UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Form 10-Q
or
Commission File Number
ASTRONICS CORPORATION
New York
16-0959303
130 Commerce Way East Aurora, New York
14052
(716) 805-1599
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
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 [X]
No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ]
No [X]
As of July 2, 2005 7,858,351 shares of common stock were outstanding consisting of 6,094,009 shares of common stock ($.01 par value) and 1,764,342 shares of Class B common stock ($.01 par value).
PART I - FINANCIAL INFORMATION
ASTRONICS CORPORATIONConsolidated Balance SheetJuly 2, 2005With Comparative Figures for December 31, 2004
(dollars in thousands)
July 2, 2005
December 31,
(Unaudited)
2004
$
1,093
8,476
-
1,000
14,935
5,880
16,994
7,110
886
560
604
796
50
660
34,562
24,482
32,642
25,252
11,000
10,031
21,642
15,221
369
488
4,370
951
2,550
2,615
1,652
1,479
65,145
45,236
904
908
7,000
7,336
2,551
3,263
1,077
3,243
2,426
1,309
1,030
110
533
25,312
6,378
10,641
11,154
4,616
4,543
955
501
68
66
19
3,627
3,432
614
656
23,012
22,206
27,340
26,379
3,719
23,621
22,660
See notes to financial statements.
Consolidated Statement of Income and Retained EarningsPeriods Ended July 2, 2005With Comparative Figures for 2004(Unaudited)(dollars in thousands except per share data)
Six Months Ended
Three Months Ended
July 3, 2004
34,495
17,909
18,839
8,940
27,707
14,772
15,344
7,491
4,793
2,532
2,582
1,265
313
142
191
85
32,813
17,446
18,117
8,841
1,682
463
722
99
876
180
525
42
806
283
197
57
22,940
23,223
.10
.04
.02
.01
Consolidated Statement of Cash FlowsSix Months Ended July 2, 2005With Comparative Figures for 2004(Unaudited) (dollars in thousands)
2005
1,322
658
527
59
(89)
155
(3,126)
(1,007)
(2,775)
(517)
39
(141)
2,684
715
114
162
640
(110)
257
(13,366)
(1,333)
(405)
(142)
(133)
(13,841)
(538)
(467)
(474)
4
6,695
(470)
44
(25)
(6,960)
(776)
(423)
(17)
(7,383)
(793)
11,808
11,015
ASTRONICS CORPORATIONNotes to Consolidated Financial Statements
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. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the six-month period ended July 2, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation's (the "Company") 2004 annual report to shareholders.
Stock Based Compensation - The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. The measurement prescribed by APB Opinion No. 25 does not recognize compensation expense if the exercise price of the stock option equals the market price of the underlying stock on the date of grant. Accordingly, no compensation expense related to stock options has been recorded in the financial statements.
For purposes of pro forma disclosures, the estimated fair value of the Company's stock options at the date of grant is amortized to expense over the options' vesting period. The Company's pro forma information for the 2005 and 2004 first six months and second quarters are presented in the table below:
673
0.10
On February 3, 2005, the Company acquired the assets of the Airborne Electronic Systems (AES) business unit from a subsidiary of General Dynamics, for $13.0 million in cash at closing with an additional purchase consideration of up to $4.0 million based on 2005 revenue. AES produces a wide range of products related to electrical power generation, control, and distribution on military, commercial, and business aircraft complimenting Astronics existing business. Operating results for this acquisition are included in the consolidated statement of earnings from the acquisition date.
Because there is contingent purchase consideration the purchase price and allocation of the purchase price is preliminary until the contingent consideration is known. The Company expects the contingent consideration to be finalized by the end of 2005.
Statement of Financial Accounting Standards 141(SFAS 141) - Business Combinations, requires that when a business combination involves contingent consideration that might result in recognition of additional cost of the acquired entity when the consideration is resolved, an amount equal to the lesser of the maximum contingent consideration or the excess of fair value over the cost of the acquired entity shall be recognized as if it were a liability. When the contingency is resolved and the consideration is issued any excess of consideration over the amount that was recognized as a liability shall be recognized as additional cost of the acquired entity. If the amount initially recognized as if it was a liability exceeds the consideration issued, that excess shall be allocated as a pro rata reduction of the amounts assigned to property, plant and equipment and intangible assets acquired. In accordance with SFAS 141 the Company has recorded a current liability of $3.2 million representing the difference between the fair value of the assets acquired and the consideration paid excluding contingent consideration. As such the purchase price and allocation of the purchase price to the assets acquired is preliminary and will not be finalized until December 31, 2005 when the contingent consideration is determinable. At December 31, 2005 when the contingent consideration if any, is determined, the Company will account for the additional consideration as an adjustment to the purchase price and adjust the preliminary purchase price allocation appropriately. This may affect the preliminary allocation of the purchase price for assets that are depreciated and amortized thus having an impact on depreciation and amortization expense related to those assets. Any adjustment to depreciation and amortization expense will be recorded during the period that it becomes determinable. This is anticipated to be at December 31, 2005.
The following table summarizes the preliminary amounts assigned to the assets acquired and the liabilities assumed at the date of acquisition as of July 2, 2005. This preliminary purchase price allocation will be finalized at the conclusion of fiscal 2005 when the additional purchase consideration, if any, is determinable.
Preliminary Value
WeightedAverage Life(years)
13
N/A
10
6
2
July 2, 2005(proforma)
July 3, 2004(proforma)
July 2, 2005(as reported)
598
0.08
In December of 2002 the Company announced the discontinuance of the Electroluminescent Lamp Business Group, whose business has involved sales of microencapsulated electroluminescent lamps to customers in the consumer electronics industry. The remaining liabilities of discontinued operations at July 2, 2005 consist of lease payments for equipment that was used in this business.
4)
Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. Inventories are as follows:
July 2, 2005(Unaudited)
December 31, 2004
1,916
644
6,147
1,068
8,931
5,398
Comprehensive income consists of net income, foreign currency translation adjustments and mark to market adjustments for derivatives. Total comprehensive income was $202 thousand and $78 thousand for the second quarter of 2005 and 2004 respectively and $764 thousand and $264 thousand for 2005 and 2004 year to date.
6)
( in thousands, except per share data)
7,835
7,762
7,857
127
54
166
7,962
7,816
8,023
12
154
156
77
78
27
220
222
111
1
20
5
16
8
40
Product Warranties
82
70
280
75
200
100
(106)
(56)
(3)
(1)
273
74
On December 16, 2004 the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R) (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006, which is when the Company expects to adopt it.
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), no amounts of operating cash flows were recognized in prior periods for such excess tax deductions.
On April 12, 2005, New York State enacted tax legislation resulting in a change to the New York State apportionment methodology. Beginning in 2006, a single sales factor apportionment method will be phased in, with a single sales factor solely used in 2008. It is expected that this enacted legislation will result in a lower apportionment of the Company's taxable income to New York State, resulting in lower New York state income taxes. Accordingly, the Company's ability to use or realize New York State tax credits will be reduced. The Company has assessed the impact of the new tax legislation and recorded a valuation allowance reducing the Company's $490 thousand deferred tax asset relating to New York State tax credits to $40 thousand. As a result of this valuation allowance the Company recorded a non-cash charge to income tax expense of $300 thousand or $.04 per diluted share during the second quarter of 2005. The charge to income tax expense is net of the affect of federal income taxes.
(The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Form 10-K for the year ended December 31, 2004.)
Percent of Net Sales
100.0
%
80.3
82.5
81.5
83.8
13.9
14.1
13.7
0.9
0.8
1.0
95.1
97.4
96.2
98.9
4.9
2.6
3.8
1.1
2005 year to date sales increased 93% to $34.5 million compared with $17.9 million for the same period last year. AES sales contributed $12.3 million of the increase while organic sales grew 24% or $4.3 million. Sales to the business jet market were $8.1 million, up $2.9 million, or 55%, compared with the same period in 2004. The increase of sales to the business jet market is due primarily to an increase in volume as production of new business jets by the airframe manufacturers increased over last year. Sales to the commercial transport market were up $11.1 million, or 317% to $14.6 million compared with the year ago period. The acquisition of AES accounted for this increase. Sales to the military market were $11.2 million, up from $8.4 million in the same period of 2004. $1.2 million of the increase is attributable to the acquisition of AES, the balance of the increase is attributed to a slight increase in demand for military products.
Year to date costs of products sold decreased by 2.2 percentage points to 80.3% as compared to 82.5% for the same period last year. As with the second quarter the addition of AES activity for 2005 has reduced cost of products sold as a percentage of sales. Excluding AES activity for the first six months of 2005, cost of products sold as a percentage of sales would have been 85.3%, an increase of 2.8 percentage points over last year from 82.5%. That increase was also primarily a result of an increase in engineering costs of approximately $950 thousand as compared to the first six months of 2004 as well as changes in product mix. These engineering costs are a result of an increase in personnel as well as increased costs for goods and services supplied by vendors such as qualification testing and out sourced testing and design work as compared to last year.
Selling, general and administrative (SG&A) expense as a percent of sales was 13.7% for the second quarter of 2005, a decrease of less than 1 percentage point compared with 14.1% for the same period of 2004.
For the first six months of 2005 SG&A as a percentage of sales was 13.9% compared to 14.1% for the same period of 2004. Excluding AES's SG&A expense for the first half of 2005 of $2.0 million , SG&A costs increased by $0.2 million for the first six months of 2005 compare with the same period in 2004. This increase is primarily the result of increased costs associated with audit and other professional services.
Net interest expense for the second quarter increased by $106 thousand from $85 thousand in the second quarter of 2004 to $191 thousand for the same period of 2005. This increase was a result of reduced interest income, increased borrowings and increased interest rates. In February 2005 the Company borrowed $7.0 million and used $6.0 million of cash to acquire AES, this resulted in increased net interest expense. Net interest expense for the first six months of 2005 increased by $171 thousand from $142 thousand to $313 thousand for the same reasons.
TAXES
The effective income tax rate for the second quarter of 2005 was 72.7% compared to 42.4% for the same period last year. The effective income tax rate for the first six months of 2005 was 52.1% compared to 38.9% for the same period last year. On April 12, 2005, New York State enacted tax legislation resulting in a change to the New York State apportionment methodology. Beginning in 2006, a single sales factor apportionment method will be phased in, with a single sales factor solely used in 2008. It is expected that this enacted legislation will result in a lower apportionment of the Company's taxable income to New York State, resulting in lower New York State income taxes. Accordingly, the Company's ability to use or realize New York State tax credit carry forwards will be reduced. The Company has assessed the impact of the new tax legislation and recorded a valuation allowance reducing the Company's $490 thousand deferred tax asset relating to New York State tax credits to $40 thousand. As a result of this valuation allowance the Company recorded a non-cash charge to income tax expense of $300 thousand or $.04 per share during the second quarter of 2005. The charge to income tax expense is net of the affect of federal income taxes. The company expects its effective income tax rate to approximate the statutory rates in the future.
Net income for the second quarter of 2005 was $197 thousand, an increase of $140 thousand from $57 thousand in the second quarter of 2004. Net income was significantly impacted by the deferred tax asset write down referred to in the previous "Taxes" section. The increased net income as compared to the second quarter of 2004 was due primarily to the acquisition of AES which contributed $543 thousand to pre tax income. Changes in the number of shares outstanding did not significantly impact the calculation.
LIQUIDITY
Cash provided by operating activities was $142 thousand during the first half of 2005, as compared with $257 thousand in 2004 as a result of net income plus depreciation and amortization and changes in working capital components.
Cash used in investing activities increased to $13.8 million from $538 thousand in the first six months of 2005 due to the $13.3 million acquisition of AES, and increase in capital equipment spending of $928 thousand offset partially by proceeds from the sale of short -term investments of $1 million. The Company's capital expenditures for the first six months were $1.3 million. Capital expenditures for the balance of 2005 are expected to be in the range of $800 thousand to $1.0 million.
The Company has a cash balance of $1.1 million at July 2, 2005.
The Company believes that cash balances at July 2, 2005, cash flow from operations and its available credit facility will be adequate to meet the Company's operational and capital expenditure requirements for 2005.
The Company's contractual obligations and commercial commitments have not changed materially from disclosures in the Company's Form 10-K for the year ended December 31, 2004, except with respect to the Company's acquisition of AES. The following table showing the additional obligations and commitments related to the AES acquisition should be considered in addition to the table appearing in the Company's Form 10-K for the year ended December 31, 2004.
Total
>1 year
1-2 years
3-4 years
After 4 years
MARKET RISK
NEW ACCOUNTINGPRONOUNCEMENTS
See note 9 in Item 1 of this Form 10Q for recently issued accounting standards that may have a material impact on our financial position or results of operations
This Quarterly Report contains "forward-looking statements". Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions affecting our customers and suppliers, competitors' responses to our products and services, particularly with respect to pricing, the overall market acceptance of such products and services, and successful completion of our capital expansion program. We use words like "will," "may," "should," "plan," "believe," "expect," "anticipate," "intend," "future" and other similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of their respective dates. These forward-looking statements are based on our current expectations and are subject to number of risks and uncertainties. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur.
See Market Risk in Item 2, above.
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
(b) Average Price Paid per Share
432,956
None
The Company filed a form 8-K on August 4, 2005, regarding its press release announcing its 2005 year to date and second quarter earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)