* - Capitalized leases.

Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for or purchases of alternative locations at market terms. We believe that our properties have been adequately maintained and are generally in good condition.

The Company has not paid any cash dividends in the three-year period ended December 31, 2015.2017. The Company has no plans to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance growth in the business.

On September 10, 2015,26, 2016, the Company announced a three-for-twenty distribution of Class B Stock to holders of both Common and Class B Stock. Stockholders received three shares of Class B Stock for every twenty shares of Common and Class B Stock held on the record date of October 8, 2015.11, 2016. Fractional shares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of this distribution.

With respectOn February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Equity Compensation Plan Information” of our definitive Proxy Statement for the 2016 Annual Meeting of Shareholders is incorporated herein by reference.

Our strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and usinguse those capabilities to provide innovative solutions to the aerospace & defense, semiconductor and other markets where our technology can be beneficial.

New Hampshire; and three located in each of Illinois and Washington State. Our Test Systems segment has facilities located in Florida and California.

Our Aerospace segment serves three primary markets. They are the military, commercial transport and business jet markets. Our Test Systems segment serves the aerospace & defense and semiconductor markets.

Important factors affecting our growth and profitability are the rate at which new aircraft are produced, government funding of military programs, our ability to have our products designed into new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or install upgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength of the global economy. Once designed into a new aircraft, the spare parts business is frequently retained by the Company. With the acquisition of ATS in 2014, futureFuture growth and profitability of the test business is dependent on developing and procuring new and follow-on business in the semiconductor market as well as with the military. The nature of our test systems business is such that it pursues large multi-year projects. There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.

Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term. We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.

Challenges which continue to face us include improving shareholder value through increasing profitability. Increasing profitability is dependent on many things, primarily revenue growth and the Company’s ability to control operating expenses and to identify means of creating improved productivity. Revenue is driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft and our products, continued government funding of defense programs, the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for new aircraft platforms and continually identifying and winning new business for our Test Systems segment. Our semiconductor test products are highly dependent on winning new and follow-on programs with our current customers as well as developing new customers. Reduced aircraft build rates driven by a weak economy, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand for our products, which will result in lower profits. Reduction of defense spending may result in fewer opportunities for us to compete, which could result in lower profits in the future. Many of our newer development programs are based on new and unproven technology and at the same time we are challenged to develop the technology on a schedule that is consistent with specific programs. We will continue to address these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.

On December 1, 2017, Astronics acquired substantially all of the assets of Telefonix Inc. and a related company Product Development Technologies, LLC and its subsidiaries, to become CSC, located primarily in Waukegan and Lake Zurich, Illinois. CSC designs and manufactures advanced in-flight entertainment and connectivity equipment, and provides industry leading design consultancy services for the global aerospace industry. Under the terms of the Agreement, the total consideration for the transaction was approximately $103.8 million, net of $0.2 million in cash acquired. CSC is included in our Aerospace Segment.

Maintaining and growing sales to the commercial transport market will depend on airlines’ capital spending budgets for cabin upgrades as well as the purchase of new aircraft by global airlines. This spending by the airlines is impacted by their profits, cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers. We expect that new aircraft will be equipped with more passenger and aircraft connectivity and in-seat power than previous generation aircraft. This market has experienced strong growth from airlines installing in-seat passenger power systems on their existing and newly delivered aircraft. Our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major IFEin-flight entertainment suppliers and global airlines.

The military market is dependent on governmental funding which can change from year to year. Risks are that overall spending may be reduced in the future, specific programs may be eliminated or that we fail to win new business through the competitive bid process. Astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss. We believe that we will continue to have opportunities similar to past years regarding this market.

Sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft. Business jet OEM build rates continue to be significantly impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years by global economic uncertainty among prospective buyers. Our sales to the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not expected to increase significantly during 2016 due to global macroeconomic conditions.2018. Despite the current market conditions, we continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies in the business jet market. There is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts.

For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates the costs are incurred on other than a straight-line basis.

Revenue of approximately $17.2$21.0 million, $2.7$20.7 million and $4.4$17.2 million for the years endingended December 31, 2015, 20142017, 2016 and 2013,2015, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting.accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. The Company makes significant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods. For contracts with anticipated losses at completion, a charge is taken against income for the amount of the entire loss in the period in which it is estimated.

We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. The Test Systems operating segment is its own reporting unit while the other reporting units are one level below our Aerospace operating segment.

Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units.units under certain circumstances. Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we would consider in determining whether to perform a quantitative test.

When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-step impairment test.

Quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value. We use the discounted cash flow method to estimate the fair value of each of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating profit margins and cash

flows, the terminal growth rate and the discount rate. Management projects revenue growth rates, operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. We early adopted ASU No. 2017-04 on January 1, 2017. Accordingly, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

In measuring the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.

As of December 31, 2015,2017, we had net deferred tax liabilities of $13.4$2.3 million. Included in the net deferred tax liabilities are approximately $19.6$15.4 million in deferred tax assets net of a $2.6$7.8 million valuation allowance. These deferred tax assets principally relate to goodwill and intangible assets, employee benefit liabilities, asset reserves, depreciation,leases, deferred revenue, state and foreign net operating loss carry-forwards, and state general business tax credit carry-forwards.

As of December 31, 2014,2016, we had net deferred tax liabilities of $13.2$8.7 million. Included in the net deferred tax liabilities are approximately $20.3$24.2 million in deferred tax assets net of a $3.1$3.8 million valuation allowance. These deferred tax assets

Because of the uncertainty as to the Company’s ability to generate sufficient future taxable income in certain states, the Company has recorded the valuation allowances accordingly in 20152017 and 2014.2016.

When the Company acquires a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment, as explained previously. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques.

With respect to determining the fair value of the purchase price, the most subjective estimates involve valuations of contingent consideration. Significant judgment is necessary to determine the fair value of the purchase price when the transaction includes an earn-out provision, such as the earn-out provision included in our 2013 acquisition of AeroSat.provision. We engage valuation specialists to assist in the determination of the fair value of contingent consideration. Key assumptions used to value the contingent consideration include future projections and discount rates.

During 2015,2017, acquisitions added approximately $4.7$4.0 million in property, plant and equipment and $25.1$66.5 million in purchased intangible assets. See Note 1918 in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, regarding the acquisitions in 2015, 2014 and 2013.2017.

A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.

Our effective tax rates for 2017, 2016 and 2015 2014were 21.3%, 29.6% and 2013 were 28.8%, 29.0% and 28.6%, respectively. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year,

but are not consistent from year to year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 35% and our effective tax rate:

We expect our capital equipment spending in 20162018 to be in the range of $25$24.0 million to $30$28.0 million. E&D costs arespending in 2018 is expected to continuebe in the range of $110.0 million to $115.0 million including the Acquired Businesses, which represents approximately 14.4% of sales at roughly the same rate as 2015.

Aerospace segment sales increased by $55.0$0.6 million, or 11.1%0.1%, to $534.6 million, when compared with the prior year, primarily due to the addition of the Acquired Businesses which added $15.5 million.

Aerospace segment sales decreased by $15.7 million, or 2.9%, when compared with the prior year to $549.7 million. Organic sales grew 6.0%, or $29.5 million, and sales from Armstrong added $25.5$534.0 million.

Aerospace sales growth year-to-date was driven by increased Electrical Power & Motion sales which increased $25.3$8.7 million, or 9.9%. The increase in this product line was3.1%, largely driven by higher sales of in-seat power products and seat motion products, which increased 14.9%were up $7.0 million and $4.3 million, respectively. Sales of Structures products were up $4.5 million. These increases were offset by a $23.4 million decline in 2015. The Lighting & Safety product line increased $8.9 million, or 6.0%,Avionics products, which was largely due to increased passenger service unitlower sales of satellite antenna systems and lower VVIP in-flight entertainment/cabin management systems, and a $4.8 million decrease in System Certification sales. Systems Certification sales was $21.3 million due to the January acquisition of Armstrong. The other Aerospace product lines comprised the remainder of the variance. 

Aerospace operating profit for 20152016 was $78.0 million, or 14.6% of sales, compared with $85.1 million, or 15.5% of sales, compared with $79.8 million, or 16.1% of sales in the priorsame period last year. Operating leverage gained on increasedThe decrease in operating profit was the result of lower sales volume, for the organic business was partially offset bycoupled with slightly higher organic E&D costs of approximately $6.2and a general increase in operating costs. E&D costs for Aerospace were $78.5 million and lower operating margins from Armstrong. Aerospace SG&A expense increased $6.6$77.9 million in 2015 as compared with 2014. Incremental SG&A from Armstrong was $5.8 million, including $2.2 million of intangible asset amortization expense for acquired intangible assets. Operating profit in 2014 included inventory step-up costs of $2.6 million that reduced normal operating margins.

Sales in 20152017 decreased 14.3%9.3% to $142.5$89.9 million compared with sales of $166.3$99.1 million for 2014,2016, due to lower shipments to both the Semiconductor and Aerospace & Defense markets. Sales to the Semiconductor market decreased $5.9 million and sales to the Aerospace & Defense market decreased $3.3 million compared with 2016.

Sales in 2016 decreased 30.5% to $99.1 million compared with sales of $142.5 million for 2015, due to lower shipments to the Semiconductor market. Sales to the Semiconductor market decreased $38.7$54.2 million compared with 2014,the same period in 2015, which was partially offset by increased sales of $14.9$10.7 million to the Aerospace & Defense market.

Operating profit was $8.5 million, or 8.6% of sales, compared with $25.5 million, or 17.9% of sales, compared with $12.4 million, or 7.4% of sales, in the prior year. Operating profit for 2014 was negatively impacted by non-recurring purchase accounting related inventory step-up costs of $16.8 million, and $1.7 million of charges related to work force reductions. Additionally, amortization expense in 2014 related to the ATS acquisition was approximately $6.0 million compared with $1.3 million in 2015. E&D costs were approximately $12.2$10.4 million in 2015, and $11.82016 compared with $12.4 million in 2014.

Our cash flow from operations and available borrowing capacity provide us with the financial resources needed to run our operations and reinvest in our business.

Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers and employees. Sales and operating results of our Aerospace segment are influenced by the build rates of new aircraft, which are subject to general economic conditions, airline passenger travel and spending for government and military programs. Our Test Systems segment depends on capital

expenditures of the semiconductor industry which, in turn, depend on current and future demand for those products. A reduction in demand for our customers’ products would adversely affect our operating results and cash flows.

Our expectation for 20162018 is that we will invest between $25$24.0 million and $30$28.0 million for PP&E. Future requirements for PP&E depend on numerous factors, including expansion of existing product lines and introduction of new products. Management believes that our cash flow from operations and current borrowing arrangements will provide for these capital expenditures. We expect to continue to evaluate acquisition opportunities in the future.

Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future. Our obligations under our Credit Agreement are jointly and severally guaranteed by each of our

On January 13, 2016, the Company amended the AgreementOriginal Facility to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021.

The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) was 3.5 to 1, increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company paid interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 1.375% and 2.25% based upon the Company’s leverage ratio. The Company paid a commitment fee to the Lenders in an amount equal to between 0.175% and 0.35% on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The Company was required to maintain a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement.

The primary financing activities in 2017 related to net borrowings from our senior facility of $126.0 million and $32.4 million in share repurchases under our original Buyback Program, as further described below, using cash generated from operations. The primary financing activities in 2016 related to net repayments on our senior facility of $19.0 million and $17.6 million in share repurchases under our original Buyback Program, using cash generated from operations.The primary financing activities in 2015 relate to borrowings on our senior credit facility to fund the acquisition of Armstrong and voluntary principal payments against our outstanding balance on the senior facility. We borrowed $50.0 million to fund the acquisition of Armstrong. During 2015, we made principal payments of $65.0 million on the senior credit facility, primarily using cash generated by operations. In February 2014, we borrowed $58.0 million to fund the acquisition of ATS. We also terminated our outstanding Industrial Revenue Bonds, which were repaid in full in November 2014 ($7.6 million). In 2013, we borrowed $190.0 million to fund the acquisitions of Peco, AeroSat and PGA and made principal payments of $17.8 million on the senior debt facility through December 31, 2013.

On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the “Buyback Program”). The Buyback Program allowsallowed the Company to purchase shares of its common stock in accordance with

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20152017 based upon the framework in Internal Control – Integrated Framework originally issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2015.2017.

Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.