation allowance applied against the deferred tax asset associated with research and development costs that are required to be capitalized for tax purposes.
Consolidated net loss was $16.4 million, or $0.50 per diluted share, compared with net loss of $14.1 million, or $0.44 per diluted share, in the prior year.
COVID-19 Impacts on Our Business
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The spread of the COVID-19 pandemic disrupted businesses on a global scale, led to significant volatility in financial markets and affected the aviation and industrial industries. The impacts of the pandemic have placed labor and supply chain pressures on our business and we have been impacted by customer demand variability. Although we saw stable and growing backlog throughout 2022 and into 2023 in our aerospace business, disruptions are ongoing and continue to adversely challenge our commercial transport market. While we remain bullish about the aerospace business, we believe the recovery to pre-pandemic activity, particularly in the widebody market, will take longer than originally anticipated at the outset of the pandemic. As economic activity continues to recover, we will continue to monitor the situation, assessing further possible implications on our operations, supply chain, liquidity, cash flow and customer orders.
23
SEGMENT RESULTS OF OPERATIONS
Operating profit (loss), as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense, other corporate expenses and other non-operating sales and expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. Operating profit (loss) is reconciled to loss before income taxes in Note 16 of the Notes to Consolidated Condensed Financial Statements included in this report.
AEROSPACE SEGMENT
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Sales | $ | 294,101 | $ | 210,694 | $ | 158,386 | $ | 109,300 | |||||||||||||||
Less Inter-segment Sales | (122) | (10) | (4) | (10) | |||||||||||||||||||
Total Aerospace Sales | $ | 293,979 | $ | 210,684 | $ | 158,382 | $ | 109,290 | |||||||||||||||
| Operating Profit (Loss) | $ | 17,806 | $ | (226) | $ | 13,719 | $ | (3,276) | |||||||||||||||
| Operating Margin | 6.1 | % | (0.1) | % | 8.7 | % | (3.0) | % | |||||||||||||||
| Aerospace Sales by Market | |||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Commercial Transport | $ | 206,292 | $ | 133,332 | $ | 112,079 | $ | 69,243 | |||||||||||||||
| Military Aircraft | 27,648 | 28,873 | 13,584 | 13,897 | |||||||||||||||||||
| General Aviation | 44,463 | 33,997 | 25,015 | 18,130 | |||||||||||||||||||
| Other | 15,576 | 14,482 | 7,704 | 8,020 | |||||||||||||||||||
| $ | 293,979 | $ | 210,684 | $ | 158,382 | $ | 109,290 | ||||||||||||||||
| Aerospace Sales by Product Line | |||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Electrical Power & Motion | $ | 121,400 | $ | 86,602 | $ | 67,946 | $ | 42,135 | |||||||||||||||
| Lighting & Safety | 78,471 | 60,599 | 41,918 | 31,388 | |||||||||||||||||||
| Avionics | 60,664 | 43,281 | 30,923 | 24,406 | |||||||||||||||||||
| Systems Certification | 13,297 | 2,671 | 7,620 | 1,669 | |||||||||||||||||||
| Structures | 4,571 | 3,049 | 2,271 | 1,672 | |||||||||||||||||||
| Other | 15,576 | 14,482 | 7,704 | 8,020 | |||||||||||||||||||
| $ | 293,979 | $ | 210,684 | $ | 158,382 | $ | 109,290 | ||||||||||||||||
| (In thousands) | July 1, 2023 | December 31, 2022 | |||||||||
Total Assets | $ | 520,564 | $ | 481,416 | |||||||
Backlog | $ | 522,577 | $ | 477,660 | |||||||
AEROSPACE SECOND QUARTER RESULTS
Aerospace segment sales increased $49.1 million, or 44.9%, to $158.4 million, and up 16.8% sequentially. The increase was driven by a 61.9% increase, or $42.8 million, in commercial transport sales. Sales to this market were $112.1 million, or 64.3% of consolidated sales in the quarter, compared with $69.2 million, or 53.6% of consolidated sales in the second quarter of 2022. Improving global airline travel driving higher fleet utilization and increased production rates resulted in increased demand.
General Aviation sales increased $6.9 million, or 38.0%, to $25.0 million.
Aerospace segment operating profit improved to $13.7 million, or 8.7% of sales, compared with operating loss of $3.3 million in the same period last year. The improved operating profit was driven by higher volume primarily in the commercial transport market.
Aerospace bookings in the second quarter were $188.8 million, for a book-to-bill ratio of 1.19:1. Backlog for the Aerospace segment was a record $522.6 million at quarter end.
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AEROSPACE YEAR-TO-DATE RESULTS
Aerospace segment sales increased $83.3 million, or 39.5%, to $294.0 million driven by a 54.7%, or $73.0 million increase in commercial transport sales. Sales to this market were $206.3 million, or 62.3% of consolidated sales in the first half of 2023, compared with $133.3 million, or 54.3% of consolidated sales in the same period of 2022. Improving global airline travel driving higher fleet utilization and increased production rates resulted in increased demand.
General Aviation sales increased $10.5 million, or 30.8%, to $44.5 million.
Aerospace segment operating profit improved to $17.8 million compared with operating loss of $0.2 million in the same period last year, which included an AMJP grant offset to cost of sales of $6.0 million. Absent the impact of the AMJP grant on the first half of last year, aerospace operating profit improved $24.0 million on a sales increase of $83.3 million. The improvement in operating profit was driven by higher volume primarily in the commercial transport market, partially offset by the effects of material and labor inflation.
TEST SYSTEMS SEGMENT
| Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Sales | $ | 37,013 | $ | 34,638 | $ | 16,072 | $ | 19,840 | |||||||||||||||
| Less Inter-segment Sales | — | (19) | — | (3) | |||||||||||||||||||
| Total Test Systems Sales | $ | 37,013 | $ | 34,619 | $ | 16,072 | $ | 19,837 | |||||||||||||||
| Operating Loss | $ | (6,740) | $ | (1,813) | $ | (6,143) | $ | (26) | |||||||||||||||
| Operating Margin | (18.2) | % | (5.2) | % | (38.2) | % | (0.1) | % | |||||||||||||||
All Test Systems sales are to the Government and Defense Market.
(In thousands) | July 1, 2023 | December 31, 2022 | |||||||||
Total Assets | $ | 119,440 | $ | 111,513 | |||||||
| Backlog | $ | 88,499 | $ | 93,696 | |||||||
TEST SYSTEMS SECOND QUARTER RESULTS
Test Systems segment sales were $16.1 million, down $3.8 million primarily as a result of lower defense revenue.
Test Systems segment operating loss was $6.1 million compared with nearly break-even in the second quarter of 2022. Test Systems operating loss for the current period was negatively affected by mix, under absorption of fixed costs due to volume and $2.2 million in increased litigation-related legal expenses.
In April 2023 the Test Systems segment implemented restructuring initiatives to align the workforce and management structure with near-term revenue expectations and operational needs. These initiatives are expected to provide savings of $4 million to $5 million annually, beginning with the third quarter.
Bookings for the Test Systems segment in the quarter were $18.3 million and included the initial $9.6 million production order for the Handheld Radio Test Sets Program for the U.S. Marine Corps. Book-to-bill ratio was 1.14:1 for the quarter. The Test Systems segment’s backlog at the end of the second quarter of 2023 was $88.5 million.
TEST SYSTEMS YEAR-TO-DATE RESULTS
Test Systems segment sales were $37.0 million, up $2.4 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 $3.4 million.
Test Systems segment operating loss was $6.7 million compared with operating loss of $1.8 million in the first half of 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 $12.6 million and was negatively affected by mix, under absorption of fixed costs due to volume and $4.8 million in increased litigation-related legal expenses.
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
Cash used for operating activities totaled $21.2 million for the first six months of 2023, as compared with $10.3 million cash used for operating activities during the same period in 2022. Cash flow from operating activities decreased compared with the same period of 2022 primarily related to increases in accounts receivable due to higher sales and increases in inventory to fulfill customer demand in upcoming quarters coupled with increased lead times on certain key components required inventory to be purchased further in advance. In contrast, operating cash flows in the first six months of 2022 benefited from the receipt of income tax refunds and AMJP grant proceeds.
Investing Activities:
Cash used for investing activities was $0.4 million for the first six months of 2023 compared with $19.5 million in cash provided by investing activities in the same period of 2022. 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. The Company expects capital spending in 2023 to be in the range of $7 million and $12 million.
Financing Activities:
Cash provided by financing activities totaled $11.9 million for the first six months of 2023, as compared with cash used for financing activities of $27.7 million during the same period in 2022. The Company had net proceeds on our credit facilities of $19.0 million in the first six months of 2023 compared with net repayments of $27.0 million in the same period in 2022. During the current year period, the Company also paid $6.4 million in debt issuance costs associated with the January 2023 refinancing. Additional debt issuance costs of $1.1 million will be paid in the future, largely comprised of the remaining Term Loan commitment fee, which is discussed further below.
The Company's long-term debt at December 31, 2022 consisted of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”). The maturity date of the loans under the Agreement was November 30, 2023. At December 31, 2022, there was $164.0 million outstanding on the Agreement and there remained $6.0 million available.
The Company amended the Agreement on January 19, 2023 by entering into the Sixth Amended and Restated Credit Agreement (the “ABL Revolving Credit Facility”). The ABL Revolving Credit Facility set the maximum aggregate amount that the Company can borrow under the revolving credit line at $115 million, with borrowings subject to a borrowing base determined primarily by certain domestic inventory and accounts receivable. The maturity date of borrowings under the ABL Revolving Credit Facility is January 19, 2026. Under the terms of the ABL Revolving Credit Facility, the Company pays interest on the unpaid principal amount of the facility at a rate equal to SOFR (which is required to be at least 1.00%) plus 2.25% to 2.75%. The Company will pay a quarterly commitment fee under the ABL Revolving Credit Facility in an amount equal to 0.25% or 0.375% based on the Company’s average excess availability.
On June 28, 2023, the Company amended the ABL Revolving Credit Facility, temporarily increasing the maximum aggregate amount that the Company can borrow under the revolving credit line by $5 million from $115 million to $120 million until October 31, 2023, at which time the limit returns to $115 million. Under the provisions of the ABL Revolving Credit Facility, the Company has a cash dominion arrangement with the lead banking institution whereby eligible daily cash receipts are contractually utilized to pay down outstanding borrowings. Eligible cash receipts that have not yet been applied to outstanding debt balance are classified as restricted cash in the accompanying consolidated balance sheets. The Company is also required to maintain minimum liquidity of $20 million through the date of delivery of the compliance certificate for the quarter ended March 31, 2024, and $10 million thereafter. At July 1, 2023, there was $93.7 million outstanding on the ABL Revolving Credit Facility and there remained $26.3 million available.
The Company also entered into a $90 million asset-based credit agreement (the “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. The remaining $0.9 million is due within the next twelve months and is classified in the accompanying Consolidated Condensed Balance Sheet within current maturities of long-term debt.
26
Amortization of the principal under the Term Loan Facility began in April with a monthly amortization rate of 0.292% of the outstanding term loan principal balance for the period April 1, 2023 through June 1, 2023, increasing to 0.542% per month for the period July 1, 2023 through September 1, 2023 then increasing to 0.833% thereafter. Total scheduled principal payments of approximately $9.0 million are payable over the next twelve months and as such, have been classified as current in the accompanying Consolidated Condensed Balance Sheet as of July 1, 2023. The weighted-average interest rate on current maturities of long-debt is 13.1%. The remaining balance of $80.3 million at July 1, 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. 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. 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 July 1, 2023.
The Company incurred $9.0 million in incremental debt issuance costs related to the new facilities, allocated between the ABL Revolving Credit Facility and the Term Loan Facility. All costs are amortized to interest expense over the term of the respective agreement. Unamortized deferred debt issuance costs associated with the ABL Revolving Credit Facility ($2.4 million as of July 1, 2023) are recorded within other assets and those associated with the Term Loan Facility ($5.3 million as of July 1, 2023) are recorded as a reduction of the carrying value of the debt on the Consolidated Condensed Balance Sheet.
Certain of the Company’s subsidiaries are borrowers or guarantors under the ABL Revolving Credit Facility and the Term Loan Facility.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the credit facilities automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, change of control, cross default under other material debt agreements, and a going concern qualification for any reason other than loan maturity date give the agent the option to declare all such amounts immediately due and payable.
Cash on hand at the end of the quarter was $4.3 million. Net debt was $178.7 million, compared with $150.2 million at the end of 2022.
The Company expects its sales growth and reductions in working capital will provide sufficient cash flows to fund operations. 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.
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.
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. During the three months ended July 1, 2023, we did not issue any securities pursuant to this registration statement, and $150 million remained available for future sales. Astronics currently expects that the net proceeds of any such future offerings of securities pursuant to the shelf registration statement would be used for general corporate purposes, including, without limitation, organic strategic initiatives and reducing debt as well as general working capital needs.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
27
BACKLOG
The Company’s backlog at July 1, 2023 was $611.1 million compared with $571.4 million at December 31, 2022 and $494.4 million at July 2, 2022.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations and commitments have not changed materially from the disclosures in our 2022 Annual Report on Form 10-K.
MARKET RISK
Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $183.0 million at July 1, 2023. 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 2023 have not been significant.
The future impacts of the Russia and Ukraine conflict and the COVID-19 pandemic and their residual effects, including economic uncertainty, inflationary environment and disruption within the global supply chain, labor markets and aerospace industry, on our business remain uncertain. As we cannot anticipate the ultimate duration or scope of the Russia-Ukraine war and the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.
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, 2022.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 of the Notes to Consolidated Condensed Financial Statements included in this report.
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. 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 this Item 3.
28
Item 4. Controls and Procedures
a.Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 1, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of July 1, 2023.
b.Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Currently, we are involved in legal proceedings relating to an allegation of patent infringement and, based on rulings to date we have concluded that losses related to these proceedings are probable. For a discussion of contingencies related to legal proceedings, see Note 15 of the Notes to Consolidated Condensed Financial Statements.
Item 1a. Risk Factors
In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or results of operations. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. There have been no material changes to the Risk Factors except as set forth below:
We are subject to extensive regulation and audit by the Defense Contract Audit Agency. The accuracy and appropriateness of certain costs and expenses used to substantiate our direct and indirect costs for the U.S. Government contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an arm of the USDOD. Such audits and reviews could result in adjustments to our contract costs and profitability. However, we cannot ensure the outcome of any future audits and adjustments may be required to reduce net sales or profits upon completion and final negotiation of audits. If any audit or review were to uncover inaccurate costs or improper activities, we could be subject to penalties and sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from conducting future business with the U.S. Government. Any such outcome could have a material adverse effect on our financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our purchases of our common stock for the three months ended July 1, 2023:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Program (1) | |||||||||||||||||||
| April 1, 2023 - April 29, 2023 | — | $ | — | — | $ | 41,483,815 | |||||||||||||||||
| April 30, 2023 - May 27, 2023 | — | $ | — | — | $ | 41,483,815 | |||||||||||||||||
| May 28, 2023 - July 1, 2023 | — | $ | — | — | $ | 41,483,815 | |||||||||||||||||
(1) On September 17, 2019, the Company’s Board of Directors authorized an additional repurchase of up to $50 million. Approximately 310,000 shares were repurchased at a cost of $8.5 million before the 10b5-1 plan associated with the share repurchase program was terminated on February 3, 2020.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Securities Trading Plans of Directors and Officers
During the three months ended July 1, 2023, no director or officer of the Company adopted terminated
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Item 6. Exhibits
| Certificate of Amendment of the Certificate of Incorporation of Astronics Corporation, dated May 23, 2023 (incorporated by reference to the Company's Current Report on Form 8-K dated May 24, 2023) | ||||||||
| First Amendment to Sixth Amended and Restated Credit Agreement dated as of June 28, 2023, by and among Astronics Corporation, the other borrowers and guarantors signatory thereto, HSBC Bank USA, National Association, as Agent and Co-Collateral Agent, Wells Fargo Bank, N.A., as Co-Collateral Agent, and the lenders signatory thereto (incorporated by reference to the Company's Current Report on Form 8-K dated June 28, 2023) | ||||||||
Section 302 Certification - Chief Executive Officer | ||||||||
Section 302 Certification - Chief Financial Officer | ||||||||
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
Exhibit 101.1* | Instance Document | |||||||
Exhibit 101.2* | Schema Document | |||||||
Exhibit 101.3* | Calculation Linkbase Document | |||||||
Exhibit 101.4* | Labels Linkbase Document | |||||||
Exhibit 101.5* | Presentation Linkbase Document | |||||||
Exhibit 101.6* | Definition Linkbase Document | |||||||
* | Submitted electronically herewith. | ||||
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASTRONICS CORPORATION | ||||||||||||||
(Registrant) | ||||||||||||||
Date: | August 7, 2023 | By: | /s/ David C. Burney | |||||||||||
David C. Burney Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
32
Exhibit 31.1
SECTION 302 CERTIFICATION
Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter J. Gundermann, President and Chief Executive Officer, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Astronics Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 8/7/2023
/s/ Peter J. Gundermann | |||||
Peter J. Gundermann | |||||
President and Chief Executive Officer | |||||
Exhibit 31.2
SECTION 302 CERTIFICATION
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, David C. Burney, Chief Financial Officer, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Astronics Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 8/7/2023
/s/ David C. Burney | |||||
David C. Burney | |||||
Chief Financial Officer | |||||
Exhibit 32
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Astronics Corporation (the "Company") hereby certify that:
The Company's Quarterly Report on Form 10-Q for the quarter ended July 1, 2023 fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
| August 7, 2023 | /s/ Peter J. Gundermann | |||||||
Peter J. Gundermann | ||||||||
Title: | Chief Executive Officer | |||||||
| August 7, 2023 | /s/ David C. Burney | |||||||
David C. Burney | ||||||||
Title: | Chief Financial Officer | |||||||
This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by the Company into such filing.