Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto contained elsewhere herein.
OVERVIEW
Business
We are a major supplier to the aerospace industry and have two reportable segments: (i) Systems & Support, whose companies’ revenues are derived from integrated solutions, including design, development and support of proprietary components, subsystems and systems, production of complex assemblies using external designs, as well as full life cycle solutions for commercial, regional, and military aircraft; and (ii) Aerospace Structures, whose companies supply commercial, business, and regional manufacturers with large metallic structures and produce close-tolerance parts primarily to customer designs and model-based definition, including a wide range of aluminum, hard metal, and composite structure capabilities.
Divestitures
During the fiscal year ended March 31, 2022, we completed the divestiture of our composites manufacturing operations located in Milledgeville, Georgia, and Rayong, Thailand, as well as our large structure manufacturing operations located in Red Oak, Texas. These losses are presented on the accompanying condensed consolidated statements of operations within loss on sale of assets and businesses for the three months ended June 30, 2021. The operating results associated with the composites and large structure manufacturing operations were included within Aerospace Structures through the date of divestiture. Refer to Note 3 for a discussion of other less significant divestitures occurring in fiscal 2022.
As disclosed in Note 13, subsequent to June 30, 2022, we completed the sale of our manufacturing operations located in Stuart, Florida, and expect to recognize a gain in the second quarter of fiscal 2023. The Stuart operations specialized in the assembly of large, complex metallic structures such as wing and fuselage assemblies. As a result of the completion of this sale, we have exited our structures business and reshaped our portfolio of companies to consist primarily of businesses providing systems and aftermarket services. The operating results associated with the Stuart operations are included within Aerospace Structures.
Summary of Significant Financial Results
Significant financial results for the first quarter of the fiscal year ending March 31, 2023, include:
•Net sales were $349.4 million compared with $396.6 million for the prior year period.
•Operating income was $14.7 million compared with $20.8 million for the prior year period.
•Net loss was $10.3 million, or ($0.16) per diluted common share, compared with a net loss of $30.4 million, or ($0.47) per diluted common share, for the prior year period.
•Backlog as of June 30, 2022, was $1.53 billion, of which we estimate that approximately $0.86 billion will be shipped by June 30, 2023.
•We used $93.0 million of cash in operating activities for the three months ended June 30, 2022, as compared with cash used in operations of $149.5 million in the comparable prior year period.
Aviation Manufacturing Jobs Protection Program
As disclosed in Note 2, in November 2021, we entered into an agreement with the Department of Transportation (“DOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”). We received total proceeds under this program of $19.4 million, of which approximately $8.8 million was received in the three months ended June 30, 2022. In July, we received a letter from the DOT confirming that we had satisfied the reporting requirements under the AMJP. In the three months ended June 30, 2022, we recognized the final approximately $5.0 million of the grant benefit as a reduction in cost of sales.
Significant Developments in Key Programs
Discussion of significant developments on key programs is included below.
Boeing 767
Boeing's 767 program includes the commercial program and a derivative to support the related tanker program. The 767 currently has a production rate of three aircraft per month. Approximately 14% of our revenue in the three months ended June 30, 2022, were generated by 767 production from our Stuart, Florida, operations, which, as disclosed above, we have sold subsequent to June 30, 2022. The impact of 767 production on our operating income was not significant.
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Boeing 747-8
Production, production facility exit plans, and storage facility exit plans are complete on the 747-8 program.
With the exception of the impact of divestitures, none of the programs noted above individually are expected to have a material impact on our net revenues. These programs do have the potential, either individually or in the aggregate, to materially and negatively impact our consolidated results of operations if future changes in estimates result in the need for a forward loss provision. Absent any such loss provisions, we do not anticipate that any of these programs will significantly dilute our future consolidated margins.
RESULTS OF OPERATIONS
The following includes a discussion of our consolidated and business segment results of operations. Our diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results. However, we have disclosed the significant variances between the respective periods.
Non-GAAP Financial Measures
We prepare and publicly release annual audited and quarterly unaudited financial statements prepared in accordance with U.S. GAAP. In accordance with Securities and Exchange Commission (the "SEC") rules, we also disclose and discuss certain non-GAAP financial measures in our public filings and earnings releases. Currently, the non-GAAP financial measures that we disclose are Adjusted EBITDA, which is our net loss before interest, income taxes, amortization of acquired contract liabilities, legal settlements, loss on divestitures, share-based compensation expense, depreciation and amortization; and Adjusted EBITDAP, which is Adjusted EBITDA, before pension expense or benefit, including the effects of curtailments, settlements, and other early retirement incentives. We disclose Adjusted EBITDA on a consolidated and Adjusted EBITDAP on a consolidated and a reportable segment basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations with our previously reported results of operations.
We view Adjusted EBITDA and Adjusted EBITDAP as operating performance measures and, as such, we believe that the U.S. GAAP financial measure most directly comparable to such measures is net loss. In calculating Adjusted EBITDA and Adjusted EBITDAP, we exclude from net loss the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. Adjusted EBITDA and Adjusted EBITDAP are not measurements of financial performance under U.S. GAAP and should not be considered as a measure of liquidity, as an alternative to net loss, or as an indicator of any other measure of performance derived in accordance with U.S. GAAP. Investors and potential investors in our securities should not rely on Adjusted EBITDA or Adjusted EBITDAP as a substitute for any U.S. GAAP financial measure, including net loss. In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of Adjusted EBITDA and Adjusted EBITDAP to net loss set forth below, in our earnings releases, and in other filings with the SEC and to carefully review the U.S. GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the U.S. GAAP financial information with our Adjusted EBITDA and Adjusted EBITDAP.
Adjusted EBITDA and Adjusted EBITDAP are used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our U.S. GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 20 years expanding our product and service capabilities, partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our net loss has included significant charges for depreciation and amortization. Adjusted EBITDA and Adjusted EBITDAP exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA and Adjusted EBITDAP helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA and Adjusted EBITDAP are measures of our ongoing operating performance because the isolation of noncash charges, such as depreciation and amortization, and nonoperating items, such as interest, income taxes, pension and other postretirement benefits, provides additional information about our cost structure and, over time, helps track our operating progress. In addition, investors, securities analysts, and others have regularly relied on Adjusted EBITDA and Adjusted EBITDAP to provide financial measures by which to compare our operating performance against that of other companies in our industry.
22
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Set forth below are descriptions of the financial items that have been excluded from our net income to calculate Adjusted EBITDA and Adjusted EBITDAP and the material limitations associated with using these non-GAAP financial measures as compared with net loss from continuing operations:
•Gains or losses from sale of assets and businesses may be useful for investors to consider because they reflect gains or losses from sale of operating units or other assets. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•Consideration payable to a customer related to a divestiture may be useful for investors to consider because it reflects consideration paid to facilitate the ultimate sale of operating units. We do not believe these charges necessarily reflect the current and ongoing cash earnings related to our operations.
•Legal judgments and settlements, when applicable, may be useful for investors to consider because it reflects gains or losses from disputes with third parties. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•Non-service defined benefit income or expense from our pension and other postretirement benefit plans (inclusive of certain pension related transactions such as curtailments, settlements, early retirement or other incentives) may be useful for investors to consider because they represent the cost of postretirement benefits to plan participants, net of the assumption of returns on the plan's assets and are not indicative of the cash paid for such benefits. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•Amortization of acquired contract liabilities may be useful for investors to consider because it represents the noncash earnings on the fair value of off-market contracts acquired through acquisitions. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•Amortization expense and nonrecurring asset impairments (including goodwill, intangible asset impairments, and nonrecurring rotable inventory impairments) may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of trade names, product rights, licenses, or, in the case of goodwill, other assets that are not individually identified and separately recognized under U.S. GAAP, or, in the case of nonrecurring asset impairments, the impact of unusual and nonrecurring events affecting the estimated recoverability of existing assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•Depreciation may be useful for investors to consider because it generally represents the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•Share-based compensation may be useful for investors to consider because it represents a portion of the total compensation to management and the board of directors. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•The amount of interest expense and other we incur may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense and other to be a representative component of the day-to-day operating performance of our business.
•Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.
23
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Management compensates for the above-described limitations by using non-GAAP measures only to supplement our U.S. GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business.
The following table shows our Adjusted EBITDA and Adjusted EBITDAP reconciled to our net income (loss) for the indicated periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
Net loss (U.S. GAAP measure) |
|
$ |
(10,342 |
) |
|
$ |
(30,351 |
) |
Income tax expense |
|
|
1,750 |
|
|
|
1,214 |
|
Interest expense and other |
|
|
31,912 |
|
|
|
38,558 |
|
Debt extinguishment loss |
|
|
— |
|
|
|
9,689 |
|
Pension settlement, curtailment, and special termination benefit charges |
|
|
— |
|
|
|
16,078 |
|
Consideration payable to customer related to divestiture |
|
|
17,185 |
|
|
|
— |
|
Loss on sale of assets and businesses, net |
|
|
— |
|
|
|
5,969 |
|
Share-based compensation |
|
|
1,578 |
|
|
|
2,247 |
|
Amortization of acquired contract liabilities |
|
|
(523 |
) |
|
|
(1,214 |
) |
Depreciation and amortization |
|
|
9,806 |
|
|
|
15,431 |
|
Adjusted EBITDA (non-GAAP measure) |
|
$ |
51,366 |
|
|
$ |
57,621 |
|
Non-service defined benefit income (excluding curtailments and special termination benefits) |
|
|
(8,586 |
) |
|
|
(14,356 |
) |
Adjusted EBITDAP (non-GAAP measure) |
|
$ |
42,780 |
|
|
$ |
43,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show our Adjusted EBITDAP by reportable segment reconciled to our operating income (loss) for the indicated periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2022 |
|
|
|
Total |
|
|
Systems & Support |
|
|
Aerospace Structures |
|
|
Corporate/ Eliminations |
|
Operating income (loss) |
|
$ |
14,734 |
|
|
$ |
33,151 |
|
|
$ |
(2,301 |
) |
|
$ |
(16,116 |
) |
Consideration payable to customer related to divestiture |
|
|
17,185 |
|
|
|
— |
|
|
|
17,185 |
|
|
|
— |
|
Share-based compensation |
|
|
1,578 |
|
|
|
— |
|
|
|
— |
|
|
|
1,578 |
|
Amortization of acquired contract liabilities |
|
|
(523 |
) |
|
|
(523 |
) |
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
9,806 |
|
|
|
7,521 |
|
|
|
1,696 |
|
|
|
589 |
|
Adjusted EBITDAP |
|
$ |
42,780 |
|
|
$ |
40,149 |
|
|
$ |
16,580 |
|
|
$ |
(13,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021 |
|
|
|
Total |
|
|
Systems & Support |
|
|
Aerospace Structures |
|
|
Corporate/ Eliminations |
|
Operating income (loss) |
|
$ |
20,832 |
|
|
$ |
35,546 |
|
|
$ |
11,223 |
|
|
$ |
(25,937 |
) |
Loss on sale of assets and businesses |
|
|
5,969 |
|
|
|
— |
|
|
|
— |
|
|
|
5,969 |
|
Share-based compensation |
|
|
2,247 |
|
|
|
— |
|
|
|
— |
|
|
|
2,247 |
|
Amortization of acquired contract liabilities |
|
|
(1,214 |
) |
|
|
(1,202 |
) |
|
|
(12 |
) |
|
|
— |
|
Depreciation and amortization |
|
|
15,431 |
|
|
|
8,504 |
|
|
|
6,159 |
|
|
|
768 |
|
Adjusted EBITDAP |
|
$ |
43,265 |
|
|
$ |
42,848 |
|
|
$ |
17,370 |
|
|
$ |
(16,953 |
) |
24
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.
Three months ended June 30, 2022, compared with three months ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
349,384 |
|
|
$ |
396,646 |
|
Segment operating income |
|
$ |
30,850 |
|
|
$ |
46,769 |
|
Corporate expense |
|
|
(16,116 |
) |
|
|
(25,937 |
) |
Total operating income |
|
|
14,734 |
|
|
|
20,832 |
|
Interest expense and other |
|
|
31,912 |
|
|
|
38,558 |
|
Debt extinguishment loss |
|
|
— |
|
|
|
9,689 |
|
Non-service defined benefit (income) loss |
|
|
(8,586 |
) |
|
|
1,722 |
|
Income tax expense |
|
|
1,750 |
|
|
|
1,214 |
|
Net loss |
|
$ |
(10,342 |
) |
|
$ |
(30,351 |
) |
Net Sales
Organic sales adjusted for intersegment sales increased $2.8 million, or 0.8%, offset by declines from approximately $17.2 million in consideration payable to a customer recognized in the three months ended June 30, 2022, related to the divestiture of our Stuart manufacturing operations, the composites and large structure manufacturing operations and Staverton, United Kingdom, divestitures of $25.4 million and sunsetting programs (i.e., 747-8 and G280) of $7.6 million. Organic sales increased primarily due to increased volume on the 737 partially offset by decreased military rotorcraft volume.
Segment Operating Income
Organic segment operating income increased $0.1 million, or 0.1%, offset by the approximately $17.2 million in consideration payable to a customer described above. Operating income from the divestitures and sunsetting programs was flat year over year. Organic gross margin for the three months ended June 30, 2022, was 27.1% compared with 26.1% for the three months ended June 30, 2021. The organic gross margin for the three months ended June 30, 2022, increased primarily from the recognition of grant benefits under the AMJP agreement with the DOT of approximately $5.0 million as well as sales mix and timing of reserve adjustments.
Gross margin for the three months ended June 30, 2022, included net favorable cumulative catch-up adjustments on long-term contracts of $10.7 million. The favorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $15.6 million and gross unfavorable adjustments of $4.9 million. Gross margins for the three months ended June 30, 2021, included net favorable cumulative catch-up adjustments of $14.9 million.
Corporate Expense
Corporate expenses decreased primarily due to decreased loss on sale of assets and businesses of $6.0 million.
Income Taxes
The effective income tax rate for the three months ended June 30, 2022, was (20.4)% compared with (4.2)% for the three months ended June 30, 2021. For the three months ended June 30, 2022, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance.
Business Segment Performance — Three months ended June 30, 2022, compared with three months ended June 30, 2021
We report our financial performance based on the following two reportable segments: Systems & Support and Aerospace Structures. Our Chief Operating Decision Maker ("CODM") utilizes Adjusted EBITDAP as a primary measure of profitability to evaluate performance of its segments and allocate resources.
The results of operations among our reportable segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. For example, Systems & Support, which generally includes proprietary products and/or arrangements where we become the primary source or one of a few primary sources to our customers, our unique engineering and manufacturing capabilities command a higher margin.
Refer to Note 1 for further details regarding the operations and capabilities of each of our reportable segments.
25
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
We currently generate a majority of our revenue from sales to OEMs and aftermarket MRO services in the commercial airline and military and defense markets. Our growth and financial results are largely dependent on continued demand for our products and services within these markets. If any of the related industries experiences a downturn, our clients in these sectors may conduct less business with us. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
% of Total Sales |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
NET SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems & Support |
|
$ |
254,643 |
|
|
$ |
258,413 |
|
|
|
(1.5 |
)% |
|
|
72.9 |
% |
|
|
65.2 |
% |
Aerospace Structures |
|
|
94,753 |
|
|
|
138,252 |
|
|
|
(31.5 |
)% |
|
|
27.1 |
% |
|
|
34.8 |
% |
Elimination of intersegment sales |
|
|
(12 |
) |
|
|
(19 |
) |
|
|
36.8 |
% |
|
|
— |
|
|
|
— |
|
Total net sales |
|
$ |
349,384 |
|
|
$ |
396,646 |
|
|
|
(11.9 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
% of Segment Sales |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
SEGMENT OPERATING INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems & Support |
|
$ |
33,151 |
|
|
$ |
35,546 |
|
|
|
(6.7 |
)% |
|
|
13.0 |
% |
|
|
13.8 |
% |
Aerospace Structures |
|
|
(2,301 |
) |
|
|
11,223 |
|
|
|
(120.5 |
)% |
|
|
(2.4 |
)% |
|
|
8.1 |
% |
Corporate |
|
|
(16,116 |
) |
|
|
(25,937 |
) |
|
|
37.9 |
% |
|
n/a |
|
|
n/a |
|
Total segment operating income |
|
$ |
14,734 |
|
|
$ |
20,832 |
|
|
|
(29.3 |
)% |
|
|
4.2 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
% of Segment Sales |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems & Support |
|
$ |
40,149 |
|
|
$ |
42,848 |
|
|
|
(6.3 |
)% |
|
|
15.8 |
% |
|
|
16.7 |
% |
Aerospace Structures |
|
|
16,580 |
|
|
|
17,370 |
|
|
|
(4.6 |
)% |
|
|
14.8 |
% |
|
|
12.6 |
% |
Corporate |
|
|
(13,949 |
) |
|
|
(16,953 |
) |
|
|
17.7 |
% |
|
n/a |
|
|
n/a |
|
|
|
$ |
42,780 |
|
|
$ |
43,265 |
|
|
|
(1.1 |
)% |
|
|
11.7 |
% |
|
|
10.9 |
% |
Systems & Support:
Net Sales
Organic net sales adjusted for intersegment sales increased by $2.2 million, or 0.9%, with additional declines from the Staverton, United Kingdom, divestiture of $5.9 million. Organic sales increased primarily due to increased volume on the 737 partially offset by decreased military rotorcraft volume.
Operating Income and Adjusted EBITDAP
Organic operating income decreased by $2.7 million, or 7.5%. The effect on operating income of the Staverton, United Kingdom, divestiture was not significant. Organic gross margin for the three months ended June 30, 2022, was 28.6% compared with 30.4% for the three months ended June 30, 2021. The decrease in organic gross margin is primarily the result of a change in sales mix and timing of reserve adjustments, partially offset by the recognition of grant benefits under the AMJP agreement with the DOT of approximately $5.0 million. The decrease in organic operating income and Adjusted EBITDAP are the result of these changes in gross margin.
Operating Margin and Adjusted EBITDAP Margin
Operating income and Adjusted EBITDAP as a percentage of segment sales both decreased due to the factors described above.
26
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Aerospace Structures:
Net Sales
Organic net sales increased by $0.7 million, or 0.6%, offset by declines from approximately $17.2 million in consideration payable to a customer recognized in the three months ended June 30, 2022, related to the divestiture of our Stuart manufacturing operations, the composites and large structure manufacturing operations of $19.4 million and sunsetting programs (i.e., 747-8 and G280) of $7.6 million. Organic net sales increased primarily due to increased volume on the 737 partially offset by decreased volume on certain commercial widebody programs.
Operating Income and Adjusted EBITDAP
Organic operating income increased by $2.7 million, or 60.9%, offset by the approximately $17.2 million in consideration payable to a customer described above. The effect on operating income of the divestitures and sunsetting programs was not significant. Organic gross margin for the three months ended June 30, 2022, was 23.6% compared with 15.8% for the three months ended June 30, 2021. The increase in organic gross margin and organic operating income is primarily the result of larger prior period losses from our Spokane, Washington, manufacturing operations the exit of which is nearing completion in the current period. The decrease in Adjusted EBITDAP was not significant.
The gross margin included net favorable cumulative catch-up adjustments of $10.8 million. The net favorable cumulative catch-up adjustments included gross favorable adjustments of $15.5 million and gross unfavorable adjustments of $4.7 million. The net favorable cumulative catch-up adjustment for the three months ended June 30, 2021, was $14.8 million.
Operating Margin and Adjusted EBITDAP Margin
Operating loss as a percentage of segment sales decreased due to the approximately $17.2 million in consideration payable to a customer described above. The increase in organic gross margin described above contributed to the increase in Adjusted EBITDAP margin.
Liquidity and Capital Resources
Operating Cash Flows
Our working capital needs are generally funded through our current cash and cash equivalents, cash flows from operations, and the availability of proceeds from the Securitization Facility. During the three months ended June 30, 2022, we had a net cash outflow of $93.0 million from operating activities compared with a net cash outflow of $149.5 million for the three months ended June 30, 2021, an improvement of $56.5 million, driven in large part by the resolution of long standing customer advances, which were transferred in the sale of our Stuart manufacturing operations and subsequently settled by the buyer in July 2022. Cash flows were primarily driven by timing of payables as well as inventory build in response to increasing demand. We expect cash flows from operations to improve over the balance of the year. Interest payments were approximately $25.9 million for the three months ended June 30, 2022, as compared with $38.5 million for the three months ended June 30, 2021. The decrease in interest payments is the result of decreased interest expense described above.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provided for, among other things, deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021, and the remaining 50% due December 31, 2022. Of the approximately $17.8 million of these deferred payments, we paid approximately $8.9 million in December 2021. The remaining $8.9 million will be repaid in December 2022 in accordance with the provisions of the CARES Act described above. The deferred amounts are recorded within accrued expenses on our condensed consolidated balance sheet as of June 30, 2022.
As disclosed in Note 2, in November 2021 the Company entered into an agreement with the DOT under the AMJP. We received total proceeds under this program of $19.4 million, of which approximately $8.8 million was received in the three months ended June 30, 2022. These cash receipts are classified within cash from operations. Refer to Note 2 for further discussion.
Investing Cash Flows
Cash flows used in investing activities for the three months ended June 30, 2022, decreased $162.2 million from the three months ended June 30, 2021. Cash flows used in investing activities for the three months ended June 30, 2022, were principally the result of a working capital settlement related to a prior period divestiture of approximately $2.3 million. We also used approximately $3.0 million for capital expenditures. Cash flows provided by investing activities for the three months ended June 30, 2021, included cash from the sale of assets and businesses of $180.5 million with additional investing outflows from capital expenditures of $2.1 million and the purchase of a facility in Rayong, Thailand that was included in the related divestiture transaction. We currently expect full year capital expenditures in fiscal 2023 to be in the range of $30.0 million, of which approximately $26.0 million pertains to our core Systems & Support operating segment. The majority of our fiscal 2023 capital expenditures are capital investments designed to improve our manufacturing efficiency and expand our capabilities.
Financing Cash Flows
27
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cash flows used in financing activities for the three months ended June 30, 2022, were $4.4 million, compared with cash flows used in financing activities for the three months ended June 30, 2021, of $360.5 million, the latter being principally related to debt redemption. Current period financing cash flows pertain primarily to borrowings and payments under finance leases and the repurchase of common stock to satisfy employee tax withholding obligations resulting from equity compensation. As of June 30, 2022, we had $134.6 million of cash on hand and $79.0 million was available under our Securitization Facility (subject to any additional constraints arising from the balance of eligible receivables at that time) after giving effect to approximately $21.0 million in outstanding letters of credit, all of which were accruing interest at 1.25% per annum.
As disclosed in Note 12, the exit of our composites manufacturing operations in Spokane, Washington could trigger a multiemployer pension plan withdrawal obligation that, if incurred, would likely be satisfied through annual payments over a period of at least ten years.
The Senior Notes are our senior obligations and rank equally in right of payment with all of our other existing and future senior indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness.
The First Lien Notes are (a) effectively senior to all existing and future second lien obligations (including the 2024 Notes) and all existing and future unsecured indebtedness of the Company and the Guarantor Subsidiaries, but only to the extent of the value of the Collateral (as defined below), and after giving effect to any permitted additional first lien secured obligations and other permitted liens of senior or equal priority; (b) secured by the Collateral on a pari passu basis with any future permitted additional first lien secured obligations, subject to a collateral trust agreement; (c) effectively subordinated to any existing and future obligations of the Company and the Guarantor Subsidiaries that are secured by assets that do not constitute the Collateral, in each case, to the extent of the value of the assets securing such obligations; and (d) structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s existing and future subsidiaries that do not guarantee the First Lien Notes, including the Securitization Facility.
The 2024 Notes are (a) effectively subordinated to all obligations of the Company and its subsidiary guarantors that are either (1) secured by a lien on the Collateral (as defined below) that is senior or prior to the second-priority liens securing the 2024 Notes, including the first-priority liens securing the First Lien Notes and certain cash management and hedging obligations, or (2) secured by assets that do not constitute the Collateral, in each case to the extent of the value of the assets securing such obligations; (b) effectively senior to all existing and future unsecured debt of the Company and its subsidiary guarantors, but only to the extent of the value of the Collateral (after giving effect to any senior liens on the Collateral); and (c) are structurally subordinated in right of payment to all indebtedness and other liabilities of the Company’s existing and future subsidiaries that do not guarantee the 2024 Notes, including the Receivables Securitization Facility.
The 2025 Notes are effectively subordinated to all obligations of the Company and its subsidiary guarantors that are (A) secured by a lien on the Collateral (including the First Lien Notes and the 2024 Notes) and certain cash management and hedging obligations, or (B) secured by assets that do not constitute the Collateral, in each case to the extent of the value of the assets securing such obligations.
The Senior Notes are guaranteed on a full, joint and several basis certain of the Company’s domestic restricted subsidiaries (the “Guarantor Subsidiaries”). Currently, our only consolidated subsidiaries that are not guarantors of the Senior Notes (the "Non-Guarantor Subsidiaries") are: (i) the receivables securitization special purpose entity, and (ii) the foreign operating subsidiaries. The First Lien Notes and the related guarantees are secured by first-priority liens on substantially all of our assets and our subsidiary guarantors, whether now owned or hereafter acquired (the “Collateral”). The 2024 Notes, and the related guarantees are secured, subject to permitted liens, by second-priority liens on the Collateral. The Senior Notes and the related guarantees are not secured by the assets of Non-Guarantor Subsidiaries. Some of our assets are excluded from the Collateral, including certain real property assets.
Pursuant to the documentation governing the Senior Notes, we may redeem some or all of the Senior Notes prior to their stated maturities, subject to certain limitations set forth in the indenture governing the applicable Senior Notes and, in certain cases, subject to significant prepayment premiums. We are obligated to offer to repurchase the Senior Notes at specified prices as a result of certain change-of-control events and a sale of all or substantially all of our assets. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The indentures governing the Senior Notes, as well as Securitization Facility, contain covenants and restrictions that, among other things, limit our ability and the ability of any of the Guarantor Subsidiaries to (i) grant liens on our assets; (ii) make dividend payments, other distributions or other restricted payments; (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments or investments; (iv) enter into sale and leaseback transactions; (v) merge, consolidate, transfer or dispose of substantially all of their assets; (vi) incur additional indebtedness; (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries (in the case of the Senior Notes); and (viii) enter into transactions with affiliates.
28
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
We are currently in compliance with all covenants under our debt documents and expect to remain in compliance for the foreseeable future.
We continue to anticipate minimal required contributions relative to our defined benefit plans over the course of the next few years. However, assets within the defined benefit plan trust have experienced recent losses in line with overall market performance, and if not recovered over time, may trigger future funding requirements sooner than previously anticipated.
For further information on our long-term debt, see Note 6.
The following tables present summarized financial information of the Company and the Guarantor Subsidiaries on a combined basis. The combined summarized financial information eliminates intercompany balances and transactions among the Company and the Guarantor Subsidiaries and equity in earnings and investments in any Guarantor Subsidiaries or Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and Guarantor Subsidiaries.
|
|
|
|
|
|
|
|
|
Parent and Guarantor Summarized Financial Information |
|
June 30, |
|
|
March 31, |
|
Summarized Balance Sheet |
|
2022 |
|
|
2022 |
|
|
|
(in thousands) |
|
Assets |
|
|
|
|
|
|
Due from Non-Guarantor Subsidiaries |
|
$ |
4,619 |
|
|
$ |
1,034 |
|
Current assets |
|
|
616,956 |
|
|
|
705,662 |
|
Noncurrent assets |
|
|
654,070 |
|
|
|
661,160 |
|
Noncurrent receivable from Non-Guarantor Subsidiaries |
|
|
108,809 |
|
|
|
92,865 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Due to Non-Guarantor Subsidiaries |
|
|
15,598 |
|
|
|
15,079 |
|
Current liabilities |
|
|
506,762 |
|
|
|
562,731 |
|
Noncurrent liabilities |
|
|
1,922,395 |
|
|
|
1,938,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Summarized Statement of Operations |
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
(in thousands) |
|
Net sales to Non-Guarantor Subsidiaries |
|
|
|
|
|
459 |
|
Net sales to unrelated parties |
|
|
|
|
|
324,087 |
|
Gross profit |
|
|
|
|
|
69,604 |
|
Loss from continuing operations before income taxes |
|
|
|
|
|
(9,205 |
) |
Net loss |
|
|
|
|
|
(9,952 |
) |
Critical Accounting Policies
Our critical accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended March 31, 2022. Except as otherwise disclosed in the condensed consolidated financial statements and accompanying notes included in this report, there were no material changes subsequent to the filing of the Annual Report on Form 10-K for the fiscal year ended March 31, 2022, in our critical accounting policies or in the assumptions or estimates used to prepare the financial information appearing in this report.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our future operations and prospects, including statements that are based on current projections and expectations about the markets in which we operate, and our beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like “may,” “might,” “will,” “expect,” “anticipate,” “believe,” “potential,” "plan," "estimate," and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by us. In addition to these factors, among other factors that could cause actual results to differ materially are uncertainties relating to our ability to execute on our restructuring plans, the integration of acquired businesses, divestitures of our business, general economic
29
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
conditions affecting our business, dependence of certain of our businesses on certain key customers as well as competitive factors relating to the aviation industry. For a more detailed discussion of these and other factors affecting us, see the risk factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the SEC on May 23, 2022, and in our quarterly reports on Form 10-Q.
30