EXHIBIT 13
----------
ANNUAL REPORT TO SHAREHOLDERS
A History of Leadership and Growth through World Class manufacturing
Astronics Corporation Annual Report 1999
Astronics Corporation At A Glance
Astronics Corporation is a diversified manufacturing company with a history
of sound and consistent growth in sales and earnings. Each of the two segments
of the company have leadership positions in the markets they serve. These
positions of leadership, gained by supplying technically superior products to
selected markets, are essential to both the past and future growth of each
business segment.
Astronics diversification in substantially different businesses, Aerospace/
Electronics and Specialty Packaging, is a strategic hedge against a downturn in
any single industry. In both business segments the focus is on strong
relationships with Astronics' Customers. In many cases, Astronics is the sole or
primary supplier. From this vantage point Astronics has made substantial
investments in technology and capacity ahead of the market requirements further
enhancing its leadership position.
The reinvestment of internally generated funds in capability for known
markets has provided Astronics with a sound base from which to plan future
growth. The past performance of this diversified manufacturer has earned the
Company a coveted position in the Forbes Index of the Best 200 Small Companies.
Performance Highlights
Record Sales for 1999 - Astronics Corporation reported record sales of
$50,637,000 while achieving the 22nd consecutive quarterly increase for the
trailing 12 months.
Record Earnings for 1999 - The Company earned a record $ .81 per diluted
share in 1999 while achieving the 23rd consecutive quarterly increase for the
trailing 12 months.
Shareholders' Equity - The Company earned 21.1 percent on beginning
shareholders' equity, exceeding 20 percent for the 4th consecutive year.
Forbes names Astronics - Astronics Corporation was again pleased to be
named in the November 1, 1999 issue of Forbes magazine as one of the "200 Best
Small Companies".
Financial Highlights
(dollars in thousands except for per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net Sales ................... $ 50,637 $ 46,073 $ 40,972 $ 38,371 $ 28,536
Net Income .................. 4,795 4,304 3,551 2,657 1,760
Diluted Earnings Per Share .. .81 .73 .61 .46 .33
Shareholders' Equity ........ 27,837 2,730 18,198 14,842 11,726
Book Value Per Share ........ 4.90 4.08 3.30 2.71 2.24
Stock Market Price - High ... 12.63 13.30 11.36 5.46 2.82
Stock Market Price - Low .... 6.69 6.93 4.43 2.55 1.45
Return on Equity ............ 21.1% 23.7% 23.9% 22.7% 17.0%
(on January 1 Equity)
Return on Sales ............. 9.5% 9.3% 8.7% 6.9% 6.2%
Message to our Shareholders
Our diversified business continues to expand with strength and potential.
Further records were set in 1999.
The records include shipments that were up 10 percent and earnings that
were up 11 percent. In addition return on equity was 21 percent, return on sales
9.5 percent, earnings per share $.81 and cash flow from operating activities of
$1.70 per share.
These achievements occurred during a year in which we concentrated on
production expansion and technology advancements, both for process management
and for new products. Capital investments in 1999 amounted to $14.6 million, a
record 29 percent of sales. Much of the investment focused on the engineering
development of new customer programs in specialty packaging and on the launching
of the F-16 lighting systems contract in aerospace and electronics.
The year was remarkable in that these significant financial commitments and
expense loads were absorbed while realizing another year of financial
performance records. At year-end, because of our high cash flow, our
indebtedness to capitalization was a stable 36 percent as compared to 35 percent
in 1998.
Our backlog at the end of December exceeded $40 million. This, combined
with other business opportunities we are pursuing, leads us to believe that
shipments in year 2000 should increase significantly to approximately $70
million along with strong earnings to accompany this sales growth. Clearly, we
expect another solid year ahead.
Our success results from the efforts of our dedicated employees who
tirelessly pursue excellence. Their pride and determination make our
opportunities possible and our success obvious.
Kevin T. Keane
President and Chief Executive Officer,
Astronics Corporation
January 21, 2000
Aerospace and Electronics
Peter J. Gundermann
President
Aerospace and Electronics
Product Lines
Electroluminescent Lamps
Cockpit Lighting Systems
Cabin Emergency Lighting
Formation Lighting Systems
Keyboards and Keypads
Astronics' Aerospace and Electronics segment has led the industry with
integrated lighting systems for over twenty years. The company supplies
integrated cockpit lighting systems, external and interior cabin lighting and
escape path lighting for over three hundred airlines around the world. As a
premier supplier to both military and commercial aircraft, the Company is
involved with exciting cutting edge programs that include lighting systems for
Lockheed's F-22 fighter and Embraer's newest family of commuter jets. Astronics'
Aerospace and Electronics segment has also penetrated the fast growing portable
electronics market with electroluminescent lighting designed for LCD's, remote
controls, instrumentation and numerous communication devices.
In accordance with Astronics' philosophy of investing in anticipation of
the market, the Aerospace and Electronics segment has doubled it's manufacturing
capacity with new facilities in Lebanon, New Hampshire and East Aurora, New
York. These investments were significant amounting to one half of the segment's
revenue for the year.
Deliveries on Astronics $50 million dollar multi-year contract for cockpit
lighting upgrades of F-16 fighter jets began during the year. These upgrades,
for which Astronics' Aerospace and Electronics segment is the prime contractor,
provide the correct instrument lighting for night vision operations. The
technology and manufacturing processes that have been developed for this project
over the last eighteen months have advanced our capabilities for future growth
in other applications and markets.
The electroluminescent product line continues to grow, particularly in the
portable electronics market. With a significant contract from a large watch
manufacturer, the Company has begun to penetrate the market for backlighting
timepieces as well as LCDdisplays and keypads on cellular phones and personal
digital assistants. This is a world wide market that will further enhance our
market diversification. Sales of MaxEL lamps were up 300 percent in 1999 and the
Company expects them to double in the year 2000.
The Aerospace and Electronics segment of Astronics has grown in both sales
and earnings in recent years. Continuous investments in both technology and
facilities position the Company well for future growth.
Astronics' Aerospace and Electronics EL lamps can be found in watches,
LCD's, remote controls, cell phones and various communication and
instrumentation equipment.
Astronics' integrated lighting systems for the Aerospace industry can be
found in aircraft cockpits, exteriors, cabins and emergency exit paths.
A History of Leadership, Integrated Lighting Systems for over 20 Years
1995 Acquired Lebanon, New Hampshire electroluminescent operations
1996 Began implementation of ISO 9001 quality standards throughout entire
Aerospace and Electronics organization
1997 Unique, Innovative MaxEL product introduced with break through technology
of micro encapsulation
1998 Awarded $50 million contract from US Air Force to upgrade F-16 cockpit
lighting systems
1999 New facility constructed for New Hampshire operations. New facility
constructed for New York operations.
3
Specialty Packaging
Daniel G. Keane
President
Specialty Packaging
Product Lines
Personalized Retail Packaging
Medical/Consumer Care Products
Food/Confectioner Packaging
Personalized Party and Gift Items
Business/Office Products
Astronics Specialty Packaging is a world class provider of paperboard
folding cartons and other specialty paper products that are used for a wide
range of applications by a diverse customer base. By providing technically
superior products at a competitive price on a just in time basis, the Company
has achieved a leadership position in the markets served. In many cases the
Company is either the sole or preferred supplier to such leading companies as
Hershey Foods and Staples Office Superstores.
For over twenty five years, the Specialty Packaging segment of Astronics
has experienced double digit growth in sales revenue. This growth rate is
greater than twice the industry average. The trend continued in 1999 with sales
up 9 percent and operating earnings at 19 percent of sales.
Many customers are moving from a "made-to-stock" to a retail oriented "made
to order" business model. The state of the art Computer to Plate (CTP)
capability that was installed over the last two years puts the Company in a
unique position to meet these requirements. This complete CTP digital workflow
ensures accuracy and quick turn around.
The Company advanced its capability in the area of specialty coatings. The
carton perfecting Heidleberg Press, which was the first of it's kind in the
Western Hemisphere, is fully operational with the ability to apply a number of
coatings to paperboard in one production pass. This coupled with our knowledge
of inks and specialty coatings continues to open up a number of exciting growth
opportunities in the high-value added segments of the packaging market.
Astronics' Specialty Packaging segment will continue to focus on the
strategies and markets that have been so successful in the past. Our customer
partnership programs will be continued and expanded. The Company also plans to
expand it's participation in the rapidly growing e-commerce business to business
market. As one of the premier suppliers to the $7 billion packaging industry,
the Specialty Packaging segment of Astronics has exciting growth prospects.
Astronics' Specialty Packaging segment has penetrated the office and school
market with an innovative program for short run, custom pocket folders.
4
A History of Growth, Consistently Growing at over Twice the Industry
Average
1995 Installed a five-color Heidelberg Printing Press with specialty coating
capabilities Selected as the preferred supplier to Hershey Foods Special
Markets Group
1996 Doubled the size of Specialty Packaging facility in Blasdell, New York
1997 Certified to ISO 9001 quality standards Entered the Office Products
industry with Staples Office store retail chain
1998 Began program to convert over to CTP (computer to plate) digital workflow
for printing plates and cutting dies Installed the first Heidelberg
Speedmaster Carton Perfector in North America
1999 Expanded Office Products market as a supplier to Norcom Corporation
Awarded a 3 year contract by the Kendall Health Care division of TYCO
International as the exclusive folding carton supplier to five of their
North Eastern United States operations
5
Astronics Corporation Financial Review
The following financial statements for Astronics Corporation have been
prepared by management and audited by Ernst and Young LLP, independent auditors.
Consolidated Statement of Income
(in thousands, except per share data)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net Sales ...................................... $50,637 $46,073 $40,972
Cost and Expenses
Cost of products sold ........................ 36,086 31,214 27,543
Selling, general and administrative expenses . 7,362 7,765 7,463
Interest expense, net of interest income of
$142, $2 and $14 .......................... 257 376 437
43,705 39,355 35,443
Income Before Taxes ............................ 6,932 6,718 5,529
Provision for income taxes ..................... 2,137 2,414 1,978
Net Income ..................................... $ 4,795 $ 4,304 $ 3,551
Earnings per Share
Basic ........................................ $ .86 $ .78 $ .65
Diluted ...................................... $ .81 $ .73 $ .61
See notes to financial statements.
6
Consolidated Balance Sheet
(in thousands, except share data)
December 31,
1999 1998
---- ----
Current Assets
Cash and cash equivalents ................................ $ 1,153 $ 523
Accounts receivable, net of allowance for doubtful
accounts of $178 in 1999 and $238 in 1998 .............. 6,852 5,435
Inventories .............................................. 8,721 4,935
Prepaid expenses ......................................... 455 1,229
Total Current Assets ................................... 17,181 12,122
Property, Plant and Equipment, at cost
Land ..................................................... 1,466 1,115
Buildings and improvements ............................... 16,259 10,077
Machinery and equipment .................................. 34,144 30,613
Construction in progress ................................. 4,087 2,285
55,956 44,090
Less accumulated depreciation and amortization ........... 19,787 19,096
Net Property, Plant and Equipment ........................ 36,169 24,994
Unexpended Industrial Revenue Bond Proceeds ................ 3,508 4,657
Other Assets ............................................... 2,994 1,934
$59,852 $43,707
Current Liabilities
Current maturities of long-term liabilities ............... $ 762 $ 446
Accounts payable .......................................... 8,560 2,939
Accrued expenses .......................................... 2,250 2,085
Income taxes .............................................. 166 347
Total Current Liabilities ............................... 11,738 5,817
Long-term Debt .............................................. 8,878 11,319
Long-term Obligations under Capital Leases .................. 7,069 789
Supplemental Retirement Plan ................................ 2,482 1,625
Other Liabilities ........................................... 598 357
Deferred Income Taxes ....................................... 1,250 1,070
Shareholders' Equity
Common Stock, $.01 par value
Authorized 10,000,000 shares, issued
5,327,112 in 1999; 5,225,001 in 1998 ................... 53 52
Class B Stock, $.01 par value
Authorized 5,000,000 shares, issued
667,326 in 1999; 693,660 in 1998 ....................... 7 7
Additional Paid-in Capital ................................ 2,912 2,681
Retained Earnings ......................................... 25,727 20,932
28,699 23,672
Less Treasury Stock: 319,405 shares in 1999; 349,187 shares
in 1998, at cost .......................................... 862 942
Total Shareholders' Equity ............................. 27,837 22,730
$59,852 $43,707
See notes to financial statements.
7
Consolidated Statement of Cash Flows
(in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities
Net income ........................................................... $ 4,795 $ 4,304 $ 3,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................................... 3,688 3,114 2,831
Provision for doubtful accounts .................................... (60) 11 (177)
Provision for deferred taxes ....................................... 180 248 27
Cash flows from changes in operating assets and liabilities,
net of the effect of acquired or sold business:
Accounts receivable ................................................ (1,357) (1,003) (578)
Inventories ........................................................ (3,786) (174) 101
Prepaid expenses ................................................... 774 (814) 163
Accounts payable ................................................... 5,621 375 101
Accrued expenses ................................................... 165 143 185
Income taxes ....................................................... (181) (13) (577)
Supplemental retirement plan and other ............................. 241 125 180
Net Cash provided by Operating Activities .............................. 10,080 6,316 6,057
Cash Flows from Investing Activities
Proceeds from sale of assets ....................................... 68 - -
Change in other assets ............................................. (527) (474) (46)
Capital expenditures ............................................... (14,607) (9,686) (3,060)
Net Cash used by Investing Activities .................................. (15,066) (10,160) (3,106)
Cash Flows from Financing Activities
New long-term debt ................................................. 7,000 9,250 -
Principal payments on long-term debt and capital lease obligations.. (2,845) (1,194) (3,146)
Unexpended industrial revenue bond proceeds ........................ 1,149 (4,657) -
Proceeds from issuance of stock .................................... 312 234 337
Fractional shares paid on stock distribution ....................... - (6) -
Purchase of stock for treasury ..................................... - - (532)
Net Cash provided (used) by Financing Activities ....................... 5,616 3,627 (3,341)
Net increase (decrease) in cash and cash equivalents ................... 630 (217) (390)
Cash and Cash Equivalents at Beginning of Year ......................... 523 740 1,130
Cash and Cash Equivalents at End of Year ............................... $ 1,153 $ 523 $ 740
Disclosure of Cash Payments for:
Interest ............................................................ $ 373 $ 413 $ 474
Income taxes ........................................................ $ 2,134 $ 2,181 $ 2,278
See notes to financial statements.
8
Consolidated Statement of Shareholders' Equity
(dollars and shares in thousands)
Common Stock Class B Stock Treasury Stock
Shares Par Shares Par Paid-In Retained
Issued Value Issued Value Shares Cost Capital Earnings
------ ----- ------ ----- ------ ---- ------- --------
Balance at
December 31, 1996 ............... 4,519 $ 45 749 $ 7 298 $ 596 $ 2,297 $13,089
Net Income for 1997 3,551
Treasury Stock Sold (38) (113) 53
Treasury Stock Purchased 82 532
Exercise of Stock Options ....... 91 1 170
Class B Stock converted to
Common Stock .................... 33 - (33) -
Balance at
December 31, 1997 ............... 4,643 46 716 7 342 1,015 2,520 16,640
Net Income for 1998 4,304
Stock Distribution .............. 537 6 34 (12)
Treasury Stock Sold (27) (73) 130
Exercise of Stock Options ....... 23 31
Class B Stock converted to
Common Stock .................... 22 - (22) -
Blance at
December 31, 1998 ............... 5,225 52 694 7 349 942 2,681 20,932
Net Income for 1999 4,795
Treasury Stock Sold (30) (80) 153
Exercise of Stock Options ....... 76 1 78
Class B Stock converted to
Common Stock .................... 26 - (26) -
Balance at
December 31, 1999 ............... 5,327 $ 53 668 $ 7 319 $ 862 $ 2,912 $25,727
See notes to financial statements.
9
Notes to Consolidated Financial Statements
Note 1
Summary of Significant Accounting Principles and Practices
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.
Revenue Recognition
Revenue is recognized on the accrual basis, i.e., at the time of shipment
of goods. There are no significant contracts allowing for right of return. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined in accordance with the first-in, first-out method. Inventories at
December 31 are as follows:
(in thousands)
1999 1998
---- ----
Finished Goods ........ $ 1,936 $ 1,357
Work in Progress ...... 1,476 1,064
Raw Material .......... 5,309 2,514
$ 8,721 $ 4,935
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, 10-40 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.
10
Goodwill
Goodwill is included in other assets, represents the excess of purchase
price over the fair value of net tangible assets acquired, net of accumulated
amortization, and amounted to $999,000 and $1,049,000 at December 31, 1999 and
1998, respectively. Accumulated amortization amounted to $432,000 and $382,000
at December 31, 1999 and 1998, respectively. These assets are amortized over
15-40 years on a straight-line basis, starting in the year of acquisition.
Income Taxes
The Company files a consolidated federal income tax return. Deferred taxes
are computed under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
Earnings Per Share
Earnings per share computations are based upon the following table:
(in thousands, except per share data)
1999 1998 1997
---- ---- ----
Net Income ............................ $4,795 $4,304 $3,551
Basic earnings per share
weighted average shares,
restated for share distributions .... 5,606 5,542 5,496
Net effect of dilutive stock options .. 337 385 370
Diluted earnings per share
weighted average shares ........... 5,943 5,927 5,866
Basic earnings per share ............. $ 0.86 $ 0.78 $ 0.65
Diluted earnings per share ........... $ 0.81 $ 0.73 $ 0.61
Cash Equivalents
The Company considers all highly-liquid investments in debt securities with
original maturities of three months or less as cash equivalents.
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 traded,
and cannot receive dividends unless an equal or greater amount is declared on
Common Stock.
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.
11
Note 2
Effect of New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The intended use of the derivative and its
designation as either (1) a hedge of the exposure to changes in the fair value
of a recognized assets or liability or a firm commitment (a fair value hedge),
(2) a hedge of the exposure to variable cash flows of a forecasted transaction
(a cash flow hedge), or (3) a hedge of the foreign currency exposure of a net
investment in a foreign operation (a foreign currency hedge), will determine
when the gains or losses on the derivatives are to be reported in earnings and
when they are to be reported as a component of other comprehensive income.
This new standard must be adopted for year 2001 financial reporting.
Management has determined that it does not have current transactions that would
require reporting under "Accounting for Derivative Instruments and Hedging
Activities."
Note 3
Notes Payable
The Company has an unsecured line of credit of $12,000,000, which provides
for interest 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. At
December 31, 1999 and 1998, $1,400,000 and $3,800,000, respectively, was
outstanding.
Note 4
Long-term Debt
Long-term debt consists of the following:
(in thousands)
1999 1998
---- ----
Mortgage payable in installments
through 2003 with interest at 11.00% ............ $ 28 $ 34
Revolver loan with interest
at LIBOR plus 100 basis points .................. 1,400 3,800
Urban Development Action Grant
financing payable in monthly
installments through 2006, with
interest at 3% .................................. 242 276
Industrial Revenue Tax-Exempt Bonds issued through
the Business Finance Authority of the State of
New Hampshire payable $400,000 annually
starting in 2001 through 2018 with interest
reset every seven days. The rate at December
31, 1999 was 5.65% .............................. 7,250 7,250
8,920 11,360
Less current maturities ........................... 42 41
$ 8,878 $ 11,319
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 mortgage payable and the grant are
secured by certain property, plant and equipment. The Company's revolver loan,
among other requirements, imposes certain covenants with which the Company
maintains compliance.
Estimated principal maturities of long-term debt over the next five years
are as follows: $42,000; $444,000; $446,000; $446,000; and $1,800,000.
Interest costs of $312,000 and $46,000 were capitalized in 1999 and 1998,
respectively.
12
Note 5
Long-term Obligations Under Capital Leases
The County of Erie, State of New York, has issued Industrial Revenue
Development Bonds in connection with the acquisition of certain land, production
facilities and equipment. The 1999 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. These bear interest at either seven to ten
percent, 70 percent of the bank's prime rate, or are reset every seven days. The
Company also leases certain other equipment under capital leases from six to ten
percent interest.
The following is a schedule by years of future minimum lease payments under
the capital leases, together with the present value of the net minimum lease
payments as of December 31, 1999:
(in thousands)
Capital
Period Lease
------ -------
2000 $ 1,074
2001 807
2002 758
2003 722
2004 640
2005-2019 7,015
Net minimum lease payments 11,016
Amounts representing interest 3,227
Present value of net
minimum lease payments $ 7,789
Amounts related to the capital leases included in the Balance Sheet are
summarized as follows:
(in thousands)
1999 1998
----- ----
Property, Plant and Equipment:
Land ......................... $ 477 $ 125
Buildings and improvements ... 6,679 2,592
Machinery and equipment ...... 2,838 2,578
9,994 5,295
Less accumulated
depreciation ................. 4,519 4,416
$ 5,475 $ 879
Debt:
Current ...................... $ 720 $ 405
Long-term .................... 7,069 789
$ 7,789 $ 1,194
The Company subleases a portion of these facilities from which they
anticipate future total minimum rentals of $1,834,000.
13
Note 6
Stock Option and Purchase Plans
A summary of the Company's stock option and purchase plans activity, and
related information for the years ended December 31 follows:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at the beginning of the year ....... 538,690 $2.81 481,026 $2.60 577,233 $2.07
Options granted ................................ 110,436 $8.57 67,869 $8.23 47,714 $7.69
Stock distribution - - 47,135 $(.25) - -
Options exercised ..............................(106,232) $3.01 (49,942) $4.69 (128,563) $2.63
Options expired ................................ (8,587) $7.82 (7,398) $8.29 (15,358) $3.38
Outstanding at the end of the year ............. 534,307 $3.88 538,690 $2.81 481,026 $2.60
Exercisable at December 31 ..................... 398,696 $2.63 435,221 $2.10 403,156 $2.02
Exercise prices for options outstanding as of December 31, 1999 range from
$.95 to $10.25. The weighted average remaining contractual life of these options
is 4.6 years.
In October 1995, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based
Compensation. The Company uses the measurement prescribed by APB Opinion No. 25
which does not recognize compensation expense if the exercise price of the stock
option equals the market price of the underlying stock on the date of grant.
SFAS No. 123 requires companies that choose to continue using APB Opinion No.
25, and thus not adopting the new fair value accounting rules, to disclose pro
forma net income and earnings per share under the new method.
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 1999; risk-free interest rate of 7.0%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.42; and a weighted average expected life of the option of 4.5 years. The
weighted average grant date fair value of options granted during the year was
$3.91.
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 fully 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
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended December 31, 1999 is as follows: net
income $4,568,000; basic earnings per share $.81; and diluted earnings per share
$.77. The pro forma effect on earnings for the year December 31, 1998 is as
follows: net income $4,163,000; basic earnings per share $.75; and diluted
earnings per share $.71. The pro forma effect on earnings for the year ended
December 31, 1997 is as follows: net income $3,431,000; basic earnings per share
$.69; and diluted earnings per share $.65.
The Company established the 1982 and 1992 Incentive Stock Option Plans for
the purpose of attracting and retaining executive officers and key employees,
and to align management's interest with those of the shareholders. Generally,
the options must be exercised within ten years from the grant date and, under
the 1992 Plan, the options 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 79,750 shares and 253,625 shares under
the 1982 and 1992 Plans, respectively. At December 31, 1999 options available
for future issuance under the 1992 Plan are 79,875 shares.
The Company established the 1984, 1993 and 1997 Directors Stock Option Plan
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 86,796 shares, 48,400
shares and 28,500 shares under the 1984, 1993 and 1997 Plans, respectively. At
December 31, 1999 options available for future issuance under the 1997 Plan are
81,500 shares.
The Company established the Employee Stock Purchase Plan to encourage
employees to invest in the Company. Each option is for one year, but may be
canceled by the employee at any time during the year. The exercised price of the
option is 85 percent of the market price on the date of grant. The employee pays
for the option through a weekly payroll deduction. At December 31, 1999
employees had outstanding options to purchase 37,236 shares at $7.23 per share
on September 30, 2000.
14
Note 7
Income Taxes
The provision for income taxes consists of the following:
(in thousands)
1999 1998 1997
---- ---- ----
Currently payable
Federal ................................ $1,807 $2,009 $1,635
State .................................. 150 157 146
Deferred (from prior) to future years .... 180 248 197
$2,137 $2,414 $1,978
The effective tax rates of 30.8% in 1999, 35.9% in 1998 and 35.8% in 1997,
which differ from the statutory federal income tax, are a result of the
following:
1999 1998 1997
---- ---- ----
Statutory federal income
tax rate ............................. 34.0% 34.0% 34.0%
Tax exempt items, net .................. .3% .3% .4%
State income tax, net of
federal income tax benefit ............ 1.4% 1.5% 1.8%
Reduction in valuation allowance ....... (3.2%) - -
Other .................................. (1.7%) .1% (.4%)
30.8% 35.9% 35.8%
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, 1999 and
1998 are as follows:
(in thousands)
1999 1998
---- ----
Long-term deferred tax liabilities:
Tax depreciation over book depreciation ..... $ 2,773 $ 2,239
Net long-term deferred tax liability ...... 2,773 2,239
Long-term deferred assets:
State investment tax credit carryforwards ... 1,089 985
Deferred compensation ....................... 835 826
Other-net ................................... 198 177
Total long-term deferred tax assets ....... 2,122 1,988
Valuation allowance for deferred tax
assets related to investment tax credit
carryforward .............................. (599) (819)
Net long-term deferred tax asset ............ 1,523 1,169
Net long-term deferred tax liability ...... $ 1,250 $ 1,070
At December 31, 1999, the Company had state investment tax credit
carryforwards of $1,654,000 expiring through 2014.
Note 8
Deferred Profit Sharing/401(k) Plan
The Company has a trusteed Deferred Profit Sharing/401(k) Plan for the
benefit of its eligible full-time employees. The Profit Sharing/401(k) Plan
provides for annual contributions based on percentages of pre-tax income. In
addition, employees may contribute up to sixteen percent of their salary to the
401(k) features. The plan may be amended or terminated at any time. Total
charges to income for the plan were $803,000, $779,000 and $745,000 in 1999,
1998 and 1997, respectively.
15
Note 9
Supplemental Retirement Plan
In December 1999, the Company adopted 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 fund the benefits as they become payable. The Plan replaces
a retirement benefit arrangement established in a prior year; accordingly, the
accrued liability under that arrangement was reclassified to the Plan during
1999.
The following table sets forth the benefit obligation, which is unfunded,
and amounts recognized in the balance sheet as of December 31, 1999:
Benefit obligation at end of year ............ $ 3,395
Unrecognized prior service cost .............. 1,770
Net amount recognized ........................ $ 1,625
Amounts recognized in the balance sheet:
Accrued benefit liability .................... $ 2,482
Less intangible asset ........................ 857
Net amount recognized ........................ $ 1,625
In determining the present value of benefit obligations, a discount rate of
8% was used and the assumed rate of increase in compensation levels was 5%. The
benefit obligation represents the actuarial present value of benefits attributed
to employee service rendered assuming future compensation levels are used to
measure the obligation. FASB Statement No. 87, "Employers' Accounting for
Pensions," requires the Company to recognize a minimum pension liability equal
to the actuarial present value of the accumulated benefit obligations. The
accumulated benefit obligation is $2,482 at December 31, 1999. An intangible
asset is required and has been recorded since the excess of the accumulated
benefit obligation over the pension cost recognized relates to prior service
costs.
Note 10
Accrued Expenses
Accrued expenses consist of the following: (in thousands)
1999 1998
---- ----
Accrued payroll and employee benefits ...... $ 896 $ 950
Accrued profit sharing ..................... 803 779
Other accrued liabilities .................. 551 356
$2,250 $ 2,085
Note 11
Selected Quarterly Financial Information
(unaudited) (in thousands, except for per share data)
Quarter ended
-------------
Dec. 31, Oct. 2, July 3, April 3, Dec. 31, Oct. 3, July 4, April 4,
1999 1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
Net Sales .................. $ 15,162 $ 12,017 $ 11,133 $ 12,325 $ 13,031 $ 11,689 $ 10,296 $ 11,057
Gross Profit ............... $ 4,173 $ 3,480 $ 3,299 $ 3,599 $ 4,808 $ 3,651 $ 3,035 $ 3,365
Income before tax .......... $ 2,485 $ 1,677 $ 1,379 $ 1,391 $ 2,683 $ 1,580 $ 1,271 $ 1,184
Net income ................. $ 1,833 $ 1,133 $ 896 $ 933 $ 1,689 $ 1,049 $ 821 $ 745
Basic earnings per share ... $ .33 $ .20 $ .16 $ .17 $ .31 $ .19 $ .14 $ .14
Diluted earnings per share . $ .31 $ .19 $ .15 $ .16 $ .29 $ .18 $ .13 $ .13
16
Note 12
Operations in Different Industries
The Company operates in two areas: Aerospace and Electronics, and Specialty
Packaging. Operations in Aerospace and Electronics involve the design,
manufacturing and marketing of state-of-the-art and advanced technological
components incorporated into functional systems including instrument panels,
photo reproductions and keyboard technologies. Customers are typically well
known companies in the automotive, aerospace, defense, and electronics
industries worldwide. Operations in Specialty Packaging involve the design,
manufacturing and marketing of folding paperboard packaging for customers'
delivery of their products and high quality custom imprinting of napkins,
invitations and other paper products. The Company is a dominant provider of
custom folding boxes in chosen markets.
Corporate assets consist mainly of cash, cash equivalents and furniture and
equipment.
(in thousands)
Aerospace and Specialty
Electronics Packaging Corporate Consolidated
------------- --------- --------- ------------
Sales to external customers:
1999 $ 26,312 $ 24,325 $ - $ 50,637
1998 23,884 22,189 - 46,073
1997 20,167 20,805 - 40,972
Interest expense, net:
1999 $ (51) $ 78 $ 230 $ 257
1998 4 105 267 376
1997 3 129 305 437
Income before taxes:
1999 $ 2,982 $ 3,544 $ 406 $ 6,932
1998 3,694 2,840 184 6,718
1997 2,676 2,931 (78) 5,529
Identifiable assets:
1999 $ 30,831 $ 26,445 $ 2,576 $ 59,852
1998 18,484 24,262 961 43,707
1997 9,110 20,011 1,120 30,241
Capital expenditures:
1999 $ 9,650 $ 4,957 $ - $ 14,607
1998 3,796 5,872 18 9,686
1997 412 2,644 4 3,060
Depreciation and amortization:
1999 $ 883 $ 2,754 $ 51 $ 3,688
1998 715 2,360 39 3,114
1997 767 2,029 35 2,831
Sales by geographic locations:
1999 North America $ 19,529 $ 24,236 $ - $ 43,765
Europe 3,009 5 - 3,014
South America 996 2 - 998
Other 2,778 82 - 2,860
26,312 24,325 - 50,637
1998 North America $ 16,899 $ 22,138 $ - $ 39,037
Europe 3,609 3 - 3,612
South America 1,807 - - 1,807
Other 1,569 48 - 1,617
23,884 22,189 - 46,073
1997 North America $ 15,606 $ 20,781 $ - $ 36,387
Europe 3,200 4 - 3,204
South America 124 1 - 125
Other 1,237 19 - 1,256
20,167 20,805 - 40,972
17
Report of Independent Auditors
To the Shareholders and Board of Directors of Astronics Corporation
We have audited the accompanying consolidated balance sheets of Astronics
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Astronics
Corporation at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Ernst & Young LLP
Buffalo, New York
January 20, 2000
Management's Statement of Responsibility
The management of Astronics Corporation is responsible for the contents of
the consolidated financial statements, which are prepared in conformity with
generally accepted accounting principles. The consolidated financial statements
necessarily include amounts based on judgements and estimates. Financial
information elsewhere in the Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains an accounting system which includes controls designed
to provide reasonable assurance as to the integrity and reliability of the
financial records and the protection of assets. The role of Ernst & Young LLP,
the independent auditors, is to provide an objective examination of the
consolidated financial statements and the underlying transactions in accordance
with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed solely of directors
who are not members of management, meets periodically with management and the
independent auditors to ensure that their respective responsibilities are
properly discharged.
Kevin T. Keane John M. Yessa
President and Chief Executive Officer Vice President-Finance, Treasurer
and Chief Financial Officer
18
Five Year Comparison of Selected Financial Data
(in thousands, except per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
For the year:
Sales .............................................. $50,637 $46,073 $40,972 $38,371 $28,536
Net income ......................................... 4,795 4,304 3,551 2,657 1,760
Per share:
Basic earnings per share ......................... .86 .78 .65 .50 .33
Diluted earnings per share ....................... .81 .73 .61 .46 .33
Shares used in computation of basic
earnings per share ............................. 5,606 5,542 5,496 5,319 5,268
Shares used in computation of diluted
earnings per share ............................. 5,943 5,927 5,866 5,723 5,268
At end of year:
Total assets ..................................... $59,852 $43,707 $30,241 $29,865 $30,815
Net investment in property, plant and equipment .. 36,169 24,994 18,160 17,642 16,276
Working capital .................................. 5,443 6,305 4,299 2,855 6,101
Long-term debt ................................... 8,878 11,319 2,110 3,798 9,713
Long-term obligations under capital leases ....... 7,069 789 1,194 1,600 2,010
Shareholders' equity ............................. 27,837 22,730 18,198 14,842 11,726
Stock Prices
The adjacent table sets forth the range of prices for the Company's Common
Stock, traded on the Nasdaq National Market System, for each quarterly period
during the last two years. The approximate number of shareholders of record as
of February 4, 2000 was 964.
1999 1998
---- ----
First $8.56 - $11.44 $6.93 - $8.86
Second 8.00 - 10.50 7.56 - 13.30
Third 6.69 - 12.63 7.84 - 12.50
Fourth 7.50 - 11.25 8.06 - 11.88
19
Management's Discussion and Analysis
The following table sets forth an income statement with percentage of net
sales and the percentage increase (decrease) of such items as compared to the
prior period.
1999 1998 1997 Period to Period
(dollars in thousands) $ % $ % $ % 1998-99 1997-98
---- ----- ------- ---- ------- ---- -----------------
Net sales
Aerospace and Electronics .. $26,312 52.0 $23,884 51.8 $20,167 49.2 10.2% 18.4%
Specialty Packaging ........ 24,325 48.0 22,189 48.2 20,805 50.8 9.6% 6.7%
50,637 100.0 46,073 100.0 40,972 100.0 9.9% 12.5%
Cost of goods sold ........... 36,086 71.3 31,214 67.7 27,543 67.2 15.6% 13.3%
Selling, general and
administrative expenses ...... 7,362 14.5 7,765 16.9 7,463 18.2 (5.2)% 4.0%
Operating Income ........ 7,189 14.2 7,094 15.4 5,966 14.6 1.3% 18.9%
Other deductions:
Interest expense, net ... 257 .5 376 .8 437 1.1 (31.7)% (14.0)%
Income before taxes ..... 6,932 13.7 6,718 14.6 5,529 13.5 3.2% 21.5%
Provision for income taxes ... 2,137 4.2 2,414 5.2 1,978 4.8 (11.5%) 22.0%
Net income .............. $ 4,795 9.5 $ 4,304 9.4 $ 3,551 8.7 11.4% 21.2%
Introduction
Astronics Corporation operates in two business segments: Aerospace and
Electronics; and Specialty Packaging. The Company changed the name of its
Electronics Systems segment in 1997 to Aerospace and Electronics to better
reflect its products and market focus. This business segment designs,
manufactures and markets electroluminescent lamps and incorporates them into
escape path lighting systems, aircraft cockpit lighting systems, military
aircraft formation lighting, and ruggedized and avionics keyboards.
On October 31, 1999, the Aerospace and Electronics segment completed their
move into and the commissioning of their new manufacturing facility in Lebanon,
New Hampshire. This new 80,000 square foot building allows the Company to
consolidate its New Hampshire operations, previously in four leased locations,
into a single facility, and expands production capacity.
On October 27, 1999, the Company closed an Industrial Revenue Tax-Exempt
Bond with the Industrial Development Agency of the County of Erie, State of New
York for $7,000,000. The interest rate floats with tax-exempt funds and is reset
every seven days. These funds are being used to finance the new East Aurora, New
York manufacturing facility and production equipment for expanded customer
needs.
Late in the Third Quarter of 1999, the Company started shipments on the
NVIS F-16 (night vision lighting modification kits) program. Shipments totaled
$3,000,000 in 1999. The Company expects these shipments to increase to
approximately $16,000,000 annually and the program, as currently designed, to go
into 2002. The Company has $27,000,000 in backlog and it expects the United
States Air Force to exercise additional production options in the future.
On July 1, 1999, the Company established a $12,000,000 five-year revolving
line of credit at the bank's prime rate or LIBOR plus 60 basis points. The
revolver can be converted to a four-year term loan at the end of five years. The
Company also renegotiated its letter of credit agreements to lower the cost of
the bank guarantee on the Industrial Revenue Bond programs.
On May 12, 1999, the Company's Aerospace and Electronics segment acquired
14.9 acres of land in East Aurora, New York, and started construction of a
70,000 square foot manufacturing facility on this new property. The Company
anticipates completion of the construction and installation of equipment and
systems during the First Half of 2000.
On April 24, 1998, the Company announced that the United States Air Force
(USAF) had selected its Luminescent Systems Inc. subsidiary to design, develop
and manufacture night vision lighting modification kits for the NVIS F-16
program. The initial award was for 377 units. On February 10, 1999, the Company
announced that the USAF had exercised an option for additional 305 units. Two
options remain for future use by the USAF. The potential value of the contract
is $50,000,000, with current awards totaling $29,000,000. Delivery started in
the Third Quarter of 1999 with the program running into 2002.
On December 30, 1998, the Company completed an Industrial Revenue
Tax-Exempt Bond with the Business Finance Authority of the State of New
Hampshire for $7,250,000. The interest rate floats with tax-exempt funds and is
reset every seven days. These funds were used to finance the new manufacturing
facility and additional production equipment in the Lebanon, New Hampshire
operation.
During the Third Quarter of 1998, the New Hampshire operations of the
Aerospace and Electronics segment received their ISO 9001 certification. In the
Third Quarter of 1997, the Specialty Packaging segment received its ISO 9001
certification.
20
Sales
Astronics Corporation established a new sales record for the year.
Astronics has set a new record for sales for the last 22 quarters based on the
trailing twelve months results. Sales increased 9.9 percent in 1999 to
$50,637,000, compared to 12.5 percent in 1998 to $46,073,000, and compared to
6.8 percent in 1997 to $40,972,000. Sales for the year were closely divided
between Aerospace and Electronics (52 percent) and Specialty Packaging (48
percent).
Sales in the Aerospace and Electronics segment increased 10.2 percent in
1999 to $26,312,000, compared to 18.4 percent in 1998 to $23,884,000, and
compared 2.3 percent in 1997 to $20,167,000. In 1999, the Company realized
$3,000,000 of business from the F-16 NVIS program. In addition, sales of its
lamps increased 22 percent. Other product lines grew between five and ten
percent except for emergency egress lighting system, formation lighting systems
for military aircraft and inverters which experienced sales decreases. The
Company's revenue for non-recurring engineering charges decreased $500,000 in
1999. The Company in 1998 experienced solid sales growth in its emergency egress
lighting systems, formation lighting systems for military aircraft and cockpit
lighting systems areas. The Company has been awarded key development contracts
for lighting systems in planes being developed for the commercial, private and
military aircraft markets.
Sales in the Specialty Packaging segment increased 9.6 percent in 1999 to a
total of $24,325,000, compared to 6.7 percent growth in 1998 to $22,189,000, and
compared to growth of 11.5 percent in 1997 to $20,805,000. This growth has been
in the specifically designed boxes for customers in the confectionery,
pharmaceutical and consumer product markets. This product line utilizes the
Company's engineering, design and manufacturing capabilities for specific
product solutions enabling customers to enhance their distribution to the
marketplace. In 1999, the Company entered the office products area and recorded
sales of approximately $500,000. The Company continues to develop opportunities
to partner with customers to jointly meet the customer's needs.
The Company is marketing it products globally. In 1999, 18 percent of its
sales were to international customers compared to 21 percent in 1998. The North
American markets, mainly Canada and Mexico, accounted for 27 percent of
international sales in each year. International sales accounted for 31 percent,
36 percent, and 27 percent of the Aerospace and Electronics sales in 1999, 1998,
and 1997, respectively. The Specialty Packaging segment has five percent, six
percent, and six percent of its sales in 1999, 1998, and 1997, respectively, in
international markets. Sales to foreign customers are made in U.S. dollars.
Sales made to Asian countries increased to 18 percent of international sales in
1999, compared to four percent in 1998. This growth reflects the sales of lamps.
Sales in the Aerospace and Electronics segment are mainly by competitive bid
based on customer specifications. None of the government contracts are subject
to renegotiation of profits clauses. Sales in the Specialty Packaging segment
are approximately half from standard catalog pricing and half from competitive
bid based on customer specifications. The Company has no sales concentrated in
any one customer.
Expenses
The gross profit margin was 28.7 percent in 1999, compared to 32.3 percent
in 1998, and 32.8 percent in 1997. The product mix change resulting from the
growth in Aerospace and Electronics sales has had an effect on the ratios. The
direct costs on the F-16 NVIS program are higher than that experienced in other
product lines. Cost of goods sold increased 15.6 percent in 1999, compared to
13.3 percent in 1998, both of which are higher than the sales increase of 9.9
percent in 1999, and 12.5 percent in 1998. Within the cost of goods sold area
there have been various shifts of costs. For example, material usage as a
percent of sales was 23.2 percent in 1999, 21.1 percent in 1998, and 19.7
percent in 1997. This reflects the higher material content of the F-16 program.
Employee costs (wages and benefits), as a percent of sales, was 28.1 percent in
1999, 27.5 percent in 1998, and 28.0 percent in 1997. Part of the increase in
employee cost reflects the technical nature of new manufacturing processes as
well as the increasing sales in Aerospace and Electronics. Depreciation, as a
percent of sales, increased to 6.1 percent of sales in 1999, after remaining at
5.5 percent of sales the past two years. Supply costs in 1999 increased to 8.3
percent of sales, compared to 7.5 percent in 1998 as the Company moved into a
new facility, developed new products and developed new manufacturing processes.
Facility costs have been in the six percent of sales area during the three-year
period. All other categories of expenses were approximately the same percentage
of the sales dollar in each of the three years.
The Company's operating profit of $7,189,000 in 1999 was 14.2 percent of
sales, compared to $7,094,000, or 15.4 percent of sales in 1998, and compared to
$5,966,000, or 14.6 percent of sales in 1997. The lower profit margin in 1999 is
the result of higher cost of products sold. The costs associated with the
selling, general and administrative area of the business tend to be more fixed
and period costs, not directly related to manufacturing volume. Employee costs
were 8.9 percent of sales in 1999, compared to 10.1 percent of sales in 1998,
and 10.2 percent in 1997. The Company instituted a new Supplemental Retirement
Benefit Plan in the year and canceled the older plan. The reserve from the
former plan was used to offset costs for the new plan, and not taken into
income. The cost of professional services was approximately one percent of sales
in 1999 and 1998, compared to two percent in 1997, when the Company utilized
outside computer consulting services. All other cost areas are within a
percentage point of the prior year.
Interest
Interest costs, net of interest income, was $257,000 (.5 percent of sales)
in 1999, compared to $376,000 (.8 percent of sales) in 1998, and $437,000 (1.1
percent of sales) in 1997. The Company earned $127,000 in interest on unexpended
Industrial Revenue Bonds proceeds during 1999. The Company reduced its total
long-term indebtedness by $2,845,000 in 1999, compared to $1,194,000 in 1998,
and compared to $3,146,000 in 1997. On October 27, 1999, the Company borrowed
$7,000,000 under a Tax-Exempt Industrial Revenue Bond with the County of Erie,
State of New York. On December 30, 1998, the Company borrowed $7,250,000 under a
Tax-Exempt Industrial Revenue Bond with the State of New Hampshire. During the
1998 year, the Company borrowed an additional $2,000,000, net, on its Revolving
Line of Credit. Interest on the industrial revenue bonds, during the
construction period, is capitalized as part of the cost of the new facility. In
1999 the Company capitalized $312,000 of interest expense.
21
Income Before Taxes
Income before taxes was $6,932,000, or 13.7 percent of sales in 1999,
compared to $6,718,000, or 14.6 percent of sales in 1998, and compared to
$5,529,000, or 13.5 percent of sales in 1997. The decrease in the percentage of
sales is the reflection of higher costs of goods sold.
Taxes
The provision for taxes for 1999 was $2,137,000, or 4.2 percent of sales,
compared to $2,414,000, or 5.2 percent of sales in 1998, and compared to
$1,978,000, or 4.8 percent of sales in 1997. The effective tax rate for 1999 is
30.8 percent, compared to 35.9 percent in 1998, and compared to 35.8 percent in
1997. The Company reduced its valuation allowance for deferred tax assets
related to state investment tax credit carryforwards as a result of higher
taxable income which allow greater utilization of the credits. The valuation
reserve was $599,000, $819,000, and $563,000 at December 31, 1999, 1998, and
1997, respectively. The Company's Deferred Income Tax Liability, resulting from
timing differences in recognition of expenses, was $1,250,000, $1,070,000, and
$822,000 at December 31, 1999, 1998, and 1997, respectively. The Company's
Federal Income Tax returns have been audited through 1995.
Net Income
The Company earned 9.5 percent on the sales dollar in 1999, a new record,
compared to 9.4 percent in 1998, and compared to 8.7 percent in 1997. Astronics
has set a new record for earnings for the last 23 quarters based on the trailing
twelve months results. The net income was $4,795,000, or $.81 per diluted share
in 1999, compared to $4,304,000, or $.73 per diluted share in 1998, and compared
to $3,551,000, or $.61 per diluted share in 1997.
Liquidity
Working capital decreased in 1999 to $5,443,000, compared to an increase in
1998 to $6,305,000, as compared to $4,299,000 in 1997. The Company reduced its
utilization of the revolving line of credit by $2,400,000 during 1999. The
Company is in compliance with all loan covenants.
As the Company prepared for F-16 shipments, it was necessary to acquire
substantial amounts of inventory. At December 31, 1999 this amounted to
$2,800,000. As an offset, several suppliers agreed to be paid when the Company
receives payment from the U.S. Government. This amounted to $3,000,000 at
December 31, 1999. In a separate transaction, the Company purchased two die
cutters in the Second Quarter of 1999, for which final payment of $2,600,000 is
due in the First Quarter of 2000.
The Company believes that the cash generated from operations combined with
borrowing capacity under its Revolving Line of Credit are adequate to fund the
needs for working capital and capital expenditures as forcasted for year 2000
operations.
Credit Line
The Company maintains an unsecured revolving line of credit for $12,000,000
with interest at either the bank's prime rate or LIBOR plus 60 basis points. At
June 30, 2004 the Company can convert the outstanding balance to a four-year
term loan. The outstanding balance was $1,400,000, $3,800,000, and $1,800,000 at
December 31, 1999, 1998, and 1997, respectively.
Dividends
On October 30, 1998, the Company paid a ten percent share distribution to
shareholders of record as of October 16, 1998. The Company believes that its
current investment programs (investments in increased capacity, technologies,
processes and equipment, acquisitions, the reduction of debt, and the possible
purchase of outstanding stock) are important uses of cash, and are in the best
long-term interest of its shareholders. Therefore, there are no plans to
institute a cash dividend program.
Backlog
At December 31, 1999, the Company's backlog was $40,198,000, compared to
$29,887,000 at December 31, 1998, and compared to $10,807,000 at December 31,
1997. The backlog for the Aerospace and Electronic segment was $39,038,000,
$28,779,000, and $9,686,000 at December 31, 1999, 1998 and 1997, respectively.
The Specialty Packaging segment had backlogs of $1,160,000, $1,108,000, and
$1,121,000 at December 31, 1999, 1998 and 1997, respectively. The current
portion of the combined backlog is $31,875,000.
22
Commitments
At December 31, 1999, the Company had outstanding capital expenditure
commitments of approximately $3,300,000, compared to $7,100,000 at December 31,
1998, and compared to $4,100,000 at the end of 1997. The major outstanding
commitment is for the new facility and production equipment for the East Aurora,
New York, Aerospace and Electronics operation. This facility project should be
completed in 2000 and the manufacturing equipment will be acquired during 2000
and 2001. The Company also has normal outstanding purchase orders for raw
materials and supplies necessary to carry on the business. The Company is not
aware of any commitments in excess of today's market values nor in excess of
quantities that will be used in normal operations. The Company is not aware of
any contingent liabilities not provided for in its financial statements.
Market Risk
The Company is subject to market interest rate risk from exposure to
changes in interest rates based upon its financing, investing. and cash
management activities. The Company utilizes a mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposure to changes in
interest rates (see Notes 4 and 5 to the consolidated financial statements). The
Company does not expect changes in interest rates to have a material adverse
effect on its income or its cash flows in 2000. However, there can be no
assurances that interest rates will not significantly change in 2000. A change
of one percent in the interest rate would cause a change in interest expense for
the year 2000 of approximately $112,000, net of taxes.
The Company purchases paperboard for its Specialty Packaging segment. This
amounts to approximately 20 percent of sales. The Company's backlog is normally
less than 30 days of sales. The Company has inventory on hand for approximately
one month's usage. Price changes in paperboard purchases would have a nominal
effect on margins as each new order is quoted to reflect the current cost of the
raw material, The Company purchases no other raw material or product component
that, by itself, would have a material effect on the success of the Company as a
result of pricing changes.
On February 14, 2000, a jury trial found Osram Sylvania, Inc. guilty of
patent infringement in the manufacturing of encapsulated phosphors used by the
Aerospace and Electronics segment in its MaxEL lamp product line. As a result of
the court decision, the Company needs to substitute another phosphor for this
product line. The Company has tested alternative formulations that it believes
meets its needs. Therefore, the Company does not anticipate a production
disruption.
Year 2000
The Company did not experience any disruptions, internally or externally,
from Year 2000 issues. The total expenditures for Year 2000 issues, mainly
software system upgrades, were less than $150,000.
Forward Looking Statements
This Annual Report to Shareholders contains certain forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are identified by the use of the words "believes,"
"expects," "intends," "anticipates" 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 (i) the timeliness of product deliveries by vendors and other vendor
performance issues, (ii) a slowdown in anticipated orders from the U.S.
government and other customers, and (iii) an inability to control the increased
growth in expenses that will accompany the Company's anticipated sales growth,
among others.
23
Board of Directors
- ------------------
Robert T. Brady
Director, Astronics Corporation
Chairman of the Board, President and Chief Executive Officer, Moog, Inc.
John B. Drenning
Secretary, Director, Astronics Corporation
Partner in the law firm Hodgson Russ Andrews Woods & Goodyear LLP
Kevin T. Keane
Chairman of the Board, President and Chief Executive Officer, Director,
Astronics Corporation
Robert J. McKenna
Director, Astronics Corporation
Chairman of the Board, President and Chief Executive Officer,
Acme Electric Corporation
John M. Yessa
Vice President-Finance and Treasurer,
Chief Financial Officer, Director, Astronics Corporation
Officers
- --------
Charles H. Biddlecom
Vice President-Marketing, MOD-PAC CORP
Donna L. Eckman
Vice President, Krepe-Kraft
Leo T. Eckman
President, Krepe-Kraft
Peter J. Gundermann
President, Luminescent Systems, Inc.
Frank J. Johns, III
Vice President, Luminescent Systems, Inc.
Daniel G. Keane
President, MOD-PAC CORP
Kevin T. Keane
Chairman of the Board, President and Chief Executive Officer,
Astronics Corporation
James S. Kramer
Vice President,Luminescent Systems, Inc.
Richard Miller
Vice President, Luminescent Systems, Inc.
Diane M. Sims
Vice President-Marketing, Krepe-Kraft
John M. Yessa
Vice President-Finance and Treasurer, Chief Financial Officer, Astronics
Corporation
24
Transfer Agent and Registrar
American Stock Transfer and Trust Company
New York, New York
Attorneys
Hodgson Russ Andrews Woods & Goodyear LLP
Buffalo, New York
Independent Accountants
Ernst & Young LLP
Buffalo, New York
Annual Meeting
April 20, 2000 - 10:00 A.M.
Orchard Park Country Club
S-4777 South Buffalo Street
Orchard Park, New York
Form 10-K Annual Report
The Company's Form 10-K Annual Report to the Securities and Exchange Commission
provides certain additional information. A copy of this report may be obtained
upon request to Shareholder Relations, Astronics Corporation, 1801 Elmwood
Avenue, Buffalo, NY 14207
Shareholder Administration
Please direct inquiries relating to shareholder accounting records and stock
transfers to:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Please report change of address promptly to ensure timely receipt of Company
communications. Please mail a signed and dated letter or postcard stating the
name in which the stock is registered, and your previous and current addresses.
Press Releases
In an effort to provide efficient and cost-effective communications to our
shareholders, we are mailing copies of all Press Releases directly to our
shareholders of record on the day of the release. These Press Releases will
carry appropriate financial data, when applicable. The Press Release dates for
the 2000 quarterly results are:
First Quarter - April 20, 2000
Second Quarter - July 25, 2000
Third Quarter - October 24, 2000
Fourth Quarter - January 25, 2001
Stock Exchange Listing
The Company's stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol ATRO.
Correspondence
Astronics Corporation
1801 Elmwood Avenue
Buffalo, New York 14207
Web Site: www.astronics.com
E-mail: invest@astronics.com
Companies of Astronics
Specialty Packaging:
Krepe-Kraft,
Blasdell, New York
MOD-PAC CORP
Buffalo, New York
Aerospace and Electronics:
Luminescent Systems Inc.,
Lebanon, New Hampshire
East Aurora, New York
Luminescent Systems Europe
B.V.B.A., Brussels, Belgium