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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| | | | | |
| ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended July 2, 2022
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
ASTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | |
New York (State or other jurisdiction of incorporation or organization) | 16-0959303 (IRS Employer Identification Number) |
| |
130 Commerce Way, East Aurora, New York (Address of principal executive offices) | 14052 (Zip code) |
(716) 805-1599
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $.01 par value per share | ATRO | NASDAQ Stock Market |
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☒ | Emerging growth company | ☐ |
| | | | | |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of August 5, 2022, 31,990,835 shares of common stock were outstanding consisting of 25,664,530 shares of common stock ($.01 par value) and 6,326,305 shares of Class B common stock ($.01 par value).
TABLE OF CONTENTS | | | | | | | | | | | | | | | | | | | | | | | |
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PART I | | | |
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| | Item 1 | | | |
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PART II | | | |
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| | Item 1 | | | |
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Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
July 2, 2022 with Comparative Figures for December 31, 2021
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| July 2, 2022 | | December 31, 2021 |
| | | |
| Current Assets: | | | |
Cash and Cash Equivalents | $ | 10,684 | | | $ | 29,757 | |
Accounts Receivable, Net of Allowance for Estimated Credit Losses | 118,342 | | | 107,439 | |
Inventories | 175,204 | | | 157,576 | |
Prepaid Expenses and Other Current Assets | 20,126 | | | 45,089 | |
| | | |
Total Current Assets | 324,356 | | | 339,861 | |
| Property, Plant and Equipment, Net of Accumulated Depreciation | 90,837 | | | 95,236 | |
| Operating Right-of-Use Assets | 15,962 | | | 16,169 | |
| Other Assets | 6,236 | | | 5,270 | |
| Intangible Assets, Net of Accumulated Amortization | 86,638 | | | 94,320 | |
| Goodwill | 58,252 | | | 58,282 | |
Total Assets | $ | 582,281 | | | $ | 609,138 | |
| Current Liabilities: | | | |
Current Maturities of Long-term Debt | $ | — | | | $ | — | |
Accounts Payable | 46,198 | | | 34,860 | |
| Current Operating Lease Liabilities | 5,933 | | | 6,778 | |
Accrued Expenses and Other Current Liabilities | 46,045 | | | 49,619 | |
Customer Advance Payments and Deferred Revenue | 26,790 | | | 27,356 | |
| | | |
Total Current Liabilities | 124,966 | | | 118,613 | |
| Long-term Debt | 136,000 | | | 163,000 | |
| Long-term Operating Lease Liabilities | 11,979 | | | 12,018 | |
| Other Liabilities | 58,660 | | | 58,903 | |
| Total Liabilities | 331,605 | | | 352,534 | |
| Shareholders’ Equity: | | | |
Common Stock | 354 | | | 353 | |
Accumulated Other Comprehensive Loss | (15,364) | | | (14,495) | |
Other Shareholders’ Equity | 265,686 | | | 270,746 | |
Total Shareholders’ Equity | 250,676 | | | 256,604 | |
| Total Liabilities and Shareholders’ Equity | $ | 582,281 | | | $ | 609,138 | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and Six Months Ended July 2, 2022 With Comparative Figures for 2021
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Sales | $ | 245,303 | | | $ | 217,015 | | | $ | 129,127 | | | $ | 111,158 | |
| Cost of Products Sold | 209,661 | | | 187,347 | | | 113,418 | | | 95,763 | |
| Gross Profit | 35,642 | | | 29,668 | | | 15,709 | | | 15,395 | |
| | | | | | | |
| Selling, General and Administrative Expenses | 48,205 | | | 45,100 | | | 24,105 | | | 21,315 | |
| | | | | | | |
| Loss from Operations | (12,563) | | | (15,432) | | | (8,396) | | | (5,920) | |
| Net Gain on Sale of Business | (11,284) | | | — | | | — | | | — | |
| Other Expense, Net of Other Income | 753 | | | 1,081 | | | 291 | | | 547 | |
| Interest Expense, Net of Interest Income | 3,293 | | | 3,457 | | | 1,662 | | | 1,699 | |
| Loss Before Income Taxes | (5,325) | | | (19,970) | | | (10,349) | | | (8,166) | |
| Provision for (Benefit from) Income Taxes | 8,786 | | | 38 | | | 661 | | | (67) | |
| Net Loss | $ | (14,111) | | | $ | (20,008) | | | $ | (11,010) | | | $ | (8,099) | |
| Loss Per Share: | | | | | | | |
Basic | $ | (0.44) | | | $ | (0.65) | | | $ | (0.34) | | | $ | (0.26) | |
Diluted | $ | (0.44) | | | $ | (0.65) | | | $ | (0.34) | | | $ | (0.26) | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income (Loss)
Three and Six Months Ended July 2, 2022 With Comparative Figures for 2021
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Net Loss | $ | (14,111) | | | $ | (20,008) | | | $ | (11,010) | | | $ | (8,099) | |
| Other Comprehensive Income (Loss): | | | | | | | |
Foreign Currency Translation Adjustments | (1,567) | | | (22) | | | (1,386) | | | 615 | |
Retirement Liability Adjustment – Net of Tax | 698 | | | 868 | | | 347 | | | 434 | |
| Total Other Comprehensive (Loss) Income | (869) | | | 846 | | | (1,039) | | | 1,049 | |
| Comprehensive Loss | $ | (14,980) | | | $ | (19,162) | | | $ | (12,049) | | | $ | (7,050) | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Six Months Ended July 2, 2022 With Comparative Figures for 2021 | | | | | | | | | | | |
(Unaudited, In thousands) | Six Months Ended |
| July 2, 2022 | | July 3, 2021 |
| Cash Flows from Operating Activities: | | | |
| Net Loss | $ | (14,111) | | | $ | (20,008) | |
| Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities: | | | |
| Depreciation and Amortization | 14,088 | | | 14,879 | |
| Provisions for Non-Cash Losses on Inventory and Receivables | 677 | | | 2,145 | |
| Equity-based Compensation Expense | 3,721 | | | 3,701 | |
| Non-Cash Accrued 401K Contribution | 2,197 | | | — | |
| Deferred Tax Benefit | — | | | (153) | |
| | | |
| | | |
| Operating Lease Non-Cash Expense | 2,928 | | | 2,343 | |
| | | |
| | | |
| Net Gain on Sale of Business, Before Taxes | (11,284) | | | — | |
| | | |
| | | |
| Contingent Consideration Liability Fair Value Adjustment | — | | | (2,200) | |
| Other | 1,320 | | | 2,105 | |
| Cash Flows from Changes in Operating Assets and Liabilities: | | | |
| Accounts Receivable | (11,449) | | | (5,281) | |
| Inventories | (19,293) | | | 720 | |
| Accounts Payable | 11,660 | | | 4,210 | |
| Accrued Expenses | (458) | | | (946) | |
| Other Current Assets and Liabilities | (3,030) | | | (70) | |
| Customer Advance Payments and Deferred Revenue | (389) | | | (927) | |
| Income Taxes | 16,909 | | | (51) | |
| Operating Lease Liabilities | (3,601) | | | (2,606) | |
| Supplemental Retirement Plan and Other Liabilities | (215) | | | (199) | |
| Cash Flows from Operating Activities | (10,330) | | | (2,338) | |
| Cash Flows from Investing Activities: | | | |
| | | |
| Proceeds from Sale of Business and Assets | 21,977 | | | — | |
| Capital Expenditures | (2,493) | | | (3,566) | |
| | | |
| Cash Flows from Investing Activities | 19,484 | | | (3,566) | |
| Cash Flows from Financing Activities: | | | |
| Proceeds from Long-term Debt | 52,625 | | | 5,000 | |
| Principal Payments on Long-term Debt | (79,625) | | | (5,000) | |
| | | |
| | | |
| Stock Award Activity | 104 | | | (59) | |
| | | |
| | | |
| Finance Lease Principal Payments | (55) | | | (854) | |
| Debt Acquisition Costs | (771) | | | — | |
| Cash Flows from Financing Activities | (27,722) | | | (913) | |
| Effect of Exchange Rates on Cash | (505) | | | (8) | |
| Decrease in Cash and Cash Equivalents | (19,073) | | | (6,825) | |
| Cash and Cash Equivalents at Beginning of Period | 29,757 | | | 40,412 | |
| Cash and Cash Equivalents at End of Period | $ | 10,684 | | | $ | 33,587 | |
| | | |
| | | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders' Equity
Three and Six Months Ended July 2, 2022 With Comparative Figures for 2021
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Common Stock | | | | | | | |
| Beginning of Period | $ | 289 | | | $ | 278 | | | $ | 290 | | | $ | 279 | |
| | | | | | | |
| | | | | | | |
| Net Issuance of Common Stock for Restricted Stock Units (“RSU’s”) | 1 | | | — | | | — | | | — | |
| | | | | | | |
| Class B Stock Converted to Common Stock | — | | | 5 | | | — | | | 4 | |
| End of Period | 290 | | | 283 | | | 290 | | | 283 | |
| Convertible Class B Stock | | | | | | | |
| Beginning of Period | 64 | | | 69 | | | 64 | | | 68 | |
| | | | | | | |
| | | | | | | |
| Class B Stock Converted to Common Stock | — | | | (5) | | | — | | | (4) | |
| End of Period | 64 | | | 64 | | | 64 | | | 64 | |
| Additional Paid in Capital | | | | | | | |
| Beginning of Period | 92,037 | | | 82,187 | | | 94,245 | | | 84,232 | |
| | | | | | | |
| | | | | | | |
| Net Exercise of Stock Options and Equity-based Compensation Expense | 4,122 | | | 3,642 | | | 1,621 | | | 1,597 | |
| Tax Withholding Related to Issuance of RSU’s | (298) | | | — | | | (5) | | | — | |
| End of Period | 95,861 | | | 85,829 | | | 95,861 | | | 85,829 | |
| Accumulated Comprehensive Income (Loss) | | | | | | | |
| Beginning of Period | (14,495) | | | (16,450) | | | (14,325) | | | (16,653) | |
| | | | | | | |
| Foreign Currency Translation Adjustments | (1,567) | | | (22) | | | (1,386) | | | 615 | |
| | | | | | | |
| Retirement Liability Adjustment – Net of Taxes | 698 | | | 868 | | | 347 | | | 434 | |
| End of Period | (15,364) | | | (15,604) | | | (15,364) | | | (15,604) | |
| Retained Earnings | | | | | | | |
| Beginning of Period | 287,225 | | | 312,803 | | | 279,047 | | | 300,894 | |
| | | | | | | |
| | | | | | | |
| Net Loss | (14,111) | | | (20,008) | | | (11,010) | | | (8,099) | |
| Reissuance of Treasury Shares for 401K Contribution | (6,776) | | | — | | | (1,699) | | | — | |
| | | | | | | |
| | | | | | | |
| End of Period | 266,338 | | | 292,795 | | | 266,338 | | | 292,795 | |
| Treasury Stock | | | | | | | |
| Beginning of Period | (108,516) | | | (108,516) | | | (99,239) | | | (108,516) | |
| | | | | | | |
| Shares Issued to Fund 401K Obligation | 12,003 | | | — | | | 2,726 | | | — | |
| | | | | | | |
| End of Period | (96,513) | | | (108,516) | | | (96,513) | | | (108,516) | |
| Total Shareholders’ Equity | $ | 250,676 | | | $ | 254,851 | | | $ | 250,676 | | | $ | 254,851 | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Consolidated Condensed Statements of Shareholders' Equity, Continued
Three and Six Months Ended July 2, 2022 With Comparative Figures for 2021
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| (Shares) | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Common Stock | | | | | | | |
| Beginning of Period | 28,911 | | | 27,825 | | | 29,009 | | | 27,897 | |
| | | | | | | |
| Net Issuance from Exercise of Stock Options | 20 | | | 20 | | | — | | | 1 | |
| Net Issuance of Common Stock for RSU’s | 48 | | | — | | | 6 | | | — | |
| Class B Stock Converted to Common Stock | 68 | | | 470 | | | 32 | | | 417 | |
| End of Period | 29,047 | | | 28,315 | | | 29,047 | | | 28,315 | |
| Convertible Class B Stock | | | | | | | |
| Beginning of Period | 6,375 | | | 6,877 | | | 6,363 | | | 6,837 | |
| Net Issuance from Exercise of Stock Options | 24 | | | 13 | | | — | | | — | |
| | | | | | | |
| Class B Stock Converted to Common Stock | (68) | | | (470) | | | (32) | | | (417) | |
| End of Period | 6,331 | | | 6,420 | | | 6,331 | | | 6,420 | |
| Treasury Stock | | | | | | | |
| Beginning of Period | 3,808 | | | 3,808 | | | 3,483 | | | 3,808 | |
| | | | | | | |
| Shares Issued to Fund 401K Obligation | (421) | | | — | | | (96) | | | — | |
| | | | | | | |
| End of Period | 3,387 | | | 3,808 | | | 3,387 | | | 3,808 | |
See notes to consolidated condensed financial statements.
ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
July 2, 2022
(Unaudited)
1) Basis of Presentation
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.
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 has 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 2, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The balance sheet at December 31, 2021 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 2021 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 the 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 December 2021, the Company agreed to a payment of $10.7 million for the calendar 2020 earnout, which was recorded in the fourth quarter of 2021 and was received by the Company in early January 2022. 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.
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. Substantially all of our operations and production activities have, to-date, remained operational. However, 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 during the first half of 2022 in our aerospace business, COVID-19 related 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.
The Company qualified for government subsidies from the Canadian and French governments as a result of the COVID-19 pandemic’s impact on our foreign operations. The Canadian and French subsidies are income-based grants intended to reimburse the Company for certain employee wages. The grants are recognized as income over the periods in which the Company recognizes as expenses the costs the grants are intended to defray. The amount recognized during the three and six months ended July 2, 2022 was immaterial.
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 $7.4 million under the grant in 2021 and $5.2 million in the first quarter of 2022. The Company expects to receive the remainder in 2022. The receipt of the full award is primarily conditioned upon the Company committing to not furlough, lay off or reduce the compensation levels of a defined group of employees during the six-month period of performance between September 2021 and March 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 is intended to defray. During the six months ended July 2, 2022, the Company recognized $6.0 million of the award.
The following table presents the COVID-19 related government assistance, including AMJP, recorded during the three and six months ended July 2, 2022 and July 3, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| (In thousands) | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Cost of Products Sold | $ | 6,101 | | | $ | 1,478 | | | $ | 16 | | | $ | 933 | |
| Selling, General and Administrative Expenses | 18 | | | 147 | | | 4 | | | 78 | |
| Total | $ | 6,119 | | | $ | 1,625 | | | $ | 20 | | | $ | 1,011 | |
Trade Accounts Receivable and Contract Assets
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 $3.1 million and $3.2 million at July 2, 2022 and December 31, 2021, respectively. The Company’s bad debt expense were insignificant during the three and six months ended July 2, 2022 and the three and six months ended July 3, 2021. Total write offs charged against the allowance were insignificant in the three and six months ended July 2, 2022 and the three and six months ended July 3, 2021. Total recoveries were insignificant in the three and six months ended July 2, 2022 and the three and six months ended July 3, 2021.
The Company's exposure to credit losses may increase if its customers are adversely affected by global economic recessions, disruption associated with the current COVID-19 pandemic, 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.
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 $12.6 million and $10.3 million for the three months ended and $24.8 million and $20.6 million for the six months ended July 2, 2022 and July 3, 2021, respectively. These costs are included in Cost of products sold.
Goodwill Impairment
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.
As of 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 three or six months then ended.
Valuation of Long-Lived Assets
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 2, 2022 and for the three and six month periods then ended, the Company concluded that no indicators of impairment relating to long-lived assets existed.
Foreign Currency Translation
The aggregate foreign currency transaction gain or loss included in operations was insignificant for the three and six months ended July 2, 2022 and July 3, 2021.
Newly Adopted Accounting Pronouncement
Recent Accounting Pronouncement Adopted | | | | | | | | |
| Standard | Description | Financial Statement Effect or Other Significant Matters |
ASU No. 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | This amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date. | This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The impact of adoption on the Company's consolidated financial statements will be prospective only and depend on the magnitude of future business acquisitions. Date of adoption: Q1 2022 |
We consider the applicability and impact of all ASUs. ASUs not listed above 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 2, 2022, we had $494.4 million of remaining performance obligations, which we refer to as total backlog. We expect to recognize approximately $278.0 million of our remaining performance obligations as revenue in the remainder of 2022.
We recognized $8.9 million and $11.3 million during the three months ended and $11.2 million and $14.4 million during the six months ended July 2, 2022 and July 3, 2021, 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 2, 2022:
| | | | | | | | | | | | | | |
| (In thousands) | | Contract Assets | | Contract Liabilities |
Beginning Balance, January 1, 2022 | | $ | 25,941 | | | $ | 28,495 | |
Ending Balance, July 2, 2022 | | $ | 26,278 | | | $ | 27,748 | |
The following table presents our revenue disaggregated by Market Segments as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Three Months Ended |
| (In thousands) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Aerospace Segment | | | | | | | | |
Commercial Transport | | $ | 133,332 | | | $ | 86,001 | | | $ | 69,243 | | | $ | 47,793 | |
Military | | 28,873 | | | 37,783 | | | 13,897 | | | 16,801 | |
General Aviation | | 33,997 | | | 29,022 | | | 18,130 | | | 14,994 | |
Other | | 14,482 | | | 17,830 | | | 8,020 | | | 9,632 | |
| Aerospace Total | | 210,684 | | | 170,636 | | | 109,290 | | | 89,220 | |
| | | | | | | | |
| Test Systems Segment | | | | | | | | |
| | | | | | | | |
Aerospace & Defense | | 34,619 | | | 46,379 | | | 19,837 | | | 21,938 | |
| Test Systems Total | | 34,619 | | | 46,379 | | | 19,837 | | | 21,938 | |
| | | | | | | | |
| Total | | $ | 245,303 | | | $ | 217,015 | | | $ | 129,127 | | | $ | 111,158 | |
The following table presents our revenue disaggregated by Product Lines as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Three Months Ended |
| (In thousands) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Aerospace Segment | | | | | | | | |
Electrical Power & Motion | | $ | 86,602 | | | $ | 64,092 | | | $ | 42,135 | | | $ | 34,748 | |
Lighting & Safety | | 60,599 | | | 51,468 | | | 31,388 | | | 24,368 | |
Avionics | | 43,281 | | | 32,864 | | | 24,406 | | | 18,021 | |
Systems Certification | | 2,671 | | | 1,838 | | | 1,669 | | | 960 | |
Structures | | 3,049 | | | 2,544 | | | 1,672 | | | 1,491 | |
Other | | 14,482 | | | 17,830 | | | 8,020 | | | 9,632 | |
| Aerospace Total | | 210,684 | | | 170,636 | | | 109,290 | | | 89,220 | |
| | | | | | | | |
| Test Systems | | 34,619 | | | 46,379 | | | 19,837 | | | 21,938 | |
| | | | | | | | |
| Total | | $ | 245,303 | | | $ | 217,015 | | | $ | 129,127 | | | $ | 111,158 | |
3) Inventories
Inventories consisted of the following: | | | | | | | | | | | |
(In thousands) | July 2, 2022 | | December 31, 2021 |
Finished Goods | $ | 31,563 | | | $ | 28,579 | |
Work in Progress | 28,127 | | | 22,954 | |
Raw Material | 115,514 | | | 106,043 | |
| $ | 175,204 | | | $ | 157,576 | |
The Company has evaluated the carrying value of existing inventories and believe they are properly reflected at their lower of carrying value or net realizable value. Future changes in demand or other market developments could result in future inventory charges. The Company is actively managing inventories and aligning them to meet known current and future demand.
4) Property, Plant and Equipment
Property, Plant and Equipment consisted of the following: | | | | | | | | | | | |
(In thousands) | July 2, 2022 | | December 31, 2021 |
Land | $ | 8,554 | | | $ | 8,632 | |
Buildings and Improvements | 70,315 | | | 70,566 | |
Machinery and Equipment | 122,288 | | | 121,960 | |
Construction in Progress | 6,441 | | | 5,680 | |
| 207,598 | | | 206,838 | |
Less Accumulated Depreciation | 116,761 | | | 111,602 | |
| $ | 90,837 | | | $ | 95,236 | |
5) Intangible Assets
The following table summarizes acquired intangible assets as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 2, 2022 | | December 31, 2021 |
| (In thousands) | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Patents | 11 years | | $ | 2,146 | | | $ | 2,022 | | | $ | 2,146 | | | $ | 1,979 | |
| Non-compete Agreement | 4 years | | 11,082 | | | 10,845 | | | 11,082 | | | 10,592 | |
| Trade Names | 10 years | | 11,384 | | | 8,947 | | | 11,447 | | | 8,518 | |
| Completed and Unpatented Technology | 9 years | | 47,824 | | | 32,682 | | | 47,932 | | | 30,441 | |
| Customer Relationships | 15 years | | 142,071 | | | 73,373 | | | 142,276 | | | 69,033 | |
| Total Intangible Assets | 12 years | | $ | 214,507 | | | $ | 127,869 | | | $ | 214,883 | | | $ | 120,563 | |
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 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
Amortization Expense | | $ | 7,526 | | | $ | 7,712 | | | $ | 3,761 | | | $ | 3,857 | |
Amortization expense for acquired intangible assets expected for 2022 and for each of the next five years is summarized as follows: | | | | | |
(In thousands) | |
| 2022 | $ | 14,923 | |
| 2023 | $ | 13,878 | |
| 2024 | $ | 12,856 | |
| 2025 | $ | 10,935 | |
| 2026 | $ | 9,533 | |
| 2027 | $ | 7,825 | |
6) Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the six months ended July 2, 2022: | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | December 31, 2021 | | | | | | Foreign Currency Translation | | July 2, 2022 |
| Aerospace | $ | 36,648 | | | | | | | $ | (30) | | | $ | 36,618 | |
| Test Systems | 21,634 | | | | | | | — | | | 21,634 | |
| $ | 58,282 | | | | | | | $ | (30) | | | $ | 58,252 | |
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.
As of July 2, 2022 and July 3, 2021, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed in the three or six months then ended.
7) Long-term Debt and Notes Payable
The Company's long-term debt consists of borrowings under its Fifth Amended and Restated Credit Agreement (the “Agreement”). On March 1, 2022, the Company executed an amendment to the Agreement, which reduced the revolving credit line from $375 million to $225 million and extended the maturity date of the loans under the facility from February 16, 2023 to May 30, 2023. The definition of Adjusted EBITDA was modified to exclude income from earnout payments and asset sales. On August 9, 2022, the Company executed a further amendment to the Agreement (the “Amended Facility”), which reduced the revolving credit line from $225 million to $190 million until September 12, 2022 with further reductions to $180 million effective September 12, 2022 and $170 million effective October 11, 2022. The Amended Facility extended the maturity date of the loans under the facility from May 30, 2023 to August 31, 2023. Interest is payable on the unpaid principal amount of the facility at a rate equal to the Secured Overnight Financing Rate (“SOFR”, which shall be at least 1.00%), plus between 1.50% to 4.75% based upon the Company’s leverage ratio. The Company also pays a commitment fee to the lenders in an amount equal to 0.10% to 0.40% on the undrawn portion of the Amended Facility, based upon the Company’s leverage ratio. Both amendments provided for the payment of a consent fee of 10 basis points of the commitment for each consenting lender.
At July 2, 2022, there was $136.0 million outstanding on the revolving credit facility and there remained $87.9 million available subject to the minimum liquidity covenant discussed below, net of outstanding letters of credit. The credit facility allocates up to $20 million of the $225 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At July 2, 2022, outstanding letters of credit totaled $1.1 million. The Company is required to maintain minimum liquidity, defined as unrestricted cash plus the unused revolving credit commitments, of $35 million. The maximum net leverage ratio is set at 4.75 to 1 for the first and second quarters of 2022 under the previous facility. The Amended Facility includes a maximum net leverage ratio of 4.25 to 1 for the third quarter of 2022 and 3.75 to 1 thereafter. The Company was in compliance with its financial covenants at July 2, 2022.
The Amended Facility temporarily restricts acquisitions through the third quarter of 2022, as well as dividend payments and share repurchases through the maturity date of the Amended Facility. The Company’s obligations under the Amended Facility are jointly and severally guaranteed by each domestic subsidiary of the Company other than non-material subsidiaries.
The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets. In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Amended Facility 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, judgments over a certain amount, and cross default under other agreements give the agent the option to declare all such amounts immediately due and payable.
We are currently in the process of evaluating terms and conditions for a new long-term financing arrangement, which includes an asset-based lending agreement and separate agreement that would monetize our real estate as collateral. The extent to which we will be able to effect such refinancing, replacement or maturity extension on terms that are favorable to us or at all is dependent on a number of uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the aerospace and defense markets, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions. In addition, rising interest rates could limit our ability to refinance our existing credit facility when it matures or cause us to pay higher interest rates upon refinancing. As the Company’s long-term debt approaches maturity, if the Company is unable to refinance, replace or extend the maturity on its credit facility, the Company’s liquidity, results of operations, and financial condition could be materially adversely impacted. If we are unable to obtain a new long-term financing facility before we file our third quarter 2022 Form 10-Q to replace our existing debt facility, borrowings outstanding under our existing credit facility will come due within 12 months of that filing date and could result in substantial doubt about our ability to continue as a going concern in the event that we are not reasonably assured to have sufficient cash balances to repay the remaining obligations at maturity.
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 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 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Balance at Beginning of Period | | $ | 8,183 | | | $ | 7,018 | | | $ | 8,049 | | | $ | 6,842 | |
| | | | | | | | |
| Warranties Issued | | 1,683 | | | 2,021 | | | 898 | | | 1,213 | |
| Warranties Settled | | (1,910) | | | (1,663) | | | (1,154) | | | (978) | |
| Reassessed Warranty Exposure | | (197) | | | (541) | | | (34) | | | (242) | |
| Balance at End of Period | | $ | 7,759 | | | $ | 6,835 | | | $ | 7,759 | | | $ | 6,835 | |
9) Income Taxes
The effective tax rates were approximately (6.4)% and 0.8% for the three months ended and (165.0)% and (0.2)% for the six months ended July 2, 2022 and July 3, 2021, 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 2022 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, tax credit carryovers, and certain timing differences that are expected to reverse during 2022. In addition, the tax rate in the 2022 period was also impacted by state income taxes and the federal research and development credit expected for 2022.
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, 2021 and 2020, the Company determined that a portion of its deferred tax assets are 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 2, 2022.
10) Earnings Per Share
Basic and diluted weighted-average shares outstanding are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Three Months Ended |
(In thousands) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Weighted Average Shares - Basic | | 32,007 | | | 30,914 | | | 32,082 | | | 30,926 | |
| Net Effect of Dilutive Stock Options | | — | | | — | | | — | | | — | |
| Weighted Average Shares - Diluted | | 32,007 | | | 30,914 | | | 32,082 | | | 30,926 | |
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 1,338,000 shares as of July 2, 2022 and 645,000 shares as of July 3, 2021. Further, due to our net loss in the three and six month periods ended July 2, 2022 and July 3, 2021, 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 2, 2022 with treasury stock in lieu of cash. The earnings per share calculation for the quarter ended July 2, 2022 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 2, 2022. Actual shares issued may differ based on the sale price on the settlement date.
11) 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 agreement, and as described further in Note 7, 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 Additional paid-in capital or Retained earnings. During the six months ended July 2, 2022, the Company reissued 421,000 treasury shares and recorded the difference between the average cost and the reissuance price, $6.8 million, as a reduction to Retained earnings.
Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows: | | | | | | | | | | | |
| (In thousands) | July 2, 2022 | | December 31, 2021 |
| Foreign Currency Translation Adjustments | $ | (6,974) | | | $ | (5,407) | |
| Retirement Liability Adjustment – Before Tax | (10,672) | | | (11,370) | |
| Tax Benefit of Retirement Liability Adjustment | 2,282 | | | 2,282 | |
| Retirement Liability Adjustment – After Tax | (8,390) | | | (9,088) | |
| Accumulated Other Comprehensive Loss | $ | (15,364) | | | $ | (14,495) | |
The components of other comprehensive (loss) income are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Three Months Ended |
| (In thousands) | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Foreign Currency Translation Adjustments | $ | (1,567) | | | $ | (22) | | | $ | (1,386) | | | $ | 615 | |
| Retirement Liability Adjustments: | | | | | | | |
| Reclassifications to General and Administrative Expense: | | | | | | | |
Amortization of Prior Service Cost | 201 | | | 201 | | | 100 | | | 100 | |
Amortization of Net Actuarial Losses | 497 | | | 667 | | | 247 | | | 334 | |
| | | | | | | |
| Retirement Liability Adjustment | 698 | | | 868 | | | 347 | | | 434 | |
| Other Comprehensive (Loss) Income | $ | (869) | | | $ | 846 | | | $ | (1,039) | | | $ | 1,049 | |
12) 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 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
| Service Cost | $ | 69 | | | $ | 97 | | | $ | 35 | | | $ | 48 | |
| Interest Cost | 417 | | | 381 | | | 208 | | | 190 | |
| Amortization of Prior Service Cost | 193 | | | 193 | | | 96 | | | 96 | |
| Amortization of Net Actuarial Losses | 474 | | | 646 | | | 235 | | | 323 | |
| Net Periodic Cost | $ | 1,153 | | | $ | 1,317 | | | $ | 574 | | | $ | 657 | |
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 2, 2022 and July 3, 2021 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 Expense, Net of Other Income.
13) Sales to Major Customers
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 2, 2022, the Company had one customer in excess of 10% of consolidated sales. Sales to The Boeing Company (“Boeing”) accounted for 11% and 12% of sales in the three and six months ended July 2, 2022. Accounts receivable from Boeing at July 2, 2022 were approximately $12.5 million. In the three and six months ended July 3, 2021, the Company had no customers in excess of 10% of consolidated sales.
14) Legal Proceedings
Lufthansa
One of the Company’s subsidiaries is involved in numerous patent infringement actions brought by Lufthansa Technik AG (“Lufthansa”) in Germany, 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, 2021. The reserve for the German indirect claim and UK damages and interest was approximately $24.4 million at July 2, 2022, which included an additional $0.2 million and $0.4 million in interest accrued during the three and six months then ended. We currently believe 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 2, 2022 and December 31, 2021. There were no other significant developments in any of these matters during the three and six months ended July 2, 2022.
At December 31, 2021, we had recorded a liability of $1.0 million for reimbursement of Lufthansa’s legal expenses associated with the UK matter. During the six months ended July 2, 2022, $0.3 million was paid. The remaining liability of $0.7 million 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 2, 2022.
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 and copyright infringement, 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 remain. The case is currently in 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. The decision is subject to appeal by Teradyne. It is anticipated that stay of litigation will be lifted with respect to the remaining claims in August 2022. No amounts have been accrued for this matter in the July 2, 2022 or December 31, 2021 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.
15)