Astronics Corp. 10-Q/A
Table of Contents

DRAFT 4 — MARCH 7, 2007
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 1, 2006
or
     
o   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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes þ            No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o           Accelerated filer o           Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o           No þ
As of April 1, 2006 7,920,291 shares of common stock were outstanding consisting of 6,433,178 shares of common stock ($.01 par value) and 1,487,113 shares of Class B common stock ($.01 par value).
 
 


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EXPLANATORY NOTE
We have restated the Company’s unaudited consolidated financial statements for the quarter ended April 1, 2006 in this Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the Quarter Ended April 1, 2006 (the “Form 10-Q”) initially filed with the Securities and Exchange Commission (the “Commission”) on May 15, 2006 (the “Original Filing”), which reflects first quarter 2006 restated financial statements and related footnote disclosures to correct an error which understated sales reported on the income statement for the quarter ended April 1, 2006 by $0.3 million and understated net income by $0.1 million. There was no restatement necessary for the quarter ended April 5, 2005.
As required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, Astronic’s principal executive officer and principal financial officer are providing Rule 13a-14(a) certifications dated March 14, 2007 in connection with this Form 10-K/A (but otherwise identical to their prior certifications) and are also furnishing, but not filing, written statements pursuant to section 906 of the Sarbanes-Oxley Act of 2002 dated March 14, 2007 (but otherwise identical to their prior statements); and Astronics is re-filing the Consent of Independent Registered Public Accounting Firm dated March 14, 2007 (identical to the previously filed consent).
The amendment on Form 10-K/A (“Form 10-K/A”) to the Company’s Annual Report on Form 10-K for the period ended December 31, 2005, initially filed with the Securities and Exchange Commission on March 27, 2006 (the “Original Filing”), reflects 2005 restated financial statements and related footnote disclosures to correct an error which overstated sales reported on the income statement at December 31, 2005 by $1.0 million and net income by $0.4 million.
On March 5, 2007, the Company concluded that its financial statements for the year ended December 31, 2005 and each of the quarters ended April, 1, 2006, July 1, 2006 and September 30, 2006 should be restated to correct an error whereby the Company incorrectly reported revenue from a bill and hold arrangement with one customer.
This correction resulted in the following:
                         
(In thousands)   April 1,   April 2,   December 31,
    2006   2005   2005
     
a) An increase in Sales
  $ 337     $       N/A  
b) An increase in Cost of Products Sold associated with the change in Sales
    174             N/A  
c) An increase in Income Before Taxes from Continuing Operations
    163             N/A  
d) An increase in Income Tax Expense associated with the change in Income Before Taxes from Continuing Operations
    55             N/A  
e) An increase in Net Income
    108             N/A  
f) An increase in Basic Earnings Per Share
    .02             N/A  
g) An increase in Diluted Earnings Per Share
    .01             N/A  
h) An increase in Deferred Revenue due to the related change in Sales
    661           $ 998  
i) An increase in Finished Goods Inventory due to the related change in Cost of Products Sold
    194             368  
j) An increase in Current Deferred Tax Assets associated with the change in Income Before Taxes from Continuing Operations
    159             214  
k) A reduction in Retained Earnings associated with the correction
    (308 )           (416 )
All referenced amounts in this report as of April 1, 2006 and December 31, 2005, and for the three months ended April 1, 2006, reflect balances and amounts on a restated basis. All of our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and Form 10Q/A will reflect the restated information included in this Form 10-Q/A, as applicable. There was no restatement necessary for the three months ended April 2, 2005.
This Form 10-Q/A is filed as part of the restatement (the “Restatement”) of our previously issued financial statements for the year ended December 31, 2005 and as well as the Company’s selected financial data for 2005 as set forth in Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Accordingly, we are also filing with the Commission substantially contemporaneously herewith (i) an amendment on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2005, (ii) an amendment on Form 10-Q/A to our Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 and (iii) an amendment on Form 10-Q/A to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. These additional amended filings with the Commission correct the same types of errors noted above. We do not intend to file any other amended Annual Reports on Form 10-K affected by this Restatement.

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This Amendment No. 1 amends only the following portions of the 10-Q; the remainder of the form 10-Q is unchanged and is not reproduced in the Amendment No. 1. The Amendment No. 1 does not reflect the events occurring after the original filing date of the Form 10-Q. Also, the Original Filing has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act (See Exhibits 31.1, 31.2 and 32).
This Amendment No. 1 contains changes to the following disclosures:
     Part I, Item 1 – Financial Statements
     Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Part I, Item 4 – Controls and Procedures
     Part II, Item 6 – Exhibits and reports on Form 8-K

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TABLE OF CONTENTS
 
EX-31.1 302 Certification for CEO
EX-31.2 302 Certification for CFO
EX-32 906 Certification for CEO and CFO
 EX-31.1
 EX-31.2
 EX-32

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Balance Sheet
April 1, 2006
With Comparative Figures for December 31, 2005
(dollars in thousands)
                 
    April 1,     December 31,  
    2006     2005  
    Restated     Restated  
    (Unaudited)          
Current Assets:
               
Cash and Cash Equivalents
  $ 6     $ 4,473  
Accounts Receivable, net of allowance for doubtful accounts of $338 in 2006 and $365 in 2005
    15,949       12,635  
Inventories
    21,563       19,381  
Prepaid Expenses
    892       626  
Deferred Taxes
    1,045       989  
 
           
Total Current Assets
    39,455       38,104  
 
           
 
               
Property, Plant and Equipment, at cost
    32,300       31,665  
Less Accumulated Depreciation and Amortization
    11,696       11,204  
 
           
Net Property, Plant and Equipment
    20,604       20,461  
 
           
 
               
Intangible Assets, net of accumulated amortization of $406 in 2006 and $329 in 2005
    3,323       3,400  
Goodwill
    2,668       2,686  
Other Assets
    1,746       1,788  
 
           
Total Assets
  $ 67,796     $ 66,439  
 
           
See notes to financial statements.

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ASTRONICS CORPORATION
Consolidated Balance Sheet
April 1, 2006
With Comparative Figures for December 31, 2005
(dollars in thousands)
                 
    April 1,     December 31,  
    2006     2005  
    Restated     Restated  
    (Unaudited)          
Current Liabilities:
               
Current Maturities of Long-term Debt
  $ 913     $ 914  
Note Payable
    6,000       7,000  
Accounts Payable
    8,035       5,421  
Accrued Payroll and Employee Benefits
    2,747       3,861  
Income Taxes Payable
    726       171  
Customer Advanced Payments and Deferred Revenue
    4,779       5,402  
Contract Loss Reserve
    568       830  
Other Accrued Expenses
    814       1,156  
 
           
Total Current Liabilities
    24,582       24,755  
 
               
Long-term Debt
    10,239       10,304  
Supplemental Retirement Plan and Other Benefits
    4,537       4,494  
Other Liabilities
    1,320       1,317  
Deferred Income Taxes
    182       151  
 
               
Shareholders’ Equity:
               
Common Stock, $.01 par value Authorized 20,000,000 shares, issued 7,111,616 in 2006, 7,082,100 in 2005
    71       71  
Class B Stock, $.01 par value Authorized 5,000,000 shares, issued 1,592,295 in 2006, 1,603,323 in 2005
    16       16  
Additional Paid-in Capital
    4,042       3,808  
Accumulated Other Comprehensive Income
    765       799  
Retained Earnings
    25,761       24,443  
 
           
 
    30,655       29,137  
 
               
Less Treasury Stock: 784,250 shares in 2006 and 2005
    3,719       3,719  
 
           
Total Shareholders’ Equity
    26,936       25,418  
 
           
Total Liabilities and Shareholders’ Equity
  $ 67,796     $ 66,439  
 
           
See notes to financial statements.

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ASTRONICS CORPORATION
Consolidated Statement of Income and Retained Earnings
Three Months Ended April 1, 2006
With Comparative Figures for 2005
(Unaudited)
(dollars in thousands except per share data)
                 
    April 1,        
    2006     April 2,  
    Restated     2005  
Sales
  $ 25,263     $ 15,656  
 
               
Costs and Expenses:
               
Cost of products sold
    19,851       12,363  
Selling, general and administrative expenses
    3,019       2,207  
Interest expense, net of interest income of $4 in 2006 and $13 in 2005
    199       126  
Other (income) expense
    (12 )      
 
           
Total costs and expenses
    23,057       14,696  
 
           
 
               
Income Before Income Taxes
    2,206       960  
Provision for Income Taxes
    888       351  
 
           
Net Income
  $ 1,318     $ 609  
 
               
Retained Earnings:
               
Beginning of period
    24,443       22,206  
 
           
End of period
  $ 25,761     $ 22,815  
 
           
 
               
Earnings per share:
               
Basic
  $ 0.17     $ 0.08  
 
           
Diluted
  $ 0.16     $ 0.08  
 
           
See notes to financial statements

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ASTRONICS CORPORATION
Consolidated Statement of Cash Flows
Three Months Ended April 1, 2006
With Comparative Figures for 2005
(Unaudited)
(dollars in thousands)
                 
    April 1,        
    2006     April 2,  
    Restated     2005  
Cash Flows from Operating Activities:
               
Net income
  $ 1,318     $ 609  
Adjustments to reconcile net income to cash (used in) provided by operating activities:
               
Depreciation and Amortization
    623       616  
Provision for Doubtful Accounts
    (33 )      
Stock Compensation Expense
    142        
Deferred Tax Provision
    (15 )      
Other
    (18 )     (11 )
Cash flows from changes in operating assets and liabilities, excluding effects of acquisition:
               
Accounts Receivable
    (3,297 )     (1,380 )
Inventories
    (2,196 )     (1,162 )
Prepaid Expenses
    (283 )     (120 )
Accounts Payable
    2,619       1,646  
Accrued Expenses
    (1,435 )     (280 )
Customer Advanced Payments and Deferred Revenue
    (623 )      
Contract Loss Reserves
    (262 )      
Income Taxes
    621       532  
Supplemental Retirement and Other Liabilities
    34        
 
           
Cash (used in) provided by Operating Activities
    (2,805 )     450  
 
           
 
               
Cash Flows from Investing Activities:
               
Business Acquisition
          (13,290 )
Proceeds from sale of short-term investments
          1,000  
Capital Expenditures
    (645 )     (551 )
Other
          (51 )
 
           
Cash used in Investing Activities
    (645 )     (12,892 )
 
           
 
               
Cash Flows from Financing Activities:
               
Principal Payments on Long-term Debt and Capital Lease Obligations
    (53 )     (40 )
Proceeds from Note Payable
          7000  
Payment on Note Payable
    (1,000 )      
Proceeds from Issuance of Stock
    26       34  
 
           
Cash (used in) provided by Financing Activities
    (1,027 )     6,994  
 
           
 
               
Effect of Exchange Rates on Cash
    10       24  
 
           
 
               
Cash used in Continuing Operations
    (4,467 )     (5,424 )
Cash used in Discontinued Operations – operating activities
            (137 )
 
           
Net decrease in Cash and Cash Equivalents
    (4,467 )     (5,561 )
 
               
Cash at Beginning of Period
    4,473       8,476  
 
           
Cash at End of Period
  $ 6     $ 2,915  
 
           
See notes to financial statements

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ASTRONICS CORPORATION
Notes to Consolidated Financial Statements (Restated)
April 1, 2006
(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. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the three-month period ended April 1, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
The balance sheet at December 31, 2005 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 for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s (the “Company”) amended Annual Report on Form 10-K/A for the year ended December 31, 2005.
2) Stock Based Compensation
The Company has stock option plans that authorize the issuance of options for shares of Common Stock to directors, officers and key employees. Stock option grants are designed to reward long-term contributions to the Company and provide incentives for recipients to remain with the Company. The exercise price, determined by a committee of the Board of Directors, may not be less than the fair market value of the Common Stock on the grant date. Options become exercisable over periods not exceeding ten years.
During the first quarter of 2006, the Company adopted SFAS 123(R), “Share-Based Payment,” applying the modified prospective method. This Statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award. Under the modified prospective method, the Company is required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. The Company uses a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense, based on vesting. Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outside directors vest six months from the date of grant and options granted to officers and key employees straight line vest over a five-year period from the date of grant.
The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of the options was $6.05 for options granted during the three months ended April 1, 2006 and was $3.32 for options granted during the three months ended April 2, 2005. The following table provides the range of assumptions used to value stock options granted during the three months ended April 1, 2006 and April 2, 2005.
                 
    Three Months Ended
    April 1, 2006   April 2, 2005
 
Expected volatility
    0.34       0.33  
Risk-free rate
    4.70 %     5.34 %
Expected dividends
    0.00 %     0.00 %
Expected term (in years)
  7 Years     7– 10 Years  

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To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock and considers currently available information to determine if future volatility is expected to differ over the expected terms of the options granted. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.
The table below reflects net earnings and net earnings per share for the three months ended April 1, 2006 compared with the pro forma information for the three months ended April 2, 2005 as follows:
                 
    Three Months Ended  
    April 1,        
    2006     April 2,  
(in thousands, except per share data)   (Restated)     2005  
 
Net earnings, as reported for the prior period (1)
  $ N/A     $ 609  
Stock compensation expense
    142       70  
Tax benefit
    (16 )     (11 )
 
           
Stock compensation expense, net of tax (2)
    126       59  
 
           
Net earnings, including the effect of stock compensation expense (3)
  $ 1,318     $ 550  
 
           
 
               
Net earnings per share:
               
Basic, as reported for the prior period (1)
  $ N/A     $ 0.08  
Basic, including the effect of stock compensation expense (3)
    0.17       0.07  
Diluted, as reported for the prior period (1)
    N/A       0.08  
Diluted, including the effect of stock compensation expense (3)
    0.16       0.07  
 
(1)   Net earnings and earnings per share prior to 2006 did not include stock compensation expense for stock options.
 
(2)   Stock compensation expense prior to 2006 is calculated based on the pro forma application of SFAS No. 123.
 
(3)   Net earnings and earnings per share prior to 2006 represents pro forma information based on SFAS 123.
A summary of the Company’s stock option activity and related information for the three months ended April 1, 2006 is as follows:
                 
    2006  
            Weighted Average  
(in thousands, except for per share data)   Options     Exercise Price  
 
Outstanding at December 31, 2005
    801,583     $ 6.49  
Options Granted
    25,000       13.41  
Options Exercised
    (22,792 )     2.95  
 
             
Outstanding at April 1, 2006
    803,791       6.80  
 
             
 
Exercisable at April 1, 2006
    492,164     $ 6.41  
 
             
The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of April 1, 2006:
                                         
    Outstanding     Exercisable  
            Weighted Average                      
            Remaining Life     Weighted Average             Weighted Average  
Exercise Price Range   Shares     in Years     Exercise Price     Shares     Exercise Price  
 
$2.59-$4.60
    59,195       1.3     $ 3.90       59,195     $ 3.90  
$5.09- $7.65
    550,639       7.3     $ 5.62       348,995     $ 5.63  
$9.83 - $13.49
    193,957       6.8     $ 11.03       83,974     $ 11.44  
 
                                   
 
    803,791       6.7     $ 6.80       492,164     $ 6.41  
 
                                   

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3) Acquisition
On February 3, 2005, the Company acquired substantially all of the assets of the General Dynamics - Airborne Electronic Systems (AES) business unit from a subsidiary of General Dynamics. Astronics AES produces a wide range of products related to electrical power generation, in-flight control, and distribution on military, commercial, and business aircraft. On the acquisition date, the Company paid $13.0 million in cash and incurred approximately $0.4 million in acquisition costs. The Company borrowed $7.0 million on its credit facility and used $6.4 million of cash on hand to finance the purchase and acquisition costs. Results of operations include the results of Astronics AES since February 3, 2005, the date of the acquisition.
The following table summarizes the gross carrying amount and accumulated amortization for major categories of acquired intangible assets:
                                         
                    Accumulated     Gross Carrying     Accumulated  
    Weighted     Gross Carrying     Amortization     Amount Dec. 31,     Amortization  
(in thousands)   Average Life     Amount Apr. 1, 2006     Apr. 1, 2006     2005     Dec 31, 2005  
 
Patents
  12 Years   $ 1,271     $ 116     $ 1,271     $ 91  
Trade Names
        N/A       553             553        
Completed and unpatented technology
  10 Years     487       57       487       45  
Government contracts
  6 Years     347       67       347       53  
Backlog
  4 Years     314       166       314       140  
 
                               
Total Intangible assets
          $ 2,972     $ 406     $ 2,972     $ 329  
 
                               
Amortization expense for each of the next five years will amount to $0.3 million for the year ended December 31, 2006 and $0.2 million for each of the years ended December 31, 2007, 2008, 2009 and 2010.
The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of the acquired business as if the acquisition took place on January 1, 2005. The pro forma consolidated results include the impact of adjustments, including depreciation, amortization of intangibles, increased interest expense on acquisition debt and related income tax effects.
                 
    Three Months Ended
    April 2, 2005   April 2, 2005
(in thousands, except for per share data)   As Reported   Pro Forma
 
Sales
  $ 15,656     $ 17,354  
Net income
    609       401  
 
Basic earnings per share
    0.08       0.05  
Diluted earnings per share
    0.08       0.05  
     The pro forma results are not necessarily indicative of what would have actually occurred if the acquisition had taken place on January 1, 2005. In addition, they are not intended to be a projection of future results.
4) Discontinued Operations
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 liabilities of discontinued operations at April 2, 2005 consisted of lease payments for equipment that was used in this business, the remaining payments under these leases were made during 2005. As of April 1, 2006 there were no remaining assets or liabilities of discontinued operations.

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5) Inventories
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:
                 
    April 1,     December 31,  
    2006     2005  
(in thousands)   Restated     Restated  
 
Finished Goods
  $ 2,708     $ 3,026  
Work in Progress
    9,368       7,805  
Raw Material
    9,487       8,550  
 
           
 
  $ 21,563     $ 19,381  
 
           
6) Comprehensive Income and accumulated other comprehensive income.
The components of Comprehensive income are as follows:
                 
    Three Months Ended  
    April 1,        
    2006     April 2,  
(in thousands)   (Restated)     2005  
 
Net income
  $ 1,318     $ 609  
Other comprehensive income:
               
Foreign currency translation adjustments
    (17 )     (69 )
Loss on derivatives, net of tax
    (17 )     22  
 
           
Comprehensive income
  $ 1,284     $ 562  
 
           
The components of accumulated other comprehensive income area as follows:
                 
    April 1,     December 31,  
(in thousands)   2006     2005  
 
Cumulative foreign currency adjustments
  $ 782     $ 799  
Accumulated loss on derivatives, net of tax
    (17 )     0  
 
           
Accumulated other comprehensive income
  $ 765     $ 799  
 
           
7) Earnings Per Share
The following table sets forth the computation of earnings per share:
                 
    Three Months Ended  
    April 1, 2006        
(in thousands, except per share data)   (Restated)     April 2, 2005  
 
Net Income
  $ 1,318     $ 609  
 
           
 
Basic earnings per share weighted average shares
    7,912       7,813  
Net effect of dilutive stock options
    231       87  
 
           
Diluted earnings per share weighted average shares
    8,143       7,900  
 
           
 
Basic earnings per share
  $ 0.17     $ 0.08  
Diluted earnings per share
  $ 0.16     $ 0.08  

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8) Supplemental Retirement Plan and Related Post Retirement Benefits
The Company has a non-qualified supplemental retirement defined benefit plan for certain executives. The following table sets forth information regarding the net periodic pension cost for the plan.
                 
    Three Months Ended  
(in thousands)   April 1, 2006     April 2, 2005  
 
Service cost
  $ 9     $ 6  
Interest cost
    77       77  
Amortization of prior service cost
    27       27  
Amortization of Net Actuarial Losses
    1        
 
           
Net periodic cost
  $ 114     $ 110  
 
           
Participants in the non-qualified supplemental retirement plan are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The following table sets forth information regarding the net periodic cost recognized for those benefits
                 
    Three Months Ended  
(in thousands)   April 1, 2006     April 2, 2005  
 
Service cost
  $ 2     $ 1  
Interest cost
    11       10  
Amortization of prior service cost
    8       8  
Amortization of Net Actuarial Losses
    3       1  
 
           
Net periodic cost
  $ 24     $ 20  
 
           
9) New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard did not have an impact on the results of operations, cash flows or financial position in the first quarter of 2006.
10) Restatement of Previously Issued Financial Statements
The Company has restated its previously issued financial statements for the year ended December 31, 2005 and for the three months ended April 1, 2006 to correct an error regarding the timing of revenue recognition for a bill-and-hold transaction. This error reduces revenue previously reported on the income statement for the year ended December 31, 2005 by $1.0 million and net income by $0.4 million. This error understated sales reported on the income statement at April 1, 2006 by $0.3 million and understated net income by $0.1 million. There were no changes necessary to the quarterly financial statements and information for the comparative period ended April 2, 2005.
This correction resulted in the following:
                         
    April 1,   April 2,   December 31,
(In thousands)   2006   2005   2005
     
a) An increase in Sales
  $ 337     $       N/A  
b) An increase in Cost of Products Sold associated with the change in Sales
    174             N/A  
c) An increase in Income Before Taxes from Continuing Operations
    163             N/A  

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    April 1,   April 2,   December 31,
(In thousands)   2006   2005   2005
     
d) An increase in Income Tax Expense associated with the change in Income Before Taxes from Continuing Operations
    55             N/A  
e) An increase in Net Income
    108             N/A  
f) An increase in Basic Earnings Per Share
    .02             N/A  
g) An increase in Diluted Earnings Per Share
    .01             N/A  
h) An increase in Deferred Revenue due to the related change in Sales
    661             998  
i) An increase in Finished Goods Inventory due to the related change in Cost of Products Sold
    194             368  
j) An increase in Current Deferred Tax Assets associated with the change in Income Before Taxes from Continuing Operations
    159             214  
k) A reduction in Retained Earnings associated with the correction
    (308 )           (416 )
             
CONSOLIDATED BALANCE SHEET
                         
    April 1, 2006
    As       As
(in thousands, except per share data)   Reported   Adjustments   Restated
 
Current Assets:
                       
Cash and Cash Equivalents
  $ 6     $       $ 6  
Accounts Receivable, net of allowance for doubtful accounts of $338 in 2006
    15,949               15,949  
Inventories
    21,369       194       21,563  
Prepaid Expenses
    892               892  
Deferred Taxes
    886       159       1,045  
     
Total Current Assets
    39,102       353       39,455  
     
 
                       
Property, Plant and Equipment, at cost
    32,300               32,300  
Less Accumulated Depreciation and Amortization
    11,696               11,696  
     
Net Property, Plant and Equipment
    20,604             20,604  
     
 
                       
Intangible Assets, net of accumulated amortization of $406 in 2006
    3,323               3,323  
Goodwill
    2,668               2,668  
Other Assets
    1,746               1,746  
     
Total Assets
  $ 67,443     $ 353     $ 67,796  
     

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CONSOLIDATED BALANCE SHEET (continued)
                         
    April 1, 2006
    As       As
(in thousands, except per share data)   Reported   Adjustments   Restated
 
Current Liabilities:
                       
Current Maturities of Long-term Debt
  $ 913     $       $ 913  
Note Payable
    6,000               6,000  
Accounts Payable
    8,035               8,035  
Accrued Payroll and Employee Benefits
    2,747               2,747  
Income Taxes Payable
    726               726  
Customer Advanced Payments and Deferred Revenue
    4,118       661       4,779  
Contract Loss Reserve
    568               568  
Other Accrued Expenses
    814               814  
     
Total Current Liabilities
    23,921       661       24,582  
     
 
                       
Long-term Debt
    10,239               10,239  
Supplemental Retirement Plan and Other Benefits
    4,537               4,537  
Other Liabilities
    1,320               1,320  
Deferred Income Taxes
    182               182  
 
                       
Shareholders’ Equity:
                       
Common Stock, $.01 par value Authorized 20,000,000 shares, issued 7,111,616 in 2006
    71               71  
Class B Stock, $.01 par value Authorized 5,000,000 shares, issued 1,592,295 in 2006
    16               16  
Additional Paid-in Capital
    4,042               4,042  
Accumulated Other Comprehensive Income
    765               765  
Retained Earnings
    26,069       (308 )     25,761  
     
 
    30,963       (308 )     30,655  
 
                       
Less Treasury Stock: 784,250 shares in 2006
    3,719               3,719  
     
Total Shareholders’ Equity
    27,244       (308 )     26,936  
     
Total Liabilities and Shareholders’ Equity
  $ 67,443     $ 353     $ 67,796  
     

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CONSOLIDATED BALANCE SHEET
                         
    December 31, 2005
    As       As
(in thousands, except per share data)   Reported   Adjustments   Restated
 
Current Assets:
                       
Cash and Cash Equivalents
  $ 4,473     $       $ 4,473  
Accounts Receivable, net of allowance for doubtful accounts of $365 in 2005
    12,635               12,635  
Inventories
    19,013       368       19,381  
Prepaid Expenses
    626               626  
Deferred Taxes
    775       214       989  
     
Total Current Assets
    37,522       582       38,104  
     
 
Property, Plant and Equipment, at cost
    31,665               31,665  
Less Accumulated Depreciation and Amortization
    11,204               11,204  
     
Net Property, Plant and Equipment
    20,461             20,461  
     
 
Intangible Assets, net of accumulated amortization of $329 in 2005
    3,400               3,400  
Goodwill
    2,686               2,686  
Other Assets
    1,788               1,788  
     
Total Assets
  $ 65,857     $ 582     $ 66,439  
     

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CONSOLIDATED BALANCE SHEET (continued)
                         
    December 31, 2005
    As       As
(in thousands, except per share data)   Reported   Adjustments   Restated
 
Current Liabilities:
                       
Current Maturities of Long-term Debt
  $ 914     $       $ 914  
Note Payable
    7,000               7,000  
Accounts Payable
    5,421               5,421  
Accrued Payroll and Employee Benefits
    3,861               3,861  
Income Taxes Payable
    171               171  
Customer Advanced Payments and Deferred Revenue
    4,404       998       5,402  
Contract Loss Reserve
    830               830  
Other Accrued Expenses
    1,156               1,156  
     
Total Current Liabilities
    23,757       998       24,755  
     
 
                       
Long-term Debt
    10,304               10,304  
Supplemental Retirement Plan and Other Benefits
    4,494               4,494  
Other Liabilities
    1,317               1,317  
Deferred Income Taxes
    151               151  
 
Shareholders’ Equity:
                       
Common Stock, $.01 par value
                       
Authorized 20,000,000 shares, issued 7,082,100 in 2005
    71               71  
Class B Stock, $.01 par value
                       
Authorized 5,000,000 shares, issued 1,603,323 in 2005
    16               16  
Additional Paid-in Capital
    3,808               3,808  
Accumulated Other Comprehensive Income
    799               799  
Retained Earnings
    24,859       (416 )     24,443  
     
 
    29,553       (416 )     29,137  
 
                       
Less Treasury Stock: 784,250 shares in 2005
    3,719               3,719  
     
Total Shareholders’ Equity
    25,834       (416 )     25,418  
     
Total Liabilities and Shareholders’ Equity
  $ 65,857     $ 582     $ 66,439  
     

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CONSOLIDATED STATEMENT OF OPERATIONS
                         
    Three Months Ended April 1, 2006
    As       As
(in thousands, except per share data)   Reported   Adjustments   Restated
 
Sales
  $ 24,926     $ 337     $ 25,263  
 
                       
Costs and Expenses:
                       
Cost of products sold
    19,677       174       19,851  
Selling, general and administrative expenses
    3,019               3,019  
Interest expense, net of interest income of $4 in 2006
    199               199  
Other (income) expense
    (12 )             (12 )
     
Total costs and expenses
    22,883       174       23,057  
     
 
                       
Income Before Income Taxes
    2,043       163       2,206  
Provision for Income Taxes
    833       55       888  
     
Net Income
    1,210       108       1,318  
 
                       
Retained Earnings:
                       
Beginning of period
    24,859       (416 )     24,443  
     
End of period
  $ 26,069     $ (308 )   $ 25,761  
     
 
                       
Earnings per share:
                       
Basic
  $ 0.15     $ 0.02     $ 0.17  
Diluted
    0.15       0.01       0.16  

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CONSOLIDATED STATEMENT OF CASH FLOWS
                         
    Three Months Ended April 1, 2006
    As       As
(in thousands)   Reported   Adjustments   As Restated
 
Cash Flows from Operating Activities:
                       
Net income
  $ 1,210     $ 108     $ 1,318  
Adjustments to reconcile net income to cash (used in) provided by operating activities:
                       
Depreciation and Amortization
    623               623  
Provision for Doubtful Accounts
    (33 )             (33 )
Stock Compensation Expense
    142               142  
Deferred Tax Provision
    (70 )     55       (15 )
Other
    (18 )             (18 )
Cash flows from changes in operating assets and liabilities, excluding effects of acquisition:
                       
Accounts Receivable
    (3,297 )             (3,297 )
Inventories
    (2,370 )     174       (2,196 )
Prepaid Expenses
    (283 )             (283 )
Accounts Payable
    2,619               2,619  
Accrued Expenses
    (1,435 )             (1,435 )
Customer Advanced Payments and Deferred Revenue
    (286 )     (337 )     (623 )
Contract Loss Reserves
    (262 )             (262 )
Income Taxes
    621               621  
Supplemental Retirement and Other Liabilities
    34               34  
     
Cash used in Operating Activities
    (2,805 )           (2,805 )
     
 
Cash Flows from Investing Activities:
                       
Business Acquisition
                   
Proceeds from sale of short-term investments
                   
Capital Expenditures
    (645 )             (645 )
Other
                   
     
Cash used in Investing Activities
    (645 )           (645 )
     
 
Cash Flows from Financing Activities:
                       
Principal Payments on Long-term Debt and Capital Lease Obligations
    (53 )             (53 )
Proceeds from Note Payable
                   
Payment on Note Payable
    (1,000 )             (1,000 )
Proceeds from Issuance of Stock
    26               26  
     
Cash used in Financing Activities
    (1,027 )           (1,027 )
     
 
Effect of Exchange Rates on Cash
    10             10  
     
 
Cash used in Continuing Operations
    (4,467 )           (4,467 )
Cash used in Discontinued Operations – operating activities
                   
     
Net decrease in Cash and Cash Equivalents
    (4,467 )           (4,467 )
 
Cash at Beginning of Period
    4,473             4,473  
     
Cash at End of Period
  $ 6     $     $ 6  
     

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
(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/A for the year ended December 31, 2005.)
The following table sets forth income statement data as a percent of net sales:
                 
    Three Months Ended  
    April 1, 2006        
    Restated     April 2, 2005  
    (Unaudited)     (Unaudited)  
 
Sales
    100.0 %     100.0 %
 
Cost of products sold
    78.6       79.0  
Selling, general and administrative and other expense
    12.0       14.1  
Interest and other (income) expense
    0.7       0.8  
 
           
Total cost and expenses
    91.3       93.9  
 
Income before taxes
    8.7 %     6.1 %
 
           
ACQUISITION
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. The Company used $6 million of cash and borrowed $7 million against its line of credit to finance the acquisition. No goodwill was recognized as a result of this acquisition. Operating results for this acquisition are included in the consolidated statement of earnings from the acquisition date.
SALES
Sales for the first quarter of 2006 increased 61% to $25.3 million compared with $15.7 million for the same period last year.
A portion of the 2006 sales increase is due to the timing of the Astronics AES acquisition. The acquisition date was February 3, 2005, as such 2005’s first quarter contained only eight weeks of sales for Astronics AES as compared with thirteen weeks in the first quarter of 2006.
Sales to the commercial transport market were $12.8 million, as compared to $6.2 million for the same period of 2005, an increase of $6.6 million or 106 percent. The increase is primarily a result of increased volume as the commercial airline market continues to strengthen combined with thirteen weeks of sales in the first quarter of 2006 as compared to eight weeks last year for our Cabin Electronics and Airframe Power product lines which accounted for $6.3 million of the increase. The balance of the increase is due to increased demand for the Cabin Lighting product line. Sales to the business jet market were $4.9 million, up $0.9 million, or 22%, compared with the same period in 2005. 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 military market were $7.1 million as compared to $5.1 million last year, an increase of $2.0 million or 40%. The majority of the increase was Airframe Power sales for the Tactical Tomahawk and Taurus Missile programs which entered high rate production in the second half of 2005.
EXPENSES AND MARGINS
Cost of products sold as a percentage of sales remained relatively flat, decreasing 0.4 percentage points to 78.6% for the first quarter of 2006 as compared to 79.0% for the same period last year. Leverage from the increased sales volume was offset by a $0.6 million increase in engineering and development costs over the same period last year.

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Selling, general and administrative (SG&A) expense as a percent of sales was 12.0% for the first quarter of 2006, a decrease of 2.1 percentage points compared with 14.1% for the same period of 2005. Although SG&A costs increased in the first quarter of 2006 as compared to the first quarter of 2005 they increased at a slower rate than the sales increased. 2006 SG&A costs increased $0.8 million primarily due to the recognition of $0.1 million of Stock Compensation expense upon adoption of SFAS 123 (R) “Share-Based Payments,” an estimated $0.4 million due to a full quarter of expenses at AES compared to only eight weeks in 2005 and the balance due to increases in wages and benefits due to increased staffing and compensation related costs.
Net interest expense for the first quarter of 2006 increased by $0.1 million from $0.1 million in the first quarter of 2005 to $0.2 million primarily due to increased interest rates on the Company’s variable rate debt.
TAXES
The effective income tax rate for the first quarter of 2006 was 40.3% compared to 36.6% last year. The increase is due primarily to increases in permanent differences which do not provide tax benefits and increases in foreign taxes.
NET INCOME AND EARNINGS PER SHARE
Net income for the first quarter of 2006 was $1.3 million or $0.16 per share diluted, an increase of $0.7 million from $0.6 million, or $0.08 per share diluted in the first quarter of 2005. The earnings per share increase is due to increased net income and was not significantly impacted by a change in shares outstanding.
LIQUIDITY
Cash used by operating activities totaled $2.8 million during the first three months of 2006, as compared with $0.5 million of cash provided by operations in 2005. The change is due primarily to increased investment in net working capital components offset by net income.
Cash used in investing activities decreased to $0.6 million in the first quarter of 2006, from $12.9 million in the three months of 2005. This is due primarily to the $13 million acquisition of Astronics AES, offset partially by proceeds from the sale of short-term investments of $1.0 million in 2005. Capital expenditures remained flat from 2005 to 2006 at $0.6 million.
In the first quarter of 2006 the Company used $1.0 million for financing activities. The Company’s cash flow from financing activities decreased $8.0 million as compared to the first quarter of 2005 due primarily to the $7.0 million drawn on the line of credit to partially fund the AES acquisition in 2005 and the 2006 first quarter pay down of $1.0 million on the line of credit.
The Company has a $15 million demand line of credit facility available. Interest on outstanding borrowings bears interest at either LIBOR or prime interest rates at the Company’s option plus an applicable margin, currently 150 basis points. As of April 1, 2006 the Company has $6.0 million outstanding on the line of credit. The line is subject to annual review and is payable on demand. The line of credit, among other requirements, imposes certain financial performance covenants measured on an annual basis with which the Company anticipates it will be compliant.
The Company believes that cash flow from operations and its available credit facility will be adequate to meet the Company’s operational and capital expenditure requirements for 2006.
BACKLOG
The Company’s backlog at April 1, 2006 was $94.7 million compared with $72.3 million at the end of the first quarter of 2005.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company’s contractual obligations and commercial commitments have not changed materially from disclosures in the Company’s Form 10-K/A for the year ended December 31, 2005.
MARKET RISK
Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $17.1 million at April 1, 2006. To partially offset this exposure, the Company entered into an interest rate swap in February 2006, on its New York Industrial Revenue Bond which effectively fixes the rate at 3.99% on this $4.3 million obligation through January 2016. As a result, a change of 1% in interest rates would impact annual net income by less than $0.1 million.
There have been no material changes in the current year regarding the market risk information for its exposure to currency exchange rates. The Company has limited exposure to fluctuation in Canadian currency exchange rates to the U.S. dollar.
Refer to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005 for a complete discussion of the Company’s market risk.
CRITICAL ACCOUNTING POLICIES
Refer to the Company’s annual report on Amended Form 10-K/A for the year ended December 31, 2005 for a complete discussion of the Company’s critical accounting policies. Other than the deferral of revenue from one bill and hold contract as discussed in Amended Form 10-K/A and the adoption of SFAS 123(R), “Share-Based Payments,” there have been no material changes in the current year regarding critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2006, we adopted SFAS 123(R), “Share-Based Payment,” applying the modified prospective method. This Statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award. Under the modified prospective method, we are required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. We use a straight-line method of attributing the value of stock-based compensation expense, based on vesting. Stock compensation expense was $0.1 million in the first quarter of 2006 after taxes. No stock compensation expense was recognized prior to 2006.
In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard did not have an impact on its results of operations, cash flows or financial position in the first quarter of 2006.

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FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves uncertainties and risks. These statements are identified by the use of the words “believes,” “expects,” “intends,” “anticipates”, “may”, “will”, “estimate”, “potential” and words of similar import. Readers are cautioned not to place undue reliance on these forward looking statements as various uncertainties and risks could cause actual results to differ materially from those anticipated in these statements. These uncertainties and risks include the success of the Company with effectively executing its plans; the timeliness of product deliveries by vendors and other vendor performance issues; changes in demand for our products from the U.S. government and other customers; the acceptance by the market of new products developed; our success in cross-selling products to different customers and markets; changes in government contracts; the state of the commercial and business jet aerospace market; the Company’s success at increasing the content on current and new aircraft platforms; the level of aircraft build rates; as well as other general economic conditions and other factors.
Item 4. Controls and Procedures
     As discussed in Note 10 of the “Notes to Condensed Consolidated Financial Statements (Restated),” contained in Part I, Item 1 of this Form 10-Q/A, we have restated in this Form 10-Q/A our unaudited consolidated financial statements for the three months ended April 1, 2006 (the “First Quarter Restatement”). This Item 4 has been updated to reflect the First Quarter Restatement which is related to the correction of an error in our recognition of revenue for a bill and hold relationship with one customer.
Evaluation of Disclosure Controls and Procedures (Restated)
     (a) Disclosure Controls and Procedures: The Company carried out an evaluation, under the supervision and with the participation of Company Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report, to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are effective to ensure such information is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. However, as described below in “Application of Generally Accepted Accounting Principles” during the Company’s 2006 year-end audit the Company became aware that its revenue recognition policy with regard to a bill and hold arrangement with one customer did not meet all of the criteria necessary to allow it to recognize revenue for the transaction while the product remained in the Company’s facility. As such Management has concluded that a material weakness in the Company’s internal control over financial reporting existed at April 1, 2006.
     (b) Changes in Internal Control over Financial Reporting: There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting . As such, the material weakness in our internal control over financial reporting that existed as of December 31, 2005, as described and as disclosed in Part II, Item 9A of our Amended 2005 Form 10-K/A, continued to exist as of April 1, 2006.
“Application of Generally Accepted Accounting Principles”
     During the Company’s 2006 year-end audit the Company became aware that its revenue recognition policy with regard to a bill and hold arrangement with one customer did not meet all of the criteria necessary to allow it to recognize revenue for the transaction while the product remained in the Company’s facility. As such Management has concluded that a material weakness in the Company’s internal control over financial reporting existed at April 1, 2006. The Company believes it has taken action to remediate the weakness that includes training with regard to bill and hold arrangements and approval of any proposed bill and hold arrangement by the CEO and CFO of the Company.

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PART II — OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Section 302 Certification — Chief Executive Officer
Exhibit 31.2 Section 302 Certification — Chief Financial Officer
Exhibit 32. Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a form 8-K on February 9, 2006, regarding its press release announcing its 2005 year to date and fourth 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.
         
 
  ASTRONICS CORPORATION
 
(Registrant)
   
 
       
Date: March 14, 2007
By: /s/ David C. Burney    
 
 
 
   
 
David C. Burney    
 
Vice President-Finance and Treasurer    
 
(Principal Financial Officer)    

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