(in thousands)
		2002		2001
Finished Goods	$	640	$	689
Work in Progress		1,011		1,031
Raw Material		4,488		4,389
	$	$6,139	$	6,109

Property, Plant and Equipment

Depreciation of property, plant and equipment is computed on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 40 years; and machinery and equipment, 4-10 years. Leasehold improvements are amortized over the terms of the lease or the lives of the assets, whichever is shorter.

The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts, and the resulting gain or loss, as well as maintenance and repair expenses, are reflected in income. Renewals and betterments are capitalized.

Goodwill

On January 1, 2002, the Company adopted the provisions of Statements of Financial Accounting Standards (SFAS) No. 142, 'Goodwill and Other Intangible Assets" and (SFAS) No. 141, "Business Combinations." The Company ceased amortizing goodwill on that date. No reclassification of identifiable intangible assets apart from goodwill was necessary as of a result of the adoption of these standards. Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a straight-line basis over periods up to 15 years. The Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test consists of comparing the fair value of a reporting unit with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be recognized for the carrying amount of goodwill in excess of its implied fair value. Goodwill amortization in 2001 was $156,000 and 5115,000 in 2000.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which arc not expected to be realized.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Earnings Per Share

Earnings per share computations are based upon the following table:

		(in thousands, except per share data)
		2002		2001		2000
Income from Continuing Operations	$	4,047	$	5,821	$	3,500
Income from Discontinued Operations		506		677		2,595
Net Income	$	4,553	$	6,498	$	6,095
Basic Earnings per Share      Weighted Average Shares		8,033		8,052		7,831
Net Effect of Dilutive Stock Options		175		294		390
Diluted Earnings per Share
Weighted Average Shares		8,208		8,346		8,221
Basic Earnings per Share
Continuing Operations	$	.51	$	.72	$	.45
Discontinued Operations		.06		.09		.33
Net Income	$	.57	$	.81	$	.78
Diluted Earnings per Share
Continuing Operations	$	.49	$	.70	$	.43
Discontinued Operations		.06		.08		.31
Net Income	$	.55	S	.78	$	.74

All earnings per share calculations have been retroactively restated to reflect the effect of stock distribution.

Class B Stock

Class B Stock is identical to Common Stock, except Class B Stock has ten votes per share, is automatically converted to Common Stock when sold or transferred, and cannot receive dividends unless an equal or greater amount is declared on Common Stock. At December 31, 2002, approximately 3,000,000 shares of common stock were reserved for issuance upon conversion of the Class B stock and exercise of stock options.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Long-lived Assets

Long-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if future undiscounted cash flows and earnings from operations are not expected to be sufficient to recover long-lived assets. The carrying amounts are then reduced by the estimated shortfall of the discounted cash flows.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 

Derivatives

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivative depends on the intended use and resulting designation. The Company designates its derivatives based upon the criteria established by SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities". The Company only has derivatives designated as cash flow hedges at December 31,2002. For a derivative designated ass cash flow hedge, the effective portion of the derivative's gain or loss is initially reported ass component of other comprehensive income ("OCI") and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portions of all derivatives are recognized immediately into earnings. Furs derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items.

 

Note 2

New Accounting Pronouncements Not Yet Adopted

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. The Company must adopt this standard for exit or disposal activities that are initiated after December 31 2002. The Company believes it will not have a material impact on its results of operations or financial condition.

In April, 2002, the FASB issued SFAS No. 145, "Recission of FASB Statement No.4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements. It rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related taxes, and requires that they be reported as part of earning from operation. SFAS No. 145 also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company will adopt this standard on January 1, 2003, and believes it will not have a material impact on its results of operations or financial condition.

In August 2001, The FASB issued SFAS No. 143, 'Accounting for Asset Retirement Obligations." Under SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recorded in the period in which it is incurred, and the carrying amount of the related long-lived asset will be increased. Over time, the liability will be adjusted for revisions to either the timing or the amount of the original estimate of cash flows and the passage of time, the capitalized cost will be depreciated over the assets useful life. A gain or loss will be recorded if necessary upon settlement of the liability. The Company will adopt this standard on January 1,2003, and believes it will not have a material impact on its result of operations or financial condition.

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 

Note 3

Discontinued Operations

On September 26,2002, Astronics announced the spin-off of its wholly owned subsidiary MOD-PAC CORP., which operated the Printing and Packaging segment. Later, in December, Astronics announced the discontinuance of the Electroluminescent Lamp Business Group, whose primary business has involved sales of microencapsulated EL lamps to customers in the consumer electronics industry.

No gain or loss has been recorded or will occur in connections with the spin-off of MOD-PAC CORP. As a result of the discontinuance of the Electroluminescent Lamp Business Group, Astronics recorded estimated losses on disposition and other exit—related costs as losses on discontinued operations in the quarter ending December 31, 2002, of $700,000 after applicable income tax benefit. This charge consists mostly of severance, inventory, and equipment-related expenses.

The consolidated financial statements and related notes for all periods presented have been restated to reflect the Printing and Packaging segment and the Electroluminescent Lamp Business Group as discontinued operations.

Operating results of discontinued operations are summarized:

		2002		2001		2000
Net Sales	$	32,763	$	32,786	$	29,399
Income Before Taxes		725		1,186		3,636
Income Tax Expense		219		509		1,041
Income from Discontinued Operations	$	506	$	677	S	2,595

 

Note 4

Long-term Debt

Long-term debt Consists of the following:

(in thousands)

		2002		2001
Revolving Line of Credit with interest at LJBOR plus 60 basis points	$	1,457	$	3,228
Industrial Revenue Bonds issued through the Erie County, New York Industrial Development Agency payable $350 annually through 2019 with interest reset weekly (1.2% at December 31, 2002)		5,950		6300
Industrial Revenue Bonds issued through the Business Finance Authority of the State of New Hampshire payable $400 annually through 2018 with interest reset weekly (1.2% at December 31,2002)		6,450		6,850
Other		126		140
		13,983		16,518
Less Current Maturities		873		989
	$	13,110	$	15,529

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 

The Industrial Revenue Bonds are held by institutional investors and are guaranteed by a bank letter of credit, which is collateralized by certain property, plant and equipment assets, the carrying value of which approximates the principal balance on the bonds. The revolving line of credit is unsecured and provides for borrowing up to $12,000,000; interest is at bank prime or LIBOR plus 60 basis points. The line is available through June 30, 2004 and may be converted into a four year term loan. The revolving line of credit, among other requirements, imposes certain covenants with which the Company maintains compliance.

Principal maturities of long-term debt (excluding the revolving line of credit) over the next five years are as follows: $873,000; $753,000; $750,000; $750,000; and $750,000.

Interest costs of $164,000 were capitalized in 2000; no interest costs were capitalized in 2002 and 2001.

To offset risks due to fluctuation in interest rates, the Company entered into an interest rate swap on the New York Industrial Revenue Bond through 2005 which effectively fixes the interest rate at 4.09%. The fair value, based on spot prices of similar contracts, of this derivative instrument which is designated as a cash flow hedge, was a net liability of $354,000 at December 31, 2002 compared to a net asset of $73,000 at December 31, 2001. These amounts are included in other assets on the balance sheet.

 

Note 5

Related Party Transactions

During the three years ended December 31, 2002,2001 and 2000, MOD-PAC CORP., an Astronics subsidiary, performed printing and order fulfillment services for VistaPrint Corporation, resulting in net sales of $6,198,000, $3,220,000 and $594,000, respectively. VistaPrint owed MOD-PAC CORP. $927,000 and $1,944,000 at December 31, 2002 and 2001, respectively, related to services. Robert S. Keane, the son of Kevin T. Keane, is a shareholder in and the chief executive officer of VistaPrint Corporation. In addition, Kevin T Keane is a shareholder in VistaPrint Corporation holding less than 5% of its capital stock.

 

 

 

 

 

 

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6

Stock Option and Purchase Plans

A summary of the Company's stock option activity, excluding MOD-PAC employees, and related information for the years ended December31 follows:

	2002				2001					2000
			Weighted					Weighted				Weighted
			Average					Average				Average
			Exercised					Exercised				Exercised
	Options			Price	Options			Price	Options			Price
Outstanding at the Beginning of the Year	404,217		$	5.47	476,834		$	4.08	391,980		$	2.81
Options Granted	45,200		$	12.12	46,500		$	16.15	52,200		$	10.52
Adjustments to Maintain Intrinsic Value as a result of
Stock Distributions	—			—	77,784			1.37	44,479		$	(40	)
Options Exercised	(56,714	)	$	1.64	(176,067	)	$	1.76	(11,825	)	$	2.23
Options Forfeited	—			—	(20,834		$
Outstanding at the End of the Year	392,703		$	6.79	404,217		$	5.47	476,834		$
Exercisable at December 31	283,702		$	4.92	293,895		$		380,064		$

Exercise prices for options outstanding as of December 31, 2002 range from $1.06 to $16.76. The weighted average remaining contractual life of these options is 4.7 years.

The Company established Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key employees, and to align managements interest with those of the shareholders. Generally, the options must be exercised within ten years from the grant date and vest ratably over a five-year period. The exercise price for the options is equal to the fair market value at the date of grant. The Company had options outstanding for 215,256 shares under the plans, excluding MOD-PAC employees. At December 31, 2002,895,150 options are available for future grant under the plan established in 2002.

The Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with those of the shareholders. The options must be exercised within ten years from the grant date. The exercise price for the option is equal to the fair market value at the date of grant. The Company had options outstanding for 177,447 shares under the plans at December 31, 2002. At December 31, 2002, 68,514 options are available for future grant under the plan established in 1997.

 The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002; risk-free interest rate of 6%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of ...349; and a weighted average expected life of the option of 6.65 years. The weighted average grant date fair value of options granted during the year was 55.78.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are filly transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Astronics established the Employee Stock Purchase Plan to encourage employees to invest in Astronics. The plan provides employees that have been with the company for at least a year the option to invest up to 20% of their cash compensation (up to an annual maximum of $20,000) in Astronics common stock at a price equal to 85% of the fair market value of the Astronics common stock, determined each October 1. Employees are allowed to enroll annually. Employees indicate the number of shares they wish to obtain through the program and their intention to pay for the shares through payroll deductions over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annual cycle and all money withheld from the employees pay is returned with interest. If an employee remains enrolled in the program, enough money will have been withheld from the employees' pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2002, employees had outstanding options to purchase 73,921 shares at $6.11 per share on September 30, 2003.

 

Note 7

Income Taxes

The provision for income taxes consists of the following:

(in thousands)

			2002			2001			2000
	Currently Payable
	US Federal	$	2,075		$	2,810		$	1,453
	Foreign		370			79			79
	State		144			303			200
	Deferred		(221	)		(248	)		62
		$	2,368		$	2,944		$	1,794
The effective tax rates differ from the statutory federal income tax as follows:
			2002			2001			2000
	Statutory Federal Income
	Tax Rate		34.0	%		34.0	%		34.0	%
	Non-deductible Items, Net		.5	%		.7	%		.3	%
	Foreign Taxes		1.4	%		.3	%		.3	%
	State Income Tax, Net of Federal       Income Tax Benefit		.9	%		2.3	%		2.5	%
	Research and Development Credits					(3.0	)%		(2.7	)%
	Other		.1	%		(.7	)%		(.5	)%
			36.9	%		33.6	%		33.9	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2002 and 2001 are as follows:

		(in thousands)
			2002			2001
	Long-term Deferred Tax Liabilities:
	Tax Depreciation over Book Depreciation	$	1,143		$	751
	Long-term Deferred Assets:
	State Investment Tax Credit Carryforwards		286			295
	Deferred Compensation		1,418			1,108
	Loss Reserves associated with Discontinued Operations MaxEL lamp product group		395			—
	Other-net		299			120
	Total Long-term Deferred Tax Assets
	Net Long-term Deferred Tax Asset	$	1,255		$	772

At December 31, 2002, the Company had state investment tax credit carryforwards of 5433,000 expiring through 2017. Accumulated earnings in Canada not repatriated were 5428,000 at December 31, 2002.

  

Note 8

Profit Sharing/401(k) Plan

The Company has a qualified Profit Sharing/401(k) Plan for the benefit of its eligible full-time employees. The Profit Sharing/40l(k) Plan provides for annual contributions based on percentages of pre-tax income. In addition, employees may contribute a portion of their salary to the 401(k) plan which is partially matched by the Company. The plan maybe amended or terminated at any time. Total charges to income from continuing operations for the plan were $582,000, $743,000 and 5524,000 in 2002,2001 and 2000, respectively.

 

Note 9

Supplemental Retirement Plan and Related Post Retirement Benefits

The Company has a non-qualified supplemental retirement defined benefit plan (the "Plan") for certain executives. The Plan provides for benefits based upon average annual compensation and years of service, less offsets for Social Security and Profit Sharing benefits. It is the Company's intent to find the benefits as they become payable. The following table sets forth the benefit obligation and amounts recognized in the balance sheet as of December 31, 2002 and 2001 along with the net period cost for the years then ended.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)