SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1997 Commission file number: 0-7087 ASTRONICS CORPORATION ________________________________________________________________ (Exact Name of Registrant as Specified in its Charter) New York 16-0959303 ________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1801 Elmwood Avenue Buffalo, New York 14207 ________________________________________________________________ (Address of principal executive office) Registrant's telephone number including area code (716) 447-9013 Securities registered pursuant to Section 12(b) of the Act: None 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 twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K. (X) EXHIBIT INDEX APPEARS ON PAGE 16 Page 1 of 17 As of March 6, 1998, 4,322,874 shares of Common Stock and 711,387 shares of Class B Stock were outstanding, and the aggregate market value of the shares of Common Stock and Class B Stock (assuming conversion of all of the outstanding Class B Stock into Common Stock) of Astronics Corporation held by non- affiliates was approximately $35,373,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1997 Annual Report to Shareholders are incorporated into Parts II and III of this Report. Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders dated March 18, 1998 are incorporated by reference into Part III of this Report. - 2 - PART I Item 1. BUSINESS Profile Astronics Corporation ("Astronics", "Company", or "Registrant"), a New York corporation formed in 1968, is a diversified company engaged principally in the design, manufacture and marketing of products and processes in two business segments: "Aerospace and Electronics" and "Specialty Packaging." Aerospace and Electronics is involved in the design, manufacture, and marketing of advanced technology products. Major applications include specialized lighting systems and ruggedized electro-mechanical assemblies. The Specialty Packaging segment is predominantly a direct marketing provider of proprietary designs of paperboard folding boxes and paper products. Aerospace and Electronics The Company's Aerospace and Electronics segment is involved in the design, manufacture, and sales of technically sophisticated systems and components for a variety of applications. Most of these applications are based on specialty lighting requirements. Approximately 20 percent of the segment's sales are defense-related and 27 percent of sales are international. The Company maintains a sales/engineering office in Belgium to support international relationships. The Aerospace and Electronics segment operates manufacturing facilities in East Aurora, NY, and Lebanon, NH. Electroluminescent Lamps: One of the Company's core technologies is designing and manufacturing electroluminescent (EL) lamps. EL is a phenomenon whereby phosphors, when sandwiched between two electrodes and exposed to alternating current, emit light. The resultant lamps are efficient, durable, thin, and flexible compared to other lighting technologies, and have become a preferred light source for many lighting applications in products as varied as automobiles, home light fixtures, and consumer electronics. The Company also manufactures power conversion devices, commonly called "inverters," to power EL lamps. EL lamps are best driven by alternating current, but typically only direct current is available in the end use application. Our inverters convert DC power to AC, thereby providing power sufficient to drive EL lamps. The Company has been involved in EL lighting for over 25 years, and has established itself as a leader in the industry. Moreover, its EL lighting expertise has been vital in helping it to establish certain of its other product lines. Still, the Company recognizes that no light source is ideal for all applications, and has therefore developed expertise in a number of other technologies as dictated by its business requirements, specifically, incandescent, light-emitting diodes, and cold - 3 - cathode fluorescence. These technologies are used selectively in the Company's various product lines, depending on what is most appropriate for each specific application. Escape Path Lighting: The Company manufactures emergency escape lighting systems for use in aircraft, buildings, and trains. These systems are designed to help people find exits in case of crashes, fire, power outages, earthquakes, and other disasters. Customers are typically vehicle fleet operators, manufacturers, or third party contractors. Often, the use of these systems is dictated by governing laws and regulations. The systems typically include a series of light elements, a case or mounting system to hold the light elements, and a network of logic controlled back-up battery systems to power the light elements. The systems are typically modular in nature, but require a significant amount of custom documentation to satisfy regulatory requirements for each installation. Aircraft Cockpit Lighting: The Company is a major supplier and integrator of cockpit lighting systems for aircraft. The Company designs and manufactures integrally illuminated display panels and related assemblies, integrally illuminated keyboards, floodlights, ambient light sensors, and dimmable power supplies. Customers include aircraft manufacturers and avionics electronics manufacturers. There is a trend in the industry whereby aircraft manufacturers are seeking system suppliers rather than component manufacturers, and the company is uniquely positioned to respond to this trend. Military Aircraft Formation Lights: The Company is the world's dominant supplier of EL formation lights for military aircraft. These lights are essentially EL lamps encapsulated in a protective shell material, which are then mounted to the outside skin of military aircraft. These lights provide visual cues to pilots who are flying in close formation to one another during night missions. Customers include military aircraft manufacturers and the government defense procuring activities who are responsible for maintaining military aircraft in their fleets. The Company's formation lights can be found on most modern western military aircraft. Ruggedized Keyboards: The Company manufactures a wide range of input/output keyboards for ruggedized computer systems. These computer systems are often used in military applications, though not exclusively. In today's world of shrinking defense budgets, investments continue in battlefield command, control, and communication systems. The Company's keyboards range from relatively simple mechanical devices to complex systems employing various display technologies, encoding topologies, and communication protocols. Customers are typically large, well-known defense electronics companies. - 4 - Specialty Packaging Astronics' Specialty Packaging group designs, manufactures and markets standard and custom folding cartons, and presentation products. By possessing such design, manufacturing and marketing capabilities in-house, the Company provides optimum efficiency and quality while retaining a wide range of flexibility. This group delivers products to over 10,000 customers in more than 10 countries and is established , within its chosen markets, as a sole or preferred supplier for most of its customer base. The Company also engages in high quality specialty imprinting of wedding and party invitations, monogrammed napkins, and related party accessories. These products are directly marketed primarily through catalogs which are located at stationery stores, printers, gift shops and specialty boutiques throughout the United States. Competitive Conditions Astronics experiences considerable competition in its segments, principally in the areas of product performance and price, from various competitors, many of which are substantially larger and have greater resources. Success in the Aerospace and Electronics segment depends upon product innovation, customer support, responsiveness, and cost management. Astronics continues to invest in developing the tools critical to competing in today's worldwide markets. Success in Specialty Packaging is dependent upon competitive pricing, innovative and responsive customer support and short lead time delivery performance. Astronics has invested and will continue to invest in state-of- the-art process and systems technology. Raw Materials Materials, supplies and components are available and purchased from a wide variety of sources, the loss of any one of which would not materially affect the Company's operations. Patents The Company has a number of patents and has filed numerous applications for others. While the aggregate protection of these patents is of value, Registrant does not consider that the successful conduct of any material part of its business is dependent upon the protection afforded by these patents. The Company's patents and patent applications relate to EL, instrument panels, keyboard technology and various components used in their manufacture. The Company regards its expertise and techniques as proprietary and relies upon trade secret laws and contractual arrangements to protect its rights. Research Activities The Company is engaged in a variety of research and development activities directed to the improvement and application of the Company's technologies. The extent of the Company's engagement in pure research, however, is not material. - 5 - Employees The Registrant employed approximately 443 employees as of December 31, 1997, including 255 in the Aerospace and Electronics segment, 181 in the Specialty Packaging segment and 7 at the Corporate level, compared to 393 as of December 31, 1996, including 204 in the Aerospace and Electronics segment, 182 in the Specialty Packaging segment and 7 at the Corporate level as of that date. The Company considers its relations with its employees to be good. Working Capital Inventories constitute a major component of the Company's working capital, reflective of the production cycle on most of the Company's products and anticipated production required for the seasonal aspects of the Company's packaging products. A substantial portion of the business of the Specialty Packaging segment consists of proprietary designs of stock boxes used by the confectionery industry, which requires the Company to increase inventory at the beginning of its principal seasons. Financial Information about Industry Segments Sales, operating profit and identifiable assets attributable to each of the Registrant's industry segments for each of the last three years as of December 31, 1997 appear on page 18 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997, submitted herewith as an exhibit and incorporated by reference. Order Backlog The backlog of orders as of December 31, 1997 was approximately $10,807,000 ($9,686,000 related to the Aerospace and Electronics segment and $1,121,000 related to the Specialty Packaging segment), substantially all of which is expected to be filled in the current fiscal year. This compares to $10,106,000 ($8,784,000 related to the Aerospace and Electronics segment and $1,322,000 related to the Specialty Packaging segment) as of December 31, 1996. Item 2. PROPERTIES Corporate Headquarters The Company's corporate office is located at 1801 Elmwood Avenue, Buffalo, NY 14207, the sight of the largest portion of the Specialty Packaging segment. Aerospace and Electronics Registrant owns manufacturing and office facilities of approximately 45,000 square feet in the Buffalo, New York area, and leases approximately 42,000 square feet in Lebanon, New Hampshire. - 6 - Specialty Packaging Registrant owns buildings totaling approximately 437,000 square feet in the Buffalo, New York area for its manufacturing and office facilities. Currently, about 40 percent of the building space is under lease to others. The Company believes that the physical properties of the Registrant are suitable and adequate for the purpose for which they are employed. Additions and expansions are made as needed. In general, the productive capacity of the Registrant's physical properties are in excess of current production requirements and greater utilization is available. Item 3. LEGAL PROCEEDINGS Rodgard Corporation, formerly a wholly-owned subsidiary of Astronics, and one of its former officers, Mason C. Winfield ("Plaintiffs"), instituted an action against Miner Enterprises, Inc. and David G. Anderson ("Defendants") on April 10, 1984, in the United States District Court of the Western District of New York, seeking damages for breaches of confidentiality agreements and seeking to be declared a co-inventor of a David G. Anderson patent. Defendants counterclaimed for unspecified damages alleging that the Plaintiffs breached a confidentiality provision pursuant to a consulting agreement between Winfield and Miner. The judge rendered a decision that neither side has a sufficient case to enable awards. The case was appealed by Plaintiffs in the Federal Court of Appeals. On March 13, 1997 the Court of Appeals remanded the case to the District Court to permit Plaintiffs to initiate discovery related to Defendants' foreign patents. The Company is engaging in discovery to determine the amount of damages and to otherwise vigorously pursue this claim in District Court. The Company is not able to estimate damages, if any. Except for the matter described above, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Executive Officers of the Registrant The following table sets forth the names and ages of all executive officers of the Company and certain information - 7 - relative to their positions with the Company and prior employment history during at least the past five years: Position with the Company Name Age and Prior Employment History Kevin T. Keane 65 President, Chief Executive Officer and Director. John M. Yessa 58 Vice President of Finance, Treasurer, Chief Financial Officer and Director. - 8 - PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information with respect to the market price of and dividends on the Company's Common Stock and related shareholder matters appears on the inside cover and page 19 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, submitted herewith as an exhibit and incorporated by reference. Item 6. SELECTED FINANCIAL DATA Selected Financial Data appears on page 20 of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997, submitted herewith as an exhibit and incorporated by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Management's discussion and analysis of financial condition, changes in financial condition and results of operations appears on pages 20, 21, 22 and 23 of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997, submitted herewith as an exhibit and incorporated by reference. Item 8. FINANCIAL STATEMENTS The Financial Statements of Astronics Corporation which are incorporated by reference in this Annual Report on Form 10-K are described in the accompanying Index to Financial Statements at Item 14 of this Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. - 9 - PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information regarding directors is contained under the captions "Election of Directors" and "Record Date and Voting Securities" in the Company's definitive Proxy Statement dated March 18, 1998 and is incorporated herein by reference. Certain information regarding executive officers is contained under the captions "Executive Compensation" and "Record Date and Voting Securities" in the Company's definitive Proxy Statement dated March 18, 1998 and on the back inside cover of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, submitted herewith as an exhibit, which are both incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation" in the Company's definitive Proxy Statement dated March 18, 1998 is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required is contained under the caption "Record Date and Voting Securities" in the Company's definitive Proxy Statement dated March 18, 1998, and is hereby incorporated by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of March 6, 1998, the Company knows of no relationships required to be disclosed pursuant to Item 404 of Regulation S-K. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The documents filed as a part of this report are as follows: 1. Financial Statements 2. Financial Statement Schedules See Index to Financial Statements and Financial Statement Schedules on page 14 of this report. All other consolidated financial schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or the notes thereto. - 10 - 3. Exhibits Exhibit No. Description 3(a) Restated Certificate of Incorporation, as amended; incorporated by reference to exhibit 3(a) of the Registrant's December 31, 1988 Annual Report on Form 10-K. (b) By-Laws, as amended; incorporated by reference to exhibit 3(b) of the Registrant's December 31, 1988 Annual Report on Form 10-K. 10.1 Restated Thrift and Profit Sharing Retirement Plan; incorporated by reference to exhibit 10.1 of the Registrant's December 31, 1994 Annual Report on Form 10-KSB. 10.3 Incentive Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 26, 1982. 10.4 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 16, 1984. 10.5 Employment Contract of Kevin T. Keane; incorporated by reference to Exhibit 10.5 of the Registrant's registration statement on Form S-2 (No. 33-8040). 10.7 Employment Contract of John M. Yessa; incorporated by reference to Exhibit 10.7 of the Registrant's registration statement on Form S-2 (No. 33-8040). 10.10 1992 Incentive Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 30, 1992. 10.11 1993 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 19, 1993. 10.12 1997 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 14, 1997. 13 1997 Annual Report to Shareholders filed herewith. (Except for those portions which are expressly incorporated by reference to the Annual Report on Form 10-K, this exhibit is furnished for the information of the Securities and Exchange Commission and is not deemed to be filed as part of this Annual Report for Form 10K.) - 11 - 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K None - 12 - ASTRONICS CORPORATION INDEX TO FINANCIAL STATEMENTS The financial statements, together with the report thereon of Ernst & Young LLP dated January 22, 1998, appearing on pages 8 to 19 of the accompanying 1997 Annual Report to Shareholders are incorporated by reference in this Annual Report on Form 10-K. Financial schedules for the years 1997, 1996 and 1995: Page Valuation and Qualifying Accounts F-2 - 13 - SCHEDULE II ASTRONICS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at the Charged to Beginning of Costs and Write-offs/ Balance at Year Description Period Expense Recoveries End of Period 1997 Allowance for Doubtful Accounts $404 $111 $(288) $227 1996 Allowance for Doubtful Accounts $359 $176 $(131) $404 1995 Allowance for Doubtful Accounts $367 $125 $(133) $359 - 14 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 1998. Astronics Corporation By /s/ Kevin T. Keane By /s/ John M. Yessa Kevin T. Keane, President John M. Yessa, Vice President- and Chief Executive Officer Finance and Treasurer, Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Robert T. Brady Director March 27, 1998 Robert T. Brady /s/ John B. Drenning Director March 27, 1998 John B. Drenning /s/ Kevin T. Keane Director March 27, 1998 Kevin T. Keane /s/ Robert J. McKenna Director March 27, 1998 Robert J. McKenna /s/ John M. Yessa Director March 27, 1998 John M. Yessa - 15 - ASTRONICS CORPORATION INDEX TO EXHIBITS Sequential Exhibit No. Description Page Number 3(a) Restated Certificate of Incorporation, as amended; incorporated by reference to exhibit 3(a) of the Registrant's December 31, 1988 Annual Report on Form 10-K. (b) By-Laws, as amended; incorporated by reference to the Registrant's December 31, 1988 Annual Report on Form 10-K. 10.1 Restated Thrift and Profit Sharing Retirement Plan; incorporated by reference to the Registrant's December 31, 1994 Annual Report on Form 10-KSB. 10.3 Incentive Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 26, 1982. 10.4 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 16, 1984. 10.5 Employment Contract of Kevin T. Keane; incorporated by reference to Exhibit 10.5 of the Registrant's registration statement on Form S-2 (No. 33-8040). 10.7 Contract of John M. Yessa; incorporated by reference to Exhibit 10.7 of the Registrant's registration statement on Form S-2 (No. 33-8040). 10.10 1992 Incentive Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 30, 1992. 10.11 1993 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 19, 1993. 10.12 1997 Director Stock Option Plan; incorporated by reference to the Registrant's definitive proxy statement dated March 14, 1997. - 16 - 13 1997 Annual Report to Shareholders filed herewith. (Except for those portions which are expressly incorporated by reference to the Annual Report on Form 10-K, this exhibit is furnished for the information of the Securities and Exchange Commission and is not deemed to be filed as part of this Annual Report on Form 10-K.) 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. - 17 - EXHIBIT 13 ASTRONICS CORPORATION 1997 ANNUAL REPORT Astronics is a niche-oriented company which, by virtue of its strategic and operational focus, achieves growth and income objectives that exceed its industry norms. Composed of two business groups, operating in the segments of Aerospace and Electronics, and Specialty Packaging, the businesses are decentralized with the autonomy necessary to capitalize on rapid changes in today's business environment. Growth opportunities are targeted that can benefit from our technical and operational superiority. This enables Astronics to provide unique product diversity and performance capabilities, competitive market pricing, and performance with exceptional response standards. Astronics enjoys substantial market share dominance within its business areas. In each of its segments, the company aims to be the sole source or the preferred provider for the majority of the business. Financial Highlights (in thousands except for per share data) 1997 1996 1995 1994 1993 Net Sales $ 40,972 $ 38,371 $ 28,536 $ 24,944 $ 23,957 Net Income 3,551 2,657 1,760 1,306 1,188* Diluted Earnings Per Share .67 .51 .37 .26 .24* Shareholders' Equity 18,198 14,842 11,726 10,334 9,414 Book Value Per Share 3.63 2.99 2.46 2.13 1.86 Stock Market Price - High 12.50 6.00 3.10 2.50 2.60 Stock Market Price - Low 4.88 2.80 1.60 1.50 1.60 Return on Equity 23.9% 22.7% 17.0% 13.9% 14.5% (on January 1 Equity) *Includes extraordinary expense item net of income taxes $307 ($.06 per share) Graph inserted depicting Net Sales (in millions) of Astronics: 1993 1994 1995 1996 1997 23.9 24.9 28.5 38.3 40.9 Performance Highlights New state-of-the-art computerized Bobst die cutting equipment purchased by Specialty Packaging has reduced make-ready from hours to minutes and increased production rates substantially. This allows lower lot sizes, smaller inventories and exceptional response capability. The new MaxEL lamp creates a new generation of electroluminescent technology and is leading Astronics into numerous new consumer electronics and automotive markets. Innovative partnerships such as the Hershey products program will continue to move Specialty Packaging to increased penetration throughout its market niches where technology, competence and exceptional responsiveness are critical success factors. Message to our Shareholders It is a pleasure to again report record sales, earnings, return on equity and record highs for our stock prices. The results for 1997 reflect the continuation of strong operations, increasing product offerings, expanding market opportunities, and management believes, the emergence of growing double-digit sales. The 1997 shipments were $40,972,000, an 11% increase from ongoing operations. As a result of continued productivity gains, earnings increased 34% to $3,551,000 or $.67 per share. For each of the last three years, earnings have grown in excess of 30% per year. Return on shareholder equity increased to 24% in 1997. All told, the market has rewarded this performance with a 90% increase in the price of the stock during 1997. Our confidence is reflected in the strong investments that we continue to make to expand our facilities, advance technological capabilities, improve process efficiencies and enhance competitive leverage. During the last five years, capital expenditures for product development, technological improvements, and facility expansions, with the exclusion of acquisitions, have exceeded 11% of sales. In 1997 alone, this figure exceeded $3,000,000 or 7% of sales. For 1998, we expect these commitments to be approximately 15% of sales. It is our conviction that we are well positioned for increasing growth rates. This will be driven by a number of new product offerings and market strategies in our business segments and by technological enhancements which are continuing to decrease costs and therefore increase competitiveness, and provide aggressive customer response capability. During 1997, we were ISO 9001 certified in our Specialty Packaging manufacturing operations. We expect to realize this certification in our Aerospace and Electronics operations within the foreseeable future. This quality process is essential to our business initiatives as we expand in our national and global marketing perspectives. Astronics continues to generate high levels of cash flow that has provided the ability to maintain our strong investments and enabled the Company, during 1997, to retire $3,146,000 in debt and long-term lease obligations. At year end, long-term debt and lease obligations were reduced to 11% of assets and 18% of equity. While we are expanding our opportunities to grow more aggressively, we continue to maintain a conservative financial structure that is important to our strategy of long-term business acceleration and development. We view 1998 as another year of potential double-digit growth. A number of new products are expected to enter the market and further broaden our marketing opportunities. Our technical capabilities are strong and continuing to improve as we commit further investments to state-of-the-art technology. We are looking forward with confidence and great anticipation to the future. Kevin T. Keane President and Chief Executive Officer January 22, 1998 Graph inserted depicting Net Income (in millions) of Astronics: 1993 1994 1995 1996 1997 1.1 1.3 1.7 2.6 3.6 Aerospace and Electronics The Aerospace and Electronics group designs, manufactures and markets specialized lighting systems and ruggedized keyboard assemblies. The Company maintains close working relationships with customers and therefore has an extensive understanding of modern aerospace requirements. The Company aggressively pursues new business by providing technologically superior products at competitive prices. Astronics' customers in this group are located in 47 countries and include high profile businesses in the electronics, aerospace, air transport and automotive industries. The Aerospace and Electronics group generates 27% of its revenues from international operations and 20% from sales to the defense industry. With a resurgence of corporate and commuter aircraft, the Aerospace and Electronics group experienced strong operating results for 1997. Operating income was 62% higher than in 1996 while sales increased 2%. Domestic and foreign sales enjoyed similar rates of growth. There were numerous process improvements in lighting and panel technology that provided significant gains in manufacturing efficiency. This group constantly commits revenues to research and development in order to ensure a consistent rate of future growth. Astronics maintains competitive advantage within the marketplace by marketing its in-depth knowledge and experience. Tight process management, quality controls, and investment in state-of-the-art manufacturing technologies nurture and support our development of innovative products and provide customers with cost-effective solutions for their technical requirements. Astronics commits to comprehensive involvement with our customers. This gives Astronics sharper focus on our chosen specialized markets. Design reviews, project management and engineering integration are common forums shared by Astronics with our clients in maximizing the potential of our product solutions. Innovative engineering, cost management, and dedicated customer support are all fundamental to Astronics' industry leadership position. By emphasizing these areas and investing in key technology, the Company drives a sustainable long-term future while maintaining a competitive position in today's chosen markets. Specialty Packaging Astronics' Specialty Packaging group designs, manufactures and markets standard and custom folding cartons, and presentation products. By possessing capabilities in-house, the Company provides optimum efficiency and quality while retaining a wide range of flexibility. This group delivers products to over 10,000 customers in more than 10 countries and is established as a sole or preferred supplier for most of its' customer base. During 1997, operating income and sales increased 23% and 11% respectively. Foreign sales remained a constant 6% of total sales. Sales expectations for 1998 are strong and include an agreement signed with Staples Office Superstores to market products nationally to its 700-plus locations. Customers are comprised largely of pharmaceutical, healthcare, food, confectionery, automotive, and similar industries that require packaging design and construction for both aesthetic and protective purposes. The Company has the ability to provide unique accommodation to these industries by virtue of its' state-of-the-art capabilities in design and production. In 1997, the Packaging business was certified to ISO 9001 quality standards. Comprehensive service and partnership relationships have developed strong customer commitments. This has created consistent market expansion among existing customers and the rapid development of new accounts. The Company is committed to investing in technologically advanced equipment in support of its niche strategy. The recent acquisition of Heidelberg printing equipment, and Bobst die cutters, positions Specialty Packaging with the most efficient systems on the market. Such reinvestment of earnings advances the competitive advantage in all areas of the business process. With a growth rate of more than twice the industry average, the Astronics Specialty Packaging group has proven itself to be a premier supplier within the specialty paperboard packaging industry. Aerospace and Electronics Electroluminescent Lamps Astronics has been a pioneer in the field of electroluminescent (EL) lighting and continues as a leading innovator. For more than 25 years, the Company has supplied the commercial and military sectors with EL systems for use in both standard and advanced applications. Our newest product addition, trade-named MaxEL, uses the latest phosphor microencapsulation technology. This lightweight, thin profile lamp is designed for high-volume, low cost manufacturing processes. MaxEL lamps are gaining recognition around the world and can be seen in watches, clocks, LCD's, hand-held keypad devices and automotive applications. Features of EL lamps include customized shaping, uniform luminosity, minimal heat generation and solid state reliability. Graph inserted depicting Sales Growth (in millions) for the Aerospace and Electronics group: 1993 1994 1995 1996 1997 9.1 9.1 11.5 19.7 20.1 Military Aircraft Formation Lights Military rotary and fixed wing aircraft have been guided by Astronics light systems while flying in formation and landing in some of the most precarious places. These EL devices provide uninterrupted performance in the presence of extreme pressures and temperatures, shock, vibration, humidity, and environmental contaminants. Astronics dominates this market segment world-wide and builds formation lights for most western military aircraft flying today. Escape Path Lighting Systems Astronics is a leading supplier of emergency lighting systems to over 300 airlines around the world. This product line combines the durability of EL lighting with the reliability of solid state electronics. Astronics' emergency lighting products include floor and seat mounted proximity escape path marking, exit locator and marking signs, and rotor craft exit locators. Other applications include ships, oil platforms, and special use buildings. Cockpit Lighting Systems Aircraft cockpit lighting is available by individual components or as fully integrated, customized assemblies. Astronics' products have set the standard for long term reliability in the most demanding aerospace applications. Made of patented Astron construction, products include integrally lit panels, avionics keyboards, ambient light sensors, annunciator panels and a full range of electronic dimmers. Astronics has developed a reputation as an innovator in this field and continues to provide the most advanced cockpit lighting systems to major airframe and avionics manufacturers in North America and Europe. The increasing use of integrated lighting systems, among the avionics industry, favors the Astronics components and should provide substantial future growth opportunities. Ruggedized Keyboard Systems Astronics has taken lighting experience, display technology, electro-mechanical packaging and combined them in a durable line of ruggedized keyboards and switch panel products. Advanced production methods allow every possibility from prototyping to high-volume runs. By incorporating a modular concept and flexible manufacturing capabilities, these units are able to satisfy requirements for both the industrial and military sectors. This product line includes full travel keyboards for high speed data entry in the harshest environments, keypads designed for military and industrial purposes and illuminated switch panels that adapt keyboard devices to detailed lighting requirements. Specialty Packaging Proprietary Products Flexibility has contributed to Astronics being a premier supplier within the Specialty Packaging industry. The Company's broad line of standard packaging designs are available for same day shipment from in-stock inventory in quantities as small as 50 units or by the truckload. With hundreds of items to choose from, this product line fills a wide range of uses and is personalized with graphic designs and special imprinting. Astronics is the dominant U.S. provider of stock boxes for small to mid-size confectionery store operations. Imprinted Products Astronics, in addition to providing substantial enhancement of packaging products through foil and ink imprinting, does custom offset printing. Specialty Packaging is noted for exceptional response capabilities and markets on a direct basis and through store catalogs nationwide, including Hawaii and Puerto Rico. Most imprinted products are shipped within 24 hours of order. Custom Products The company's custom packaging is a practical solution for filling unique requirements such as protective functions and product differentiation. These forms can be economically manufactured in most configurations and satisfy a wide range of applications. Throughout all stages of design and production, every effort is made to minimize manufacturing costs and maintain a highly creative product. Within custom products, customers are offered full or partial packaging programs which utilize advanced computer aided design and manufacturing systems (CAD-CAM). As of early 1998, these systems will be fully networked with printing plate production (CTP), computer driven product production, and quality management systems. This creates the ability for innovative and short cycle time packaging solutions that are a key factor for success in today's market. Graph inserted depicting Sales Growth (in millions) for the Specialty Packaging group: 1993 1994 1995 1996 1997 14.7 15.8 17.0 18.6 20.8 Partnership Programs Special interactive programs and partnerships are utilized for focused market expansion. As a result, new demands from the market are quickly recognized and analyzed for execution. Solid graphic arts coupled with strong structural design are joined with customer initiatives to provide a product that is optimally designed for the manufacturing process. Coordinated initiatives significantly reduce the production cycle times and production costs which translates to a major competitive advantage. Astronics Corporation Financial Review The following financial statements and related information for Astronics Corporation has been prepared by management and audited by Ernst and Young LLP, independent auditors. Consolidated Statements of Income (in thousands, except per share data) Year ended December 31, 1997 1996 1995 ____ ____ ____ Net Sales $40,972 $38,371 $28,536 Cost and Expenses Cost of products sold 27,543 27,333 19,970 Selling, general and administrative expenses 7,463 7,959 5,148 Interest expense, net of interest income of $14, $23 and $102 437 813 479 Gain on sale of assets - (1,757) - _______ _______ _______ 35,443 34,348 25,597 Income before taxes 5,529 4,023 2,939 Provision for income taxes 1,978 1,366 1,179 _______ _______ _______ Net Income $ 3,551 $ 2,657 $ 1,760 ======= ======= ======= Earnings per Share Basic $ .71 $ .55 $ .37 ======= ======= ======= Diluted $ .67 $ .51 $ .37 ======= ======= ======= See notes to financial statements. Consolidated Balance Sheets (in thousands, except per share data) December 31, 1997 1996 ____ ____ Current Assets Cash and cash equivalents $ 740 $ 1,130 Accounts receivable, net of allowance for doubtful accounts of $227 in 1997 and $404 in 1996 4,443 3,688 Inventories 4,761 4,862 Prepaid expenses 415 578 _______ _______ Total Current Assets 10,359 10,258 Property, Plant and Equipment, at cost Land 326 326 Buildings and improvements 9,807 9,178 Machinery and equipment 24,640 22,210 _______ _______ 34,773 31,714 Less accumulated depreciation and amortization 16,613 14,072 _______ _______ Net Property, Plant and Equipment 18,160 17,642 Other Assets 1,722 1,965 _______ _______ $30,241 $29,865 ======= ======= Current Liabilities Current maturities of long-term liabilities $ 1,194 $ 2,246 Accounts payable 2,564 2,463 Accrued expenses 1,942 1,757 Income taxes 360 937 _______ ______ Total Current Liabilities 6,060 7,403 Long-Term Debt 2,110 3,798 Long-Term Obligations Under Capital Leases 1,194 1,600 Deferred Income Taxes 822 545 Deferred Compensation 1,857 1,677 Shareholders' Equity Common Stock, $.01 par value Authorized 10,000,000 shares, issued 4,642,910 in 1997; 4,519,219 in 1996 46 45 Class B Stock, $.01 par value Authorized 5,000,000 shares, issued 715,797 in 1997; 749,161 in 1996 7 7 Additional Paid-in capital 2,520 2,297 Retained earnings 16,640 13,089 _______ _______ 19,213 15,438 Less Treasury Stock: 341,946 shares in 1997; 298,307 shares in 1996, at cost 1,015 596 _______ _______ Total Shareholders' Equity 18,198 14,842 _______ _______ $30,241 $29,865 ======= ======= Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 1997 1996 1995 ---- ---- ---- Cash Flows from Operating Activities Net income $3,551 $2,657 $1,760 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,831 2,631 2,575 Provision for doubtful accounts (177) 45 (8) Gain on sale of assets - (1,757) (50) Provision for deferred taxes 277 (330) (300) Cash flows from changes in operating assets and liabilities, Net of the effect of acquired or sold business: Accounts receivable (578) 1,141 169 Inventories 101 1,354 565 Prepaid expenses 163 68 51 Accounts payable 101 (61) 615 Accrued expenses 185 308 235 Income taxes (577) 685 10 Deferred compensation 180 1,339 - ------ ----- ----- Net Cash provided by Operating Activities 6,057 8,080 5,622 ------ ----- ----- Cash Flows from Investing Activities Proceeds from sale of assets - 219 60 Change in other assets (46) (281) (429) Capital expenditures (3,060) (4,025) (6,101) Net payment for assets of company acquired - - (6,292) Proceeds from sale of division - 2,250 - ------ ------ ------ Net Cash used by Investing Activities (3,106) (1,837) (12,762) ------ ------ ----- Cash Flows from Financing Activities New long-term debt - - 6,990 Principal payments on long-term debt and capital lease obligations (3,146) (6,345) (2,230) Proceeds from issuance of stock 337 464 193 Fractional shares paid on stock distribution - (4) - Purchase of stock for treasury (532) - (561) ------ ------ ------ Net Cash provided (used) by Financing Activities (3,341) (5,885) 4,392 Net increase (decrease) in cash and ------ ------ ------ cash equivalents (390) 358 (2,748) Cash and Cash Equivalents at Beginning of Year 1,130 772 3,520 ------ ------ ------ Cash and Cash Equivalents at End of Year $ 740 $1,130 $ 772 ====== ====== ====== Disclosure of Cash Payments for: Interest $ 474 $ 869 $ 551 Income taxes 2,278 1,017 1,468 See notes to financial statements. Consolidated Statements of Shareholders' Equity (dollars and shares in thousands)