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☒			Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

☐			Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

 

 

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

☐

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).

July 1, 2023 with Comparative Figures for December 31, 2022

(Unaudited)

 

			July 1, 2023						December 31, 2022
Current Assets:
Cash and Cash Equivalents			$	3,472					$	13,778
Restricted Cash			822						—
Accounts Receivable, Net of Allowance for Estimated Credit Losses			170,806						147,790
Inventories			207,446						187,983
Prepaid Expenses and Other Current Assets			15,650						15,743
Total Current Assets			398,196						365,294
Property, Plant and Equipment, Net of Accumulated Depreciation			87,800						90,658
Operating Right-of-Use Assets			29,404						13,028
Other Assets			7,870						8,605
Intangible Assets, Net of Accumulated Amortization			72,108						79,277
Goodwill			58,210						58,169
Total Assets			$	653,588					$	615,031
Current Liabilities:
Current Maturities of Long-term Debt			$	8,960					$	4,500
Accounts Payable			79,837						64,193
Current Operating Lease Liabilities			4,606						4,441
Accrued Expenses and Other Current Liabilities			53,477						45,911
Customer Advance Payments and Deferred Revenue			27,288						32,567
Total Current Liabilities			174,168						151,612
Long-term Debt			168,733						159,500
Long-term Operating Lease Liabilities			26,082						9,942
Other Liabilities			54,204						54,057
Total Liabilities			423,187						375,111
Shareholders’ Equity:
Common Stock			355						354
Accumulated Other Comprehensive Loss			(8,443)						(9,526)
Other Shareholders’ Equity			238,489						249,092
Total Shareholders’ Equity			230,401						239,920
Total Liabilities and Shareholders’ Equity			$	653,588					$	615,031

(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			$	330,992					$	245,303					$	174,454					$	129,127
Cost of Products Sold			270,787						209,661						141,759						113,418
Gross Profit			60,205						35,642						32,695						15,709
Selling, General and Administrative Expenses			60,179						48,205						30,299						24,105
Income (Loss) from Operations			26						(12,563)						2,396						(8,396)
Net Gain on Sale of Business			(3,427)						(11,284)						—						—
Other (Income), Net of Other Expense			(910)						753						378						291
Interest Expense, Net of Interest Income			11,390						3,293						5,920						1,662
Loss Before Income Taxes			(7,027)						(5,325)						(3,902)						(10,349)
Provision for Income Taxes			9,387						8,786						8,097						661
Net Loss			$	(16,414)					$	(14,111)					$	(11,999)					$	(11,010)
Loss Per Share:
Basic			$	(0.50)					$	(0.44)					$	(0.37)					$	(0.34)
Diluted			$	(0.50)					$	(0.44)					$	(0.37)					$	(0.34)

(Unaudited)

 

			Six Months Ended												Three Months Ended
			July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Net Loss			$	(16,414)					$	(14,111)					$	(11,999)					$	(11,010)
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments			711						(1,567)						487						(1,386)
Retirement Liability Adjustment – Net of Tax			372						698						187						347
Total Other Comprehensive Income (Loss)			1,083						(869)						674						(1,039)
Comprehensive Loss			$	(15,331)					$	(14,980)					$	(11,325)					$	(12,049)

Six Months Ended July 1, 2023 With Comparative Figures for 2022

			Six Months Ended
(Unaudited, In thousands)			July 1, 2023						July 2, 2022
Cash Flows from Operating Activities:
Net Loss			$	(16,414)					$	(14,111)
Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities:
Depreciation and Amortization			13,373						14,088
Amortization of Deferred Financing Fees			1,363						—
Provisions for Non-Cash Losses on Inventory and Receivables			1,705						677
Equity-based Compensation Expense			3,992						3,721
Operating Lease Non-Cash Expense			2,563						2,928
Non-Cash Accrued 401K Contribution			2,536						2,197
Net Gain on Sale of Business, Before Taxes			(3,427)						(11,284)
Non-Cash Deferred Liability Recovery			(5,824)						—
Other			(1,275)						1,320
Changes in Operating Assets and Liabilities Providing (Using) Cash:
Accounts Receivable			(22,619)						(11,449)
Inventories			(22,638)						(19,293)
Accounts Payable			14,081						11,660
Accrued Expenses			5,460						(458)
Other Current Assets and Liabilities			472						(3,030)
Customer Advance Payments and Deferred Revenue			959						(389)
Income Taxes			7,422						16,909
Operating Lease Liabilities			(2,674)						(3,601)
Supplemental Retirement Plan and Other Liabilities			(206)						(215)
Net Cash Used by Operating Activities			(21,151)						(10,330)
Cash Flows from Investing Activities:
Proceeds from Sale of Business and Assets			3,427						21,977
Capital Expenditures			(3,806)						(2,493)
Net Cash (Used) Provided by Investing Activities			(379)						19,484
Cash Flows from Financing Activities:
Proceeds from Long-term Debt			131,732						52,625
Principal Payments on Long-term Debt			(112,774)						(79,625)
Stock Award Activity			(601)						104
Finance Lease Principal Payments			(24)						(55)
Debt Acquisition Costs			(6,388)						(771)
Net Cash Provided (Used) by Financing Activities			11,945						(27,722)
Effect of Exchange Rates on Cash			101						(505)
Decrease in Cash and Cash Equivalents and Restricted Cash			(9,484)						(19,073)
Cash and Cash Equivalents and Restricted Cash at Beginning of Period			13,778						29,757
Cash and Cash Equivalents and Restricted Cash at End of Period			$	4,294					$	10,684

See notes to consolidated condensed financial statements.

(Unaudited)

(Unaudited)

July 1, 2023

(Unaudited)

The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

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.

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.

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.

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 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.

Under the provisions of the ABL Revolving Credit Facility (as defined and discussed below in Note 7), the Company has a lockbox arrangement with the banking institution for its accounts within the United States whereby daily lockbox receipts are contractually utilized to pay down outstanding balances on the ABL Revolving Credit Facility debt. Lockbox balances that have not yet been applied to the ABL Revolving Credit Facility are classified as restricted cash in the accompanying Consolidated Condensed Balance Sheets. The following table provides a reconciliation of cash and restricted cash included in Consolidated Condensed Balance Sheets to the amounts included in the Consolidated Condensed Statements of Cash Flows.

The allowance for estimated credit losses is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as the age of the receivable balances, historical experience, credit quality, current economic conditions, and reasonable and supportable forecasts of future economic conditions that may affect a customer’s ability to pay. The allowance for estimated credit losses balance was $1.7 million and $2.6 million at July 1, 2023 and December 31, 2022, respectively. The Company’s bad debt expense was insignificant during the three and six months ended July 1, 2023 and July 2, 2022. Total write-offs charged against the allowance were $0.7 million and $0.8 million in the three and six months ended July 1, 2023 and insignificant in the three and six months ended July 2, 2022. Total recoveries were insignificant in the three and six months ended July 1, 2023 and July 2, 2022.

The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the COVID-19 pandemic or the Russian/Ukrainian conflict, industry conditions, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables and contract assets as airlines and other aerospace companies’ cash flows are impacted by the COVID-19 pandemic and associated supply chain disruptions.

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.

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.

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.

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.

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:

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.

The following table presents our revenue disaggregated by Market Segments as follows:

						Six Months Ended												Three Months Ended
(In thousands)						July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Aerospace Segment
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
Aerospace Total						293,979						210,684						158,382						109,290
Test Systems Segment
Government & Defense						37,013						34,619						16,072						19,837
Test Systems Total						37,013						34,619						16,072						19,837
Total						$	330,992					$	245,303					$	174,454					$	129,127

The following table presents our revenue disaggregated by Product Lines as follows:

						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						$	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
Aerospace Total						293,979						210,684						158,382						109,290
Test Systems						37,013						34,619						16,072						19,837
Total						$	330,992					$	245,303					$	174,454					$	129,127

Inventories consisted of the following:

(In thousands)			July 1, 2023						December 31, 2022
Finished Goods			$	33,731					$	30,703
Work in Progress			32,185						29,895
Raw Material			141,530						127,385
			$	207,446					$	187,983

Property, Plant and Equipment consisted of the following:

(In thousands)			July 1, 2023						December 31, 2022
Land			$	8,595					$	8,578
Buildings and Improvements			71,073						73,744
Machinery and Equipment			125,942						123,071
Construction in Progress			5,041						6,415
			210,651						211,808
Less Accumulated Depreciation			122,851						121,150
			$	87,800					$	90,658

The following table summarizes acquired intangible assets as follows:

									July 1, 2023												December 31, 2022
(In thousands)			Weighted Average Life						Gross Carrying Amount						Accumulated Amortization						Gross Carrying Amount						Accumulated Amortization
Patents			11 years						$	2,146					$	2,110					$	2,146					$	2,066
Non-compete Agreement			4 years						11,082						11,062						11,082						11,052
Trade Names			10 years						11,417						9,749						11,402						9,350
Completed and Unpatented Technology			9 years						47,880						37,063						47,855						34,877
Customer Relationships			15 years						142,180						82,613						142,133						77,996
Total Intangible Assets			12 years						$	214,705					$	142,597					$	214,618					$	135,341

All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows:

						Six Months Ended												Three Months Ended
(In thousands)						July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Amortization Expense						$	7,196					$	7,526					$	3,599					$	3,761

Amortization expense for acquired intangible assets expected for 2023 and for each of the next five years is summarized as follows:

The following table summarizes the changes in the carrying amount of goodwill for the six months ended July 1, 2023:

(In thousands)			December 31, 2022																		Foreign Currency Translation						July 1, 2023
Aerospace			$	36,534																	$	41					$	36,575
Test Systems			21,635																		—						21,635
			$	58,169																	$	41					$	58,210

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.

In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from twelve to sixty months. The Company determines warranty reserves needed by product line based on experience and current facts and circumstances.

Activity in the warranty accrual is summarized as follows:

						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						$	8,009					$	8,183					$	7,401					$	8,049
Warranties Issued						1,908						1,683						1,128						898
Warranties Settled						(2,151)						(1,910)						(814)						(1,154)
Reassessed Warranty Exposure						(61)						(197)						(10)						(34)
Balance at End of Period						$	7,705					$	7,759					$	7,705					$	7,759

During the three months ended July 1, 2023, the Company entered into an operating lease and recorded a right-of-use asset and corresponding liabilities of $12.7 million. The lease will require annual payments between $1.6 million and $1.9 million into 2033. Associated lease costs are $1.7 million per year. Other leasing activity during the quarter was insignificant.

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.

Basic and diluted weighted-average shares outstanding are as follows:

						Six Months Ended												Three Months Ended
(In thousands)						July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Weighted Average Shares - Basic						32,560						32,007						32,614						32,082
Net Effect of Dilutive Stock Options						—						—						—						—
Weighted Average Shares - Diluted						32,560						32,007						32,614						32,082

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.

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.

The components of accumulated other comprehensive loss are as follows:

(In thousands)			July 1, 2023						December 31, 2022
Foreign Currency Translation Adjustments			$	(6,624)					$	(7,335)
Retirement Liability Adjustment – Before Tax			(4,101)						(4,473)
Tax Benefit of Retirement Liability Adjustment			2,282						2,282
Retirement Liability Adjustment – After Tax			(1,819)						(2,191)
Accumulated Other Comprehensive Loss			$	(8,443)					$	(9,526)

The components of other comprehensive income (loss) are as follows:

			Six Months Ended												Three Months Ended
(In thousands)			July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Foreign Currency Translation Adjustments			$	711					$	(1,567)					$	487					$	(1,386)
Retirement Liability Adjustments:
Reclassifications to Selling, General and Administrative Expense:
Amortization of Prior Service Cost			193						201						98						100
Amortization of Net Actuarial Losses			179						497						89						247
Retirement Liability Adjustment			372						698						187						347
Other Comprehensive Income (Loss)			$	1,083					$	(869)					$	674					$	(1,039)

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.

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.

The loss of major customers or a significant reduction in business with a major customer would significantly, negatively impact our sales and earnings. In the three and six months ended July 1, 2023 and July 2, 2022, the Company had one customer in excess of 10% of consolidated sales. Sales to The Boeing Company (“Boeing”) accounted for 11.5% and 10.9% of sales in the three and six months ended July 1, 2023 and 10.6% and 11.9% in the three and six months ended July 2, 2022, respectively. Accounts receivable from Boeing at July 1, 2023 were approximately $21.8 million.

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 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.

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 amounts have been accrued for this matter in the July 1, 2023 or December 31, 2022 financial statements, as loss exposure was neither probable nor estimable at such times.

Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our financial condition or results of operations.

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.

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						$	520,564					$	481,416
Test Systems						119,440						111,513
Corporate						13,584						22,102
Total Assets						$	653,588					$	615,031

There were no financial assets or liabilities carried at fair value measured on a recurring basis at July 1, 2023 or December 31, 2022.

There were no non-recurring fair value measurements performed in the six months ended July 1, 2023 and July 2, 2022.

Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable and accounts payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair value due to the variable rate feature of these instruments.

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.

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.

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

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.

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.

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.

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 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.

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)		%