Astronics 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 1, 2006


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 0-7087

ASTRONICS CORPORATION

(Exact name of registrant as specified in its charter)


New York (State or other jurisdiction of incorporation or organization)		16-0959303 (IRS Employer Identification Number)

130 Commerce Way East Aurora, New York (Address of principal executive offices)		14052 (Zip code)

(716) 805-1599
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 1, 2006 7,942,344 shares of common stock were outstanding consisting of 6,499,364 shares of common stock ($.01 par value) and 1,442,981 shares of Class B common stock ($.01 par value).

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
		Item 1. Financial Statements
		Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Item 3. Quantitative and Qualitative Disclosures About Market Risk
		Item 4. Controls and Procedures

PART II — OTHER INFORMATION
		Item 1. Legal Proceedings
		Item 1a. Risk Factors
		Item 2. Unregistered sales of equity securities and use of proceeds
		Item 3. Defaults Upon Senior Securities
		Item 4. Submission of Matters to a Vote of Securities Holders
		Item 5. Other Information
		Item 6 Exhibits and Reports on Form 8-K

SIGNATURES
		EX-31.1 302 Certification for CEO
		EX-31.2 302 Certification for CFO
		EX-32 906 Certification for CEO and CFO
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ASTRONICS CORPORATION
Consolidated Balance Sheet
July 1, 2006
With Comparative Figures for December 31, 2005
(dollars in thousands)


	July 1, 2006		December 31, 2005
	(Unaudited)

Current Assets:
Cash and Cash Equivalents	$	425	$	4,473
Accounts Receivable, net of allowance for doubtful accounts of $311 in 2006 and $365 in 2005		17,784		12,635
Inventories		23,223		19,013
Prepaid Expenses		1,022		626
Deferred Taxes		873		775

Total Current Assets		43,327		37,522

Property, Plant and Equipment, at cost		33,322		31,665
Less Accumulated Depreciation and Amortization		12,237		11,204

Net Property, Plant and Equipment		21,085		20,461

Intangible Assets, net of accumulated amortization of $483 in 2006 and $329 in 2005		3,246		3,400
Goodwill		2,761		2,686
Other Assets		1,750		1,788

Total Assets	$	72,169	$	65,857

See notes to financial statements.

ASTRONICS CORPORATION
Consolidated Balance Sheet
July 1, 2006
With Comparative Figures for December 31, 2005
(dollars in thousands)


	July 1, 2006		December 31, 2005
	(Unaudited)
Current Liabilities:
Current Maturities of Long-term Debt	$	919	$	914
Note Payable		6,000		7,000
Accounts Payable		10,167		5,421
Accrued Payroll and Employee Benefits		3,653		3,861
Customer Advance Payments		4,101		4,404
Other Accrued Expenses		1,256		1,156
Income Taxes Payable		219		171
Contract Loss Reserve		—		830

Total Current Liabilities		26,315		23,757

Long-term Debt		9,868		10,304
Supplemental Retirement Plan and Other Benefits		4,579		4,494
Other Liabilities		1,337		1,317
Deferred Income Taxes		210		151

Shareholders’ Equity:
Common Stock, $.01 par value Authorized 20,000,000 shares, issued 7,177,801 in 2006, 7,082,100 in 2005		72		71
Class B Stock, $.01 par value Authorized 5,000,000 shares, issued 1,548,793 in 2006, 1,603,323 in 2005		15		16
Additional Paid-in Capital		4,533		3,808
Accumulated Other Comprehensive Income		875		799
Retained Earnings		28,084		24,859

		33,579		29,553
Less Treasury Stock: 784,250 shares in 2006 and 2005		3,719		3,719

Total Shareholders’ Equity		29,860		25,834

Total Liabilities and Shareholders’ Equity	$	72,169	$	65,857

See notes to financial statements.

ASTRONICS CORPORATION
Consolidated Statement of Income and Retained Earnings
Six Months Ended July 1, 2006
With Comparative Figures for 2005
(Unaudited)
(dollars in thousands except per share data)


	Six Months Ended						Three Months Ended
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005

Sales	$	53,965		$	34,495		$	29,039		$	18,839

Costs and Expenses:
Cost of products sold		41,872			27,707			22,195			15,344
Selling, general and administrative expenses		6,462			4,793			3,443			2,582
Interest expense, net of interest income		418			317			219			191
Other (income) expense		(34	)		(4	)		(22	)		—

Total costs and expenses		48,718			32,813			25,835			18,117


Income Before Income Taxes		5,247			1,682			3,204			722
Provision for Income Taxes		2,022			876			1,189			525

Net Income	$	3,225		$	806		$	2,015		$	197


Retained Earnings:
Beginning of period		24,859			22,206

End of period	$	28,084		$	23,012


Earnings per share:
Basic	$	.41		$	.10		$	.25		$	.02

Diluted	$	.39		$	.10		$	.25		$	.02

See notes to financial statements

ASTRONICS CORPORATION
Consolidated Statement of Cash Flows
Six Months Ended July 1, 2006
With Comparative Figures for 2005
(Unaudited)
(dollars in thousands)


	July 1, 2006			July 2, 2005
Cash Flows from Operating Activities:
Net income	$	3,225		$	806
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and Amortization		1,259			1,322
Deferred Taxes		(42	)		527
Other		(46	)		(89	)
Provision for Doubtful Accounts		(21	)		—
Stock Compensation Expense		329			—
Cash flows from changes in operating assets and liabilities, excluding effects of acquisition:
Accounts Receivable		(5,062	)		(3,126	)
Inventories		(4,139	)		(2,775	)
Prepaid Expenses		(409	)		39
Accounts Payable		4,718			2,684
Accrued Expenses		(81	)		640
Customer Advanced Payments		(303	)		—
Contract Loss Reserves		(830	)		—
Income Taxes		49			114
Supplemental Retirement and Other Liabilities		84			—

Cash (used in) provided by Operating Activities		(1,269	)		142


Cash Flows from Investing Activities:
Business Acquisition		—			(13,366	)
Proceeds from sale of short-term investments		—			1,000
Capital Expenditures		(1,607	)		(1,333	)
Other		—			(142	)

Cash used in Investing Activities		(1,607	)		(13,841	)


Cash Flows from Financing Activities:
Principal Payments on Long-term Debt and Capital Lease Obligations		(483	)		(467	)
Proceeds from Note Payable		—			7,000
Payment on Note Payable		(1,000	)		—
Proceeds from exercise of stock options		324			162
Income tax benefit from exercise of stock options		72

Cash (used in) provided by Financing Activities		(1,087	)		6,695


Effect of Exchange Rates on Cash		(85	)		44


Cash used in Continuing Operations		(4,048	)		(6,960	)
Cash used in Discontinued Operations operating activities		—			(423	)

Net decrease in Cash and Cash Equivalents		(4,048	)		(7,383	)

Cash at Beginning of Period		4,473			8,476

Cash at End of Period	$	425		$	1,093

See notes to financial statements

ASTRONICS CORPORATION
Notes to Consolidated Financial Statements
July 1, 2006
(Unaudited)

1) Basis of Presentation

The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the six month period ended July 1, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in Astronics Corporation’s (the “Company”) 2005 annual report on Form 10-K.

2) Stock Based Compensation

The Company has stock option plans that authorize the issuance of options for shares of Common Stock to directors, officers and key employees. Stock option grants are designed to reward long-term contributions to the Company and provide incentives for recipients to remain with the Company. The exercise price, determined by a committee of the Board of Directors, may not be less than the fair market value of the Common Stock on the grant date. Options become exercisable over periods not exceeding ten years. The Company’s practice has been to issue new shares upon the exercise of the options.

During the first quarter of 2006, the Company adopted SFAS 123(R), “Share-Based Payment,” applying the modified prospective method. This Statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award. Under the modified prospective method, the Company is required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. The Company uses a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense, based on vesting. Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outside directors vest six months from the date of grant and options granted to officers and key employees straight line vest over a five-year period from the date of grant.

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of the options was $6.05 for options granted during the six months ended July 1, 2006 and was $3.32 for options granted during the six months ended July 2, 2005. The following table provides the range of assumptions used to value stock options granted during the six months ended July 1, 2006 and July 2, 2005.


	Six Months Ended
	July 1, 2006			July 2, 2005

Expected volatility		0.34			0.33
Risk-free rate		4.70	%		5.34	%
Expected dividends		0.00	%		0.00	%
Expected term (in years)	7 Years			7 — 10 Years

To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock and considers currently available information to determine if future volatility is expected to differ over the expected terms of the options granted. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.

The table below reflects net earnings and net earnings per share for the three and six months ended July 1, 2006 compared with the pro forma information for the three and six months ended July 2, 2005 as follows:


	Six Months Ended						Three Months Ended
(in thousands, except per share data)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005

Net earnings, as reported for the prior period (1)	$	N/A		$	806		$	N/A		$	197
Stock compensation expense		329			208			187			116
Tax benefit		(51	)		(75	)		(35	)		(42	)

Stock compensation expense, net of tax (2)		278			133			152			74

Net earnings, including the effect of stock compensation expense (3)	$	3,225		$	673		$	2,015		$	123


Net earnings per share:
Basic, as reported for the prior period (1)	$	N/A		$	.10		$	N/A		$	.02
Basic, including the effect of stock compensation expense (3)	$	.41		$	.09		$	.26		$	.02
Diluted, as reported for the prior period (1)	$	N/A		$	.10		$	N/A		$	.02
Diluted, including the effect of stock compensation expense (3)	$	.39		$	.08		$	.25		$	.02


(1)		Net earnings and earnings per share prior to 2006 did not include stock compensation expense for stock options.

(2)		Stock compensation expense prior to 2006 is calculated based on the pro forma application of SFAS No. 123.

(3)		Net earnings and earnings per share prior to 2006 represents pro forma information based on SFAS 123.

A summary of the Company’s stock option activity and related information for the six months ended July 1, 2006 is as follows:


				2006
				Weighted Average
				Exercise Price		Aggregate
(in thousands, except per option data)	Number of Options			per option		Intrinsic Value

Outstanding at December 31, 2005		801,583		$	6.49	$	5,522
Options Granted		25,000			13.41		(1	)
Options Exercised		(44,846	)		8.13		(236	)

Outstanding at July 1, 2006		781,737			6.62		5,285

Exercisable at July 1, 2006		472,688		$	6.12	$	3,432

The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stock price of Common Stock of $13.38 as of July 1, 2006, which would have been received by the option holders had all option holders exercised their options as of that date.

The fair value of options vested since December 31, 2005 is $0.2 million. At July 1, 2006, total compensation costs related to non vested awards not yet recognized amounts to $0.9 million and will be recognized over a weighted average period of 2.1 years.

The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of July 1, 2006:


	Outstanding						Exercisable
			Weighted Average						Weighted Average
			Remaining Life		Weighted Average				Remaining Life		Weighted Average
Exercise Price Range	Shares		in Years		Exercise Price		Shares		in Years		Exercise Price

$2.59-$4.60		59,195		1.1	$	3.90		59,195		1.1	$	3.90
$5.09-$7.65		550,639		7.0	$	5.62		348,995		6.4	$	5.63
$9.83-$13.49		171,903		7.4	$	10.73		64,498		4.0	$	10.83

		781,737		6.6	$	6.62		472,688		5.4	$	6.12

3) Acquisition

On February 3, 2005, the Company acquired substantially all of the assets of the General Dynamics - Airborne Electronic Systems (AES) business unit from a subsidiary of General Dynamics. Astronics AES produces a wide range of products related to electrical power generation, in-flight control, and distribution on military, commercial, and business aircraft. On the acquisition date, the Company paid $13.0 million in cash and incurred approximately $0.4 million in acquisition costs. The Company borrowed $7.0 million on its credit facility and used $6.4 million of cash on hand to finance the purchase and acquisition costs. Results of operations include the results of Astronics AES since February 3, 2005, the date of the acquisition.

The following table summarizes the gross carrying amount and accumulated amortization for major categories of acquired intangible assets:


		Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Weighted Average	Amount		Amortization		Amount		Amortization
(in thousands)	Life	July 1, 2006		July 1, 2006		Dec. 31, 2005		Dec 31, 2005

Patents	12 Years	$	1,271	$	140	$	1,271	$	91
Trade Names	N/A		553		—		553		—
Completed and unpatented technology	10 Years		487		69		487		45
Government contracts	6 Years		347		82		347		53
Backlog	4 Years		314		192		314		140

Total Intangible assets		$	2,972	$	483	$	2,972	$	329

Amortization expense for each of the next five years is expected to amount to $0.3 million for the year ended December 31, 2006 and $0.2 million for each of the years ended December 31, 2007, 2008, 2009 and 2010.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of the acquired business as if the acquisition took place on January 1, 2005. The pro forma consolidated results include the impact of adjustments, including depreciation, amortization of intangibles, increased interest expense on acquisition debt and related income tax effects.


Unaudited	Six Months Ended				Three Months Ended
	July 2, 2005		July 2, 2005		July 2, 2005		July 2, 2005
(in thousands, except for per share data)	As Reported		Pro Forma		As Reported		Pro Forma

Sales	$	34,495	$	36,194	$	18,840	$	18,840
Net income	$	806	$	598	$	197	$	197

Basic earnings per share	$	.10	$	.08	$	.02	$	.02
Diluted earnings per share	$	.10	$	.08	$	.02	$	.02

The pro forma results are not necessarily indicative of what would have actually occurred if the acquisition had taken place on January 1, 2005. In addition, they are not intended to be a projection of future results.

4) Discontinued Operations

In December of 2002 the Company announced the discontinuance of the Electroluminescent Lamp Business Group, whose business has involved sales of microencapsulated electroluminescent lamps to customers in the consumer electronics industry. The liabilities of discontinued operations at July 2, 2005 consisted of lease payments for equipment that was used in this business, the remaining payments under these leases were made during 2005. As of December 31, 2005 there were no remaining assets or liabilities of discontinued operations.

5) Inventories

Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. Inventories are as follows:


(in thousands)	July 1, 2006		December 31, 2005


Finished Goods	$	2,801	$	2,658
Work in Progress		10,576		7,805
Raw Material		9,846		8,550

	$	23,223	$	19,013

6) Comprehensive Income and Accumulated Other Comprehensive Income

The components of comprehensive income are as follows:


	Six Months Ended					Three Months Ended
(in thousands)	July 1, 2006		July 2, 2005			July 1, 2006		July 2, 2005

Net income	$	3,225	$	806		$	2,015	$	197

Other comprehensive income:
Foreign currency translation adjustments		71		(79	)		88		(10	)
Gain on derivatives, net of tax		5		37			22		15

Comprehensive income	$	3,301	$	764		$	2,125	$	202

The components of accumulated other comprehensive income are as follows:


(in thousands)	July 1, 2006		December 31, 2005

Cumulative foreign currency adjustments	$	870	$	799
Accumulated gain on derivatives, net of tax		5		0

Accumulated other comprehensive income	$	875	$	799

7) Earnings Per Share

The following table sets forth the computation of earnings per share:


	Six Months Ended				Three Months Ended
(in thousands, except per share data)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005


Net Income	$	3,225	$	806	$	2,015	$	197


Basic earnings per share weighted average shares		7,925		7,835		7,937		7,857
Net effect of dilutive stock options		258		127		286		166

Diluted earnings per share weighted average shares		8,183		7,962		8,223		8,023


Basic earnings per share	$	0.41	$	0.10	$	0.25	$	0.02
Diluted earnings per share	$	0.39	$	0.10	$	0.25	$	0.02

8) Supplemental Retirement Plan and Related Post Retirement Benefits

The Company has a non-qualified supplemental retirement defined benefit plan for certain executives. The following table sets forth information regarding the net periodic pension cost for the plan.


	Six Months Ended				Three Months Ended
(in thousands)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005


Service cost	$	18	$	12	$	9	$	6
Interest cost		154		154		77		77
Amortization of prior service cost		54		54		27		27
Amortization of net actuarial losses		2		—		1		—

Net periodic cost	$	228	$	220	$	114	$	110

Participants in the non-qualified supplemental retirement plan are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The following table sets forth information regarding the net periodic cost recognized for those benefits:


	Six Months Ended				Three Months Ended
(in thousands)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005


Service cost	$	4	$	2	$	2	$	1
Interest cost		22		20		11		10
Amortization of prior service cost		16		16		8		8
Amortization of net actuarial losses		6		2		3		1

Net periodic cost	$	48	$	40	$	24	$	20

9) New Accounting Pronouncements

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation for SFAS No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with for SFAS No. 109, “Accounting for Income Taxes.” The pronouncement prescribes a recognition threshold and measurement attributable to financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of determining the effect, if any; the adoption of FIN 48 will have on our financial statements.

10) Income Taxes

On April 12, 2005, New York State enacted tax legislation resulting in a change to the New York State apportionment methodology. Beginning in 2006, a single sales factor apportionment method will be phased in, with a single sales factor solely used in 2008. It is expected that this enacted legislation will result in a lower apportionment of the Company’s taxable income to New York State, resulting in lower New York state income taxes. Accordingly, the Company’s ability to use or realize New York State tax credits has been reduced. In 2005, the Company has assessed the impact of the new tax legislation and recorded a valuation allowance reducing the Company’s $490 thousand deferred tax asset relating to New York State tax credits to $40 thousand. As a result of this valuation allowance the Company recorded a non-cash charge to income tax expense of $300 thousand or $0.04 per diluted share during the second quarter of 2005. The charge to income tax expense is net of the affect of federal income taxes. The effective tax rate in 2006 returned to a more normal rate of 38.5%


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Form 10-K for the year ended December 31, 2005.)

The following table sets forth income statement data as a percent of net sales:


	Six Months Ended						Three Months Ended
(in thousands)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005

Sales		100.0	%		100.0	%		100.0	%		100.0	%

Cost of products sold		77.6			80.3			76.4			81.5
Selling, general and administrative and other expense		11.9			13.9			11.8			13.7
Interest expense		0.8			0.9			0.8			1.0

Total cost and expenses		90.3			95.1			89.0			96.2

Income before taxes		9.7	%		4.9	%		11.0	%		3.8	%

ACQUISITION

On February 3, 2005, the Company acquired the assets of the Airborne Electronic Systems (AES) business unit from a subsidiary of General Dynamics, for $13.0 million. The Company used $6.0 million of cash and borrowed $7.0 million against its line of credit to finance the acquisition. No goodwill was recognized as a result of this acquisition. Operating results for this acquisition are included in the consolidated statement of earnings from the acquisition date.

SALES

Sales for the second quarter of 2006 increased 54.1% to $29.0 million compared with $18.8 million for the same period last year. Sales to the commercial transport market were $16.9 million, as compared to $8.4 million for the same period of 2005, an increase of $8.5 million or 100.3 percent. The sales increase to the commercial transport market was primarily a result of increased volume of cabin electronics products. The volume increase has been driven by increased installations of in-seat power and in-flight entertainment systems utilizing our products. The balance of the increase in commercial transport market sales was due to a broad increased demand for the cabin lighting product line. Sales to the business jet market were $5.4 million, up $1.3 million, or 32.9%, compared with sales of $4.1 million for the same period in 2005. The increase of sales to the business jet market is due primarily to an increase in volume as production of new business jets by the airframe manufacturers increased over last year. Sales to the military market were $6.5 million as compared to $6.1 million last year, an increase of $0.4 million or 6.1%. A $1.0 million increase in sales for airframe power products driven by shipments for the Tactical Tomahawk and Taurus Missile programs was offset by a $1.0 million decrease in deliveries for F-16 night vision kits for the Korean air force. The balance of the increase for military sales was a result of a general increase in volume.

2006 year to date sales increased 56.4 % to $54.0 million compared with $34.5 million for the same period last year. Sales to the commercial transport market were up $14.7 million, or 101.0% to $29.3 million compared with the year ago period at $14.6 million. The increase is due to primarily a result of increased volume of cabin electronics products as the commercial airline market continues to strengthen. The volume increase has been driven by increased installations of in-seat power and in-flight entertainment systems utilizing our products. Sales to the business jet market were $10.3 million, up $2.2 million, or 27.5%, compared with $8.1 million for the same period in 2005. The increase of sales to the business jet market is due primarily to an increase in volume as production of new business jets by the airframe manufacturers increased over last year. Sales to the military market were $13.6 million, up from $11.2 million in the same period of 2005. Shipments for the Tactical Tomahawk and Taurus Missile programs were primarily responsible for a $2.5 million increase of sales for airframe power products to the military markets. This was partially offset by a $0.9 million decrease in deliveries for F-16 night vision kits for the Korean air force as the Korean program was concluded in 2005. The balance of the increase for military sales was a result of a general increase in volume.

A small portion of the 2006 year to date sales increase is due to the timing of the Astronics Advanced Electronic Systems acquisition. The acquisition date was February 3, 2005, as such the first six months of 2005 contained only twenty one weeks of sales for Astronics Advanced Electronic Systems as compared with twenty six weeks in the first six months of 2006.

EXPENSES AND MARGINS

Cost of products sold as a percentage of sales decreased 5.1 percentage points to 76.4% for the second quarter of 2006 as compared to 81.5% for the same period last year. That decrease was primarily a result of the leverage provided by sales volume increases without a corresponding increase to our fixed manufacturing costs.

Year to date costs of products sold decreased by 2.7 percentage points to 77.6 % as compared to 80.3% for the same period last year. That decrease was also a result of the leverage provided by sales volume increases without a corresponding increase to our fixed manufacturing costs. That leverage was partially offset by a $0.9 million increase in engineering and development costs over the same period last year.

Selling, general and administrative and other (SG&A) expense as a percent of sales was 11.8 % for the second quarter of 2006, a decrease of 1.9 percentage points compared with 13.7% for the same period of 2005. Second quarter 2006 SG&A costs increased $0.8 million as compared to the second quarter of 2005. The increase was primarily due to increased wages and benefits due to increased staffing and compensation related costs and increased costs for audit and other professional services related to Sarbanes-Oxley 404 implementation.

For the first six months of 2006 SG&A as a percentage of sales was 11.9% compared to 13.9% for the same period of 2005. In terms of dollars SG&A costs increased $1.6 million to $6.4 million for the first six months of 2006 from $4.8 million in the first six months of 2005. The increase was due to increased wages and benefits due to increased staffing and compensation related costs and increased costs for audit and other professional services related to Sarbanes-Oxley 404 implementation. Also, a portion of the 2006 year to date SG&A increase is due to the timing of the Astronics Advanced Electronic Systems acquisition. The acquisition date was February 3, 2005, as such the first six months of 2005 contained only twenty one weeks of expenses for Astronics Advanced Electronic Systems as compared with twenty six weeks in the first six months of 2006.

Net interest expense for the second quarter of 2006 and 2005 was $0.2 million. Net interest expense for the six months of 2006 increased by $0.1 million from $0.3 million in 2005 to $0.4 million due to an increase in interest rates, offset somewhat by the impact of a pay down of $1.0 million on the note payable during the first half of 2006.

TAXES

The effective income tax rate for the second quarter of 2006 was 37.1 % compared to 72.7% last year. The 2005 tax rate was due primarily to the Company’s assessment of the impact of the new tax legislation in 2005 and the recording of a valuation allowance reducing the Company’s $0.5 million deferred tax asset relating to New York State tax credits to $40 thousand. As a result of this valuation allowance the Company recorded a non-cash charge to income tax expense of $0.3 million or $.04 per share during the second quarter of 2005.

The 2006 year to date effective income tax rate was 38.5% compared to 52.1% last year. Last year’s effective rate was impacted by the valuation allowance discussed in the preceding paragraph.

The Company expects its effective income tax rate to continue to approximate the statutory rates in the future.

NET INCOME AND EARNINGS PER SHARE

Net income for the second quarter of 2006 was $2.0 million or $0.25 per share diluted, an increase of $1.8 million from $0.2 million, or $0.02 per share diluted in the second quarter of 2005. Net income in the second quarter of 2005 was significantly impacted by recording a valuation allowance for certain deferred tax assets referred to in the previous “Taxes” section. The earnings per share increase was due to increased net income and was not significantly impacted by a change in shares outstanding.

LIQUIDITY

Cash used by operating activities totaled $1.3 million during the first six months of 2006, as compared with $0.1 million of cash provided by operations during the first six months of 2005. The change was due primarily to net income being offset by increased investment in net working capital components. The increase in net working capital components is a function of the increased sales over the past several quarters.

Cash used in investing activities decreased to $1.6 million in the first six months of 2006, from $13.8 million used in the first six months of 2005. This was due primarily to last year’s $13.4 million acquisition of Astronics Advanced Electronic Systems, offset partially by proceeds from the sale of short-term investments of $1.0 million in 2005. Capital expenditures increased by $0.3 million to $1.6 million in 2006 compared to $1.3 million in 2005.

In the first six months of 2006 the Company used $1.1 million for financing activities as it paid down $1.0 million on its revolving credit facility and made principal payments against its long term debt totaling $0.5 million. This was partially offset by proceeds from the issuance of stock relating to the exercise of stock options totaling $0.4 million.

The Company has a $15 million demand line of credit facility. Interest on outstanding borrowings bears interest at either LIBOR plus an applicable margin, currently 150 basis points or prime interest rate, at the Company’s option. As of July 1, 2006 the Company has $6.0 million outstanding on the line of credit. The line is subject to annual review and is payable on demand. The line of credit, among other requirements, imposes certain financial performance covenants measured on an annual basis with which the Company anticipates it will be compliant.

The Company believes that cash flow from operations and its available credit facility will be adequate to meet the Company’s operational and capital expenditure requirements for 2006.

BACKLOG

The Company’s backlog at July 1, 2006 was $94.7 million compared with $77.9 million at July 2, 2005.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Company’s contractual obligations and commercial commitments have not changed materially from disclosures in the Company’s Form 10-K for the year ended December 31, 2005.

MARKET RISK

Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $16.8 million at July 1, 2006. To partially offset this exposure, the Company entered into an interest rate swap in February 2006, on its New York Industrial Revenue Bond which effectively fixes the rate at 3.99% on this $4.3 million obligation through January 2016. As a result, a change of 1% in interest rates would impact annual net income by less than $0.1 million.

There have been no material changes in the current year regarding the market risk information for its exposure to currency exchange rates. The Company has limited exposure to fluctuation in Canadian currency exchange rates to the U.S. dollar.

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for a complete discussion of the Company’s market risk.

CRITICAL ACCOUNTING POLICIES

Refer to the Company’s annual report on Form 10-K for the year ended December 31, 2005 for a complete discussion of the Company’s critical accounting policies. Other than the adoption of SFAS 123(R), “Share-Based Payments,” there have been no significant changes in the current year regarding critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

During the first quarter of 2006, we adopted SFAS 123(R), “Share-Based Payment,” applying the modified prospective method. This Statement requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award. Under the modified prospective method, we are required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. We use a straight-line method of attributing the value of stock-based compensation expense, based on vesting. Stock compensation expense was $0.1 million in the second quarter of 2006 and $0.3 million year to date, after taxes. No stock compensation expense was recognized prior to 2006.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard did not have an impact on its results of operations, cash flows or financial position in the first half of 2006.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation for SFAS No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with for SFAS No. 109, “Accounting for Income Taxes”. The pronouncement prescribes a recognition threshold and measurement attributable to financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The company is in the process of determining the effect, if any; the adoption of FIN 48 will have on our financial statements.

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves uncertainties and risks. These statements are identified by the use of the words “believes,” “expects,” “intends,” “anticipates”, “may”, “will”, “estimate”, “potential” and words of similar import. Readers are cautioned not to place undue reliance on these forward looking statements as various uncertainties and risks could cause actual results to differ materially from those anticipated in these statements. These uncertainties and risks include the success of the Company with effectively executing its plans; the timeliness of product deliveries by vendors and other vendor performance issues; changes in demand for our products from the U.S. government and other customers; the acceptance by the market of new products developed; our success in cross-selling products to different customers and markets; changes in government contracts; the state of the commercial and business jet aerospace market; the Company’s success at increasing the content on current and new aircraft platforms; the level of aircraft build rates; as well as other general economic conditions and other factors.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

See Market Risk in Item 2, above.


Item 4.		Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 1, 2006. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of July 1, 2006. There were no material changes in the Company’s internal control over financial reporting during the second quarter of 2006.

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings.

None.


Item 1a		Risk Factors.

In addition to other information set forth in this report, you should carefully consider the factors discussed in Part 1, Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or results of operations. The risks described in our Annual Report of Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.


Item 2.		Unregistered sales of equity securities and use of proceeds.


					(c) Total number of		(d) Maximum Number
					shares Purchased as		of Shares that May
					part of Publicly		Yet Be Purchased
	(a) Total number of		(b) Average Price		Announced Plans or		Under the Plans or
Period	shares Purchased		Paid per Share		Programs		Programs
April 2 — April 29, 2006		—		—		—		432,956
April 30 — May 27, 2006		—		—		—		432,956
May 28 — July 1, 2006		—		—		—		432,956
Total		—		—		—		432,956


Item 3.		Defaults Upon Senior Securities

None.


Item 4.		Submission of Matters to a Vote of Securities Holders.

The Company’s Annual Meeting of Shareholders was held on May 12, 2006. The following matters were submitted to a vote of security holders at the Annual Meeting.

The nominees to the Board of Directors were elected based on the following shares voted:


Nominee	For		Authority Withheld
Raymond W. Boushie		17,234,820		963,470
Robert T. Brady		17,001,289		1,197,001
John B. Drenning		16,855,557		1,342,733
Peter J. Gundermann		17,166,491		1,035,799
Kevin T. Keane		17,035,139		1,163,151
Robert J. McKenna		17,108,511		1,089,779

The selection of Ernst & Young LLP as the Registrant’s auditors was approved by the following vote: 17,261,389 in favor; 902,613 against; and 34,287 abstentions.

The proposal to adopt the amendment of the Company’s Employee Stock Purchase Plan was approved by the following vote: 11,908,914 in favor; 1,979,303 against; and 174,884 abstentions.

Under applicable New York law and the Company’s charter documents, abstentions and non-votes have no effect.


Item 5.		Other Information.

None.


Item 6		Exhibits and Reports on Form 8-K

(a) Exhibits


Exhibit 31.1		Section 302 Certification — Chief Executive Officer

Exhibit 31.2		Section 302 Certification — Chief Financial Officer

Exhibit 32.		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

On May 11, 2006, Astronics Corporation issued a news release in Form 8-K announcing its financial results for the first quarter of 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ASTRONICS CORPORATION
	(Registrant)

Date: August 11, 2006	By:	/s/ David C. Burney
		David C. Burney
		Vice President-Finance and Treasurer (Principal Financial Officer)

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