Basis of Presentation |
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Oct. 01, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation |
1) Basis of Presentation
The accompanying unaudited statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been included.
Operating Results
The results of operations for any interim period are not necessarily indicative of results for
the full year. Operating results for the nine and three month periods ended October 1, 2011 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The balance sheet at December 31, 2010 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 2010 annual report on Form 10-K.
Description of the Business
Astronics is a leading supplier of advanced, high-performance lighting systems, electrical
power generation systems, aircraft safety systems, electronics systems for the global aerospace
industry as well as test, training and simulation systems primarily for the military. We sell our
products to airframe manufacturers (OEM’s) in the commercial transport, business jet and military
markets as well as FAA/Airport, OEM suppliers, and aircraft operators around the world. The
Company has two reportable segments, Aerospace and Test Systems. The Aerospace segment designs and
manufactures products for the global aerospace industry. The Test Systems segment designs,
develops, manufactures and maintains communications and weapons test systems and training and
simulation devices for military applications.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
Acquisitions are accounted for under the purchase method and, accordingly, the operating results
for the acquired companies are included in the consolidated statements of earnings from the
respective dates of acquisition.
Revenue and Expense Recognition
Revenue Recognition in the Aerospace Segment
In the Aerospace segment, revenue is recognized on the accrual basis at the time of
shipment of goods and transfer of title. There are no significant contracts allowing for right of
return.
Revenue Recognition in the Test Systems Segment
In the Test Systems segment, revenue is recognized primarily from long-term, fixed-price
contracts using the percentage-of-completion method of accounting, measured by multiplying the
estimated total contract value by the ratio of actual contract costs incurred to date to the
estimated total contract costs. Substantially all long-term contracts are with U.S. government
agencies and contractors thereto. The Company makes significant estimates involving its usage of
percentage-of-completion accounting to recognize contract revenues. The Company periodically
reviews contracts in process for estimates-to-completion, and revises estimated gross profit
accordingly. While the Company believes its estimated gross profit on contracts in process is
reasonable, unforeseen events and changes in circumstances can take place in a subsequent
accounting period that may cause the Company to revise its estimated gross profit on one or more of
its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such
contracts can vary significantly from estimated amounts between accounting periods.
Expenses
Cost of products sold includes the costs to manufacture products such as direct materials and
labor and manufacturing overhead as well as all engineering and developmental costs. Shipping and
handling costs are expensed as incurred and are included in costs of products sold. The Company is
engaged in a variety of engineering and design activities as well as
basic research and development activities directed to the substantial improvement or new
application of the Company’s existing technologies. These costs are expensed when incurred and
included in cost of sales. Research and development, design and related engineering amounted to
approximately $26.6 million and $21.0 million for the nine months ended and $9.5 million and $6.9
million for the three months ended October 1, 2011 and October 2, 2010, respectively.
Selling, general and administrative expenses include costs primarily related to our sales and
marketing departments and administrative departments.
Fair Value
ASC Topic 820, “Fair value Measurements and Disclosures”, (“ASC Topic 820”) defines fair
value, establishes a framework for measuring fair value and expands the related disclosure
requirements. This statement applies under other accounting pronouncements that require or permit
fair value measurements. The statement indicates, among other things, that a fair value measurement
assumes that the transaction to sell an asset or transfer a liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. ASC Topic 820 defines fair value based upon an exit price model.
ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the financial
instrument.
Level 3 inputs are unobservable inputs based on our own assumptions used to measure
assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement. The following table
provides the financial assets and liabilities carried at fair value measured on a recurring basis
as of October 1, 2011 and December 31, 2010:
Interest rate swaps are securities with no quoted readily available Level 1 inputs, and
therefore are measured at fair value using inputs that are directly observable in active markets
and are classified within Level 2 of the valuation hierarchy, using the income approach.
In accordance with the provisions of ASC Topic 350 “Intangibles — Goodwill and Other” the
Company estimates the fair value of reporting units, utilizing unobservable Level 3 inputs. Level
3 inputs require significant management judgment due to the absence of quoted market prices or
observable inputs for assets of a similar nature. The Company utilizes a discounted cash flow
analysis to estimate the fair value of reporting units utilizing unobservable inputs. The fair
value measurement of the reporting unit under the step-one and step-two analysis of the goodwill
impairment test are classified as Level 3 inputs.
Intangible assets that are amortized are evaluated for recoverability whenever adverse effects
or changes in circumstances indicate that the carrying value may not be recoverable. The
recoverability test consists of comparing the undiscounted projected cash flows with the carrying
amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss
would be recognized to the extent the carrying amount exceeds fair value. For indefinite-lived
intangible assets, the impairment test consists of comparing the fair value, determined using the
relief from royalty method, with its carrying amount. An impairment loss would be recognized for
the carrying amount in excess of its fair value.
At October 1, 2011, the fair value of goodwill and intangible assets classified using Level 3
inputs were as follows:
The Company concluded that no indicators of goodwill and intangibles impairment existed and an
interim test was not performed as of October 1, 2011.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts
receivable, accounts payable, notes payable, long-term debt and interest rate swaps. The Company
performs periodic credit evaluations of its customers’ financial condition and generally does not
require collateral and the Company does not hold or issue financial instruments for trading
purposes. Due to their short-term nature the carrying value of cash and equivalents, accounts
receivable, accounts payable, and notes payable approximate fair value. The carrying value of the
Company’s variable rate long-term debt also approximates fair value due to the variable rate
feature of these instruments as well as the lack of changes in the Company’s credit history. The
carrying value of the subordinated promissory note approximates its fair value based on
management’s estimation that a current interest rate would not differ materially from the stated
rate. The Company’s interest rate swaps are recorded at fair value as described under “Fair
Value.”
Derivatives
The Company records all derivatives on the balance sheet at fair value with the related gains
or losses deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income
(Loss) (AOCI) and any ineffectiveness is recorded to the income statement. The accounting for
changes in the fair value of derivatives depends on the intended use and resulting designation. The
Company’s use of derivative instruments was limited to a cash flow hedge for interest rate risk
associated with long-term debt. Interest rate swaps are used to adjust the proportion of total debt
that is subject to variable and fixed interest rates. The interest rate swaps are designated as
hedges of the amount of future cash flows related to interest payments on variable-rate debt that,
in combination with the interest payments on the debt, convert a portion of the variable-rate debt
to fixed-rate debt. At October 1, 2011, we had interest rate swaps consisting of the following:
To the extent the interest rate swaps are not perfectly effective in offsetting the change in
the value of the payments being hedged; the ineffective portion of these contracts is recognized in
earnings immediately. All of the Company’s cash flow hedges are considered to be highly effective.
Amounts to be reclassified to income through the remainder of 2011 are not expected to be
significant.
Long-term Debt and Notes Payable
The Company extended and modified its existing credit facility by entering into a Second
Amended and Restated Credit Agreement (the “Credit Agreement”), dated as of August 31, 2011, with
HSBC Bank USA, National Association, Bank of America, N.A. and Manufacturers and Traders Trust
Company. The Credit Agreement provides for the continuation of the Company’s revolving credit line
in the amount of $35 million for an additional five years through August 31, 2016 and for the
continuation of the Company’s existing $18 million term loan maturing January 30, 2014, with
interest on both loans at a rate of LIBOR plus between 1.50% and 2.50% based on the Company’s
Leverage Ratio.
The balance of the term note was $18.0 million and $21.0 million on October 1, 2011 and
December 31, 2010, respectively. The Company had no balance outstanding on its revolving credit
facility at October 1, 2011 and December 31, 2010, respectively. The revolving credit facility
provides for borrowing up to $35.0 million less outstanding letters of credit. For working
capital requirements, the Company had available on its credit facility $23.2 million and $22.5
million at October 1, 2011 and December 31, 2010, respectively. The credit facility allocates up to
$20 million of the revolving credit line for the issuance of letters of credit, including certain
existing letters of credit totaling approximately $11.8 million at October 1, 2011. In addition,
the Company is required to pay a commitment fee quarterly at a rate of between
0.25% and 0.35% per annum on the unused portion of the total revolving credit commitment, also
based on the Company’s Leverage Ratio.
The Company’s obligations under the Credit Agreement are jointly and severally guaranteed by
Astronics Advanced Electronic Systems Corp., Luminescent Systems, Inc. and DME Corporation, each a
wholly-owned domestic subsidiary of the Company. The obligations are secured by a first priority
lien on substantially all of the Company’s and the guarantors’ assets and 100% of the issued and
outstanding equity interest of each subsidiary.
In the event of voluntary or involuntary bankruptcy of the Company or any
subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically
become due and payable. Other events of default, such as failure to make payments as they become
due and breach of financial and other covenants, give the Agent the option to declare all such
amounts immediately due and payable.
At October 1, 2011, we were in compliance with all of the covenants pursuant to the credit
facility.
Foreign Currency Translation
The Company accounts for its foreign currency translation in accordance with ASC Topic 830,
Foreign Currency Translation. The aggregate transaction gain or loss included in determining net
income was insignificant for the periods ending October 1, 2011 and October 2, 2010.
Income Taxes
The FASB issued ASC Topic 740-10 “Overall — Uncertainty in Income Taxes” (“ASC Topic 740-10”)
which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. ASC
Topic 740-10 seeks to reduce the diversity in practice associated with certain aspects of the
recognition and measurement related to accounting for income taxes. The Company is subject to the
provisions of ASC Topic 740-10 and has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all open tax years in
these jurisdictions.
Should the Company need to accrue a liability for unrecognized tax benefits, any interest
associated with that liability will be recorded as interest expense. Penalties, if any, would be
recognized as operating expenses. There are no penalties or interest liability accrued as of
October 1, 2011 and December 31, 2010. The years under which we conducted our evaluation coincided
with the tax years currently still subject to examination by major federal and state tax
jurisdictions, those being 2010 for federal purposes and 2008 through 2010 for state purposes.
Accounting Pronouncements Adopted in 2011
On January 1, 2011, the Company adopted the new provisions of Accounting Standards Update
(“ASU”) No. 2010-28, Intangibles—Goodwill and Other (Topic 350) (“ASU 2010-28”). ASU 2010-28
clarifies the requirement to test for impairment of goodwill. ASC Topic 350 has required that
goodwill be tested for impairment under Step 2 if the carrying amount of a reporting unit exceeds
its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or
negative an entity must assume that it is more likely than not that a goodwill impairment exists,
perform an additional Step 2 test to determine whether goodwill has been impaired and calculate the
amount of that impairment. The impact on the Company’s financial statements is not anticipated to
be significant.
On January 1, 2011, the Company adopted the new provisions of ASU No. 2010-29, Disclosure of
Supplementary Pro Forma information for Business Combinations (Topic 805) (“ASU 2010-29”). ASC
Topic 350 has required pro forma revenue and earnings disclosure requirements for business
combinations. ASU 2010-29 clarifies the requirements for disclosure of supplementary pro forma
information for business combinations. The amendments in this update specify that if a public
entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and
earnings. The impact on the Company’s disclosures was not significant.
In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or
rescinds portions of the interpretive guidance included in the codification of the Staff Accounting
Bulletin Series. This update is intended to make the relevant interpretive guidance consistent
with current authoritative accounting guidance issued as a part of the FASB’s Codification. The
principal changes involve revision or removal of accounting guidance references and other
conforming changes to ensure consistency of referencing through the SAB Series. The effective date
for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on
the Company’s consolidated financial statements.
On September 15, 2011, the Financial Accounting Standards Board issued ASU No. 2011-08,
Intangibles — Goodwill and Other (Topic 350). The amendments in this Update will allow an entity to
first assess qualitative factors to determine
whether it is necessary to perform the two-step quantitative goodwill impairment test. Under
these amendments, an entity would not be required to calculate the fair value of a reporting unit
unless the entity determines, based on a qualitative assessment, that it is more likely than not
that its fair value is less than its carrying amount. The amendments are effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The
Company elected to adopt this pronouncement in 2011 as early adoption is permitted. The impact on
the Company’s financial statements is not anticipated to be significant.
Loss contingencies
Loss contingencies may from time to time arise from situations such as warranty claims and
other legal actions. Loss contingencies are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is
required when there is a reasonable possibility that the ultimate loss will exceed the recorded
provision. Contingent liabilities are often resolved over long time periods. In recording
liabilities for probable losses, management is required to make estimates and judgments regarding
the amount or range of the probable loss. Management continually assesses the adequacy of estimated
loss contingencies and, if necessary, adjusts the amounts recorded as better information becomes
known.
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