Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 27, 2014

October 3, 2015

or

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

For the transition period fromto

Commission File Number 0-7087

ASTRONICS CORPORATION

(Exact name of registrant as specified in its charter)

New York 16-0959303

New York
(State or other jurisdiction of

incorporation or organization)

16-0959303
(IRS Employer
Identification Number)
 

(IRS Employer

Identification Number)

130 Commerce Way, East Aurora, New York
14052
(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  xý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  xý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨ý Accelerated filerx¨
Non-accelerated filer
¨
 Smaller Reporting Company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  xý

As of September 27, 2014, 21,787,436October 3, 2015, 25,531,907 shares of common stock were outstanding consisting of 14,694,64517,396,338 shares of common stock ($.01 par value) and 7,092,7918,135,569 shares of Class B common stock ($.01 par value).



Table of Contents

TABLE OF CONTENTS

  PAGE
PART 1I 
 
 Item 1
 Item 1
 
 
  
 3
 
  
 4
 
  
 5
 
  
 6
 
  
7-17
 7 – 20
 Item 2
 Item 2
18 – 25
 21 – 27
 Item 3
 Item 3
 28
 Item 4
 Item 4
 28
PART II 
PART II
 
 Item 1
 Item 1
 29
 Item 1a
 Item 1a
 29
 Item 2
 Item 2
 30
 Item 3
 Item 3
 30
 Item 4
 Item 4
 30
 Item 5
 Item 5
 30
 Item 6
 ExhibitsItem 6 30
SIGNATURES 30
 EX-31.1 302 Certification for CEO
EX-31.2302 Certification for CFO
EX-32.1906 Certification for CEO and CFO
EX-101Instance Document
EX-101Schema Document
EX-101Calculation Linkbase Document
EX-101Labels Linkbase Document
EX-101Presentation Linkbase Document
EX-101Definition Linkbase Document


2


Part 1I – Financial Information

Item 1.Financial Statements

Item 1. Financial Statements
ASTRONICS CORPORATION

Consolidated Condensed Balance Sheets

September 27, 2014

October 3, 2015 with Comparative Figures for December 31, 2013

2014

(In thousands)

   September 27,
2014
  December 31,
2013
 
   (Unaudited)    

Current Assets:

   

Cash and Cash Equivalents

  $24,928   $54,635  

Accounts Receivable, net of allowance for doubtful accounts

   111,898    60,942  

Inventories

   126,564    85,269  

Prepaid Expenses and Other Current Assets

   14,149    10,352  
  

 

 

  

 

 

 

Total Current Assets

   277,539    211,198  

Property, Plant and Equipment, net of accumulated depreciation

   111,362    70,900  

Other Assets

   6,179    5,474  

Intangible Assets, net of accumulated amortization

   95,285    102,701  

Goodwill

   100,542    100,998  
  

 

 

  

 

 

 

Total Assets

  $590,907   $491,271  
  

 

 

  

 

 

 

Current Liabilities:

   

Current Maturities of Long-term Debt

  $10,239   $12,279  

Accounts Payable

   43,534    25,255  

Accrued Expenses

   32,970    24,668  

Accrued Income Taxes

   3,355    1,318  

Customer Advance Payments and Deferred Revenue

   45,618    20,747  

Deferred Income Taxes

   —      970  
  

 

 

  

 

 

 

Total Current Liabilities

   135,716    85,237  

Long-term Debt

   202,404    188,041  

Other Liabilities

   41,518    46,484  
  

 

 

  

 

 

 

Total Liabilities

   379,638    319,762  
  

 

 

  

 

 

 

Shareholders’ Equity:

   

Common Stock

   218    214  

Accumulated Other Comprehensive Loss

   (6,217  (3,611

Other Shareholders’ Equity

   217,268    174,906  
  

 

 

  

 

 

 

Total Shareholders’ Equity

   211,269    171,509  
  

 

 

  

 

 

 

Total Liabilities and Shareholders’ Equity

  $590,907   $491,271  
  

 

 

  

 

 

 

 October 3,
2015
 December 31,
2014
 (Unaudited)  
Current Assets:   
Cash and Cash Equivalents$22,433
 $21,197
Accounts Receivable, Net of Allowance for Doubtful Accounts124,663
 88,888
Inventories119,811
 115,053
Prepaid Expenses and Other Current Assets19,501
 20,680
Total Current Assets286,408
 245,818
Property, Plant and Equipment, Net of Accumulated Depreciation125,940
 116,316
Other Assets8,907
 5,632
Intangible Assets, Net of Accumulated Amortization111,196
 94,991
Goodwill115,942
 100,153
Total Assets$648,393
 $562,910
Current Liabilities:   
Current Maturities of Long-term Debt$2,745
 $2,796
Accounts Payable27,763
 27,903
Accrued Expenses and Other Current Liabilities42,076
 33,465
Customer Advance Payments and Deferred Revenue40,565
 45,052
Total Current Liabilities113,149
 109,216
Long-term Debt205,789
 180,212
Other Liabilities45,469
 45,305
Total Liabilities364,407
 334,733
Shareholders’ Equity:   
Common Stock255
 252
Accumulated Other Comprehensive Loss(14,875) (11,949)
Other Shareholders’ Equity298,606
 239,874
Total Shareholders’ Equity283,986
 228,177
Total Liabilities and Shareholders’ Equity$648,393
 $562,910
See notes to consolidated condensed financial statements.


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ASTRONICS CORPORATION

Consolidated Condensed Statements of Operations

Three and Nine Months Ended September 27, 2014October 3, 2015 With Comparative Figures for 2013

2014

(Unaudited)

(In thousands, except per share data)

   Nine Months Ended   Three Months Ended 
   Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Sales

  $494,956    $234,481    $179,442    $89,681  

Cost of Products Sold

   370,439     171,796     128,132     65,896  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

   124,517     62,685     51,310     23,785  

Selling, General and Administrative Expenses

   62,638     31,291     25,539     11,433  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from Operations

   61,879     31,394     25,771     12,352  

Interest Expense, net of interest income

   7,183     2,085     2,301     1,605  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

   54,696     29,309     23,470     10,747  

Provision for Income Taxes

   16,965     8,432     6,390     3,592  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $37,731    $20,877    $17,080    $7,155  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

  $1.74    $1.00    $0.79    $0.34  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $1.67    $0.95    $0.75    $0.32  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
 October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Sales$534,939
 $494,956
 $200,145
 $179,442
Cost of Products Sold385,898
 370,439
 140,718
 128,132
Gross Profit149,041
 124,517
 59,427
 51,310
Selling, General and Administrative Expenses66,213
 62,638
 22,297
 25,539
Income from Operations82,828
 61,879
 37,130
 25,771
Interest Expense, Net of Interest Income3,600
 7,183
 1,243
 2,301
Income Before Income Taxes79,228
 54,696
 35,887
 23,470
Provision for Income Taxes26,161
 16,965
 11,193
 6,390
Net Income$53,067
 $37,731
 $24,694
 $17,080
Earnings Per Share:       
Basic$2.09
 $1.51
 $0.97
 $0.68
Diluted$2.02
 $1.45
 $0.94
 $0.65
See notes to consolidated condensed financial statements.


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ASTRONICS CORPORATION

Consolidated Condensed Statements of Comprehensive Income

Three and Nine Months Ended September 27, 2014October 3, 2015 With Comparative Figures for 2013

2014

(Unaudited)

(In thousands)

   Nine Months Ended  Three Months Ended 
   Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Net Income

  $37,731   $20,877   $17,080   $7,155  
  

 

 

  

 

 

  

 

 

  

 

 

 

Other Comprehensive Income (Loss):

     

Foreign Currency Translation Adjustments

   (2,943  (260  (2,375  129  

Change in Accumulated Income on Derivatives – net of tax

   19    65    27    27  

Retirement Liability Adjustment – net of tax

   318    316    110    105  
  

 

 

  

 

 

  

 

 

  

 

 

 

Other Comprehensive (Loss) Income

   (2,606  121    (2,238  261  
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $35,125   $20,998   $14,842   $7,416  
  

 

 

  

 

 

  

 

 

  

 

 

 

 Nine Months Ended Three Months Ended
 October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Net Income$53,067
 $37,731
 $24,694
 $17,080
Other Comprehensive (Loss) Income:       
Foreign Currency Translation Adjustments(3,410) (2,943) (196) (2,375)
Change in Accumulated Loss on Derivatives – Net of Tax
 19
 
 27
Retirement Liability Adjustment – Net of Tax484
 318
 161
 110
Other Comprehensive (Loss) Income(2,926) (2,606) (35) (2,238)
Comprehensive Income$50,141
 $35,125
 $24,659
 $14,842
See notes to consolidated condensed financial statements.


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ASTRONICS CORPORATION

Consolidated Condensed Statements of Cash Flows

Nine Months Ended September, 2014

October 3, 2015

With Comparative Figures for 2013

2014

(Unaudited)

(In thousands)

   September 27,
2014
  September 28,
2013
 

Cash Flows From Operating Activities:

   

Net Income

  $37,731   $20,877  

Adjustments to Reconcile Net Income to Cash Provided By Operating Activities:

   

Depreciation and Amortization

   21,168    6,547  

Provisions for Non-Cash Losses on Inventory and Receivables

   733    381  

Stock Compensation Expense

   1,304    1,048  

Deferred Tax (Benefit) Expense

   (4,598  1,109  

Other

   (1,095  (863

Cash Flows from Changes in Operating Assets and Liabilities:

   

Accounts Receivable

   (41,562  4,804  

Inventories

   16,184    (3,668

Accounts Payable

   7,923    3,790  

Other Current Assets and Liabilities

   5,199    (590

Customer Advanced Payments and Deferred Revenue

   22,593    (1,579

Income Taxes

   2,048    1,454  

Supplemental Retirement and Other Liabilities

   921    838  
  

 

 

  

 

 

 

Cash Provided By Operating Activities

   68,549    34,148  
  

 

 

  

 

 

 

Cash Flows From Investing Activities:

   

Acquisition of Business, net of cash acquired

   (70,028  (135,898

Capital Expenditures

   (29,971  (4,833
  

 

 

  

 

 

 

Cash Used For Investing Activities

   (99,999  (140,731
  

 

 

  

 

 

 

Cash Flows From Financing Activities:

   

Proceeds from Long Term Debt

   245,414    190,000  

Payments for Long-term Debt

   (245,761  (21,294

Debt Acquisition Costs

   (573  (2,288

Acquisition Earnout Payments

   (37  (81

Proceeds from Exercise of Stock Options

   1,290    408  

Income Tax Benefit from Exercise of Stock Options

   2,041    649  
  

 

 

  

 

 

 

Cash Provided By Financing Activities

   2,374    167,394  
  

 

 

  

 

 

 

Effect of Exchange Rates on Cash

   (631  (5
  

 

 

  

 

 

 

(Decrease) Increase in Cash and Cash Equivalents

   (29,707  60,806  

Cash and Cash Equivalents at Beginning of Period

   54,635    7,380  
  

 

 

  

 

 

 

Cash and Cash Equivalents at End of Period

  $24,928   $68,186  
  

 

 

  

 

 

 

 October 3,
2015
 September 27,
2014
Cash Flows From Operating Activities:   
Net Income$53,067
 $37,731
Adjustments to Reconcile Net Income to Cash Provided By Operating Activities:   
Depreciation and Amortization18,831
 21,168
Provisions for Non-Cash Losses on Inventory and Receivables1,513
 733
Stock Compensation Expense1,740
 1,304
Deferred Tax Benefit(243) (4,598)
Non-Cash Earnout Liability Adjustment(1,576) (477)
Other21
 (618)
Cash Flows from Changes in Operating Assets and Liabilities:   
Accounts Receivable(29,796) (41,562)
Inventories(4,805) 16,184
Accounts Payable(1,656) 7,923
Accrued Expenses5,662
 7,660
Other Current Assets and Liabilities(498) (2,461)
Customer Advanced Payments and Deferred Revenue(5,396) 22,593
Income Taxes5,072
 2,048
Supplemental Retirement and Other Liabilities1,238
 921
Cash Provided By Operating Activities43,174
 68,549
Cash Flows From Investing Activities:   
Acquisition of Business, Net of Cash Acquired(52,606) (70,028)
Capital Expenditures(15,857) (29,971)
Other Investing Activities(2,677) 
Cash Used For Investing Activities(71,140) (99,999)
Cash Flows From Financing Activities:   
Proceeds from Long-term Debt55,000
 245,414
Payments for Long-term Debt(29,008) (245,761)
Debt Acquisition Costs
 (573)
Acquisition Earnout Payments(2) (37)
Proceeds from Exercise of Stock Options3,308
 1,290
Income Tax Benefit from Exercise of Stock Options619
 2,041
Cash Provided By Financing Activities29,917
 2,374
Effect of Exchange Rates on Cash(715) (631)
Increase (Decrease) in Cash and Cash Equivalents1,236
 (29,707)
Cash and Cash Equivalents at Beginning of Period21,197
 54,635
Cash and Cash Equivalents at End of Period$22,433
 $24,928
See notes to consolidated condensed financial statements.


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ASTRONICS CORPORATION

Notes to Consolidated Condensed Financial Statements

September 27, 2014

October 3, 2015
(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.

All share quantities and per share data reported have been restated to reflect the impact of the three-for-twenty Class B stock distribution to shareholders of record on October 8, 2015.
Operating Results

The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the three and nine month periodsmonths ended September 27, 2014October 3, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

2015.

The balance sheet at December 31, 20132014 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 20132014 annual report on Form 10-K.

Description of the Business

Astronics Corporation (“Astronics” or the “Company”) is a leading supplier of products to the global aerospace, defense, electronics and defensesemiconductor industries. Our products and services include advanced, high-performance lighting and safety systems, electrical power generation & distribution and motionsystems, lighting & safety systems, avionics products, aircraft structures, engineering design and structuresystems certification and other products for the global aerospace industry as well asautomated test training and simulation systems for the military, semi-conductor and consumer electronics markets.

The Company has two reportable segments, Aerospace and Test Systems. The Aerospace segment designs and manufactures products for the global aerospace industry. The Test Systems segment designs, manufactures and maintains communications and weapons test systems and training and simulation devices for military applications as well as automatic test systems, subsystems and instruments for semi-conductor and consumer electronics products.

systems.

We have twelve primary locations, tenoperations in the United States one in(“U.S.”), Canada and one in France. We design and build our products through our wholly owned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Astronics Test Systems, Inc. (“ATS”); Ballard Technology, Inc. (“Ballard”); DME Corporation and Astronics DME LLC (“DME”); Luminescent Systems, Inc. (“LSI”); Luminescent Systems Canada, Inc. (“LSI Canada”); Max-Viz, Inc. (“Max-Viz”); Peco, Inc. (“Peco”) and; PGA Electronic s.a. (“PGA”); Astronics Test Systems, Inc. (“ATS”) and Armstrong Aerospace, Inc. (“Armstrong”).

On January 14, 2015, the Company acquired 100% of the equity of Armstrong, located in Itasca, Illinois. Armstrong is a leading provider of engineering, design and systems certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrong is included in our Aerospace segment.
On February 28, 2014, Astronics acquired, through a wholly owned subsidiary ATS, certain assets and liabilities of EADS North America’s Test and Services division, located in Irvine, California. ATS is a leading provider of highly engineered automaticautomated test systems, subsystems and instruments for semi-conductorcommercial electronics and consumer electronicssemiconductor products to both the commercial and defense industries. ATS is included in our Test Systems segment.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Acquisitions are accounted for under the purchase method and, accordingly, the operating results for the acquired companies are included in the consolidated statements of earnings from the respective dates of acquisition.

Revenue and Expense Recognition

In the Aerospace segment, segment revenue is recognized on the accrual basis at the time of shipment of goods and transfer of title. There are no significant contracts allowing for right of return.

In the Test Systems segment, revenue of approximately 1% and 62% for the three months ending September 27, 2014 and September 28, 2013, respectively, and approximately 1% and 40% for the nine months ending September 27, 2014 and September 28, 2013 respectively, is recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. Substantially all long-term contracts are with U.S. government agencies and contractors thereto. The Company makes significant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods. Revenue not recognized using the percentage-of-completion method is recognized at the time of shipment of goods and transfer of title.

With the acquisition of ATS, a portion of our Test Systems segment sales are recognized as multiple element arrangements, whereby revenue is allocated to the equipment and post installation maintenance service components based upon vendor specific objective evidence, typically pricing established in the contracts for the post installation services. If vendor-specific objective evidence of selling price is not available, we allocate revenue to the elements of the bundled arrangement using the estimated selling price method in order to qualify the components as separate units of accounting. Revenue on the equipment component is recognized when the equipment is accepted by the customers and title passes. Revenue on the post installation maintenance service component is recognized over the contractual life of the service to be provided, typically 24 months from installation.

Cost of Products Sold, Engineering and Development and Selling, General and Administrative Expenses

Cost of products sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead as well as all engineering and developmentaldevelopment costs. The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. These costs are expensed when incurred and included in cost of products sold. Research and development, design and related engineering amounted to $19.1$22.5 million and $12.4$19.1 million for the three months ended October 3, 2015 and September 27, 2014, and September 28, 2013, respectively, and $57.1$66.1 million and $38.6$57.1 million for the nine months ended October 3, 2015 and September 27, 2014, and September 28, 2013, respectively. Selling, general and administrative expenses include costs primarily

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related to our sales and marketing departments and administrative departments. Interest expense is shown net of interest income. Interest income was insignificant for the three and nine months ended for bothOctober 3, 2015 and September 27, 2014.
Derivatives
In November 2014, and September 28, 2013.

Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable, long-term debt andthe Company terminated its interest rate swaps.swap. Ineffectiveness was not significant for the three and nine months ended September 27, 2014. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company does not hold or issue financial instruments for trading purposes. Due to their short-term nature,classified the carrying values of cash and equivalents, accounts receivable, accounts payable, and notes payable, if any, approximate fair value. The carrying value of the Company’s variable rate long-term debt also approximates fair value due to the variable rate feature of these instruments. The Company’s interest rate swaps are recorded at fair value as described under Note 16 – Fair Value and Note 17 – Derivative Financial Instruments.

Derivatives

The accounting for changesflows from hedging transactions in the fair value of derivatives depends onsame category as the intended use and resulting designation. The Company’s use ofcash flows from the respective hedged items. No derivative instruments is limited to cash flow hedgeswere outstanding at or for interest rate risk associated with long-term debt. Interest rate swaps are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. The Company records all derivatives on the balance sheet at fair value as described under Note 16 – Fair Value and Note 17 – Derivative Financial Instruments. The related gainsthree or losses, to the extent the derivatives are effective as a hedge, are deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings at the time interest expense is recognized on the associated long-term debt. Any ineffectiveness is immediately recorded in the statement of operations.

nine months ended October 3, 2015.

Foreign Currency Translation

The Company accounts for its foreign currency translation in accordance with Accounting Standards Codification (“ASC”) Topic 830,Foreign Currency Translation. The aggregate transaction gain or loss included in operations was insignificant for the periods endingthree and nine months ended October 3, 2015 and September 27, 2014 and September 28, 2013.

2014.

Loss contingencies

Contingencies

Loss contingencies may from time to time arise from situations such as claims and other legal actions. Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. In recording liabilities for probable losses, management is required to make estimates and judgments regarding the amount or range of the probable loss. Management continually assesses the adequacy of estimated loss contingencies and, if necessary, adjusts the amounts recorded as better information becomes known.

Accounting Pronouncements Adopted in 2014

On January 1, 2014, the Company adopted the new provisions of Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward2015

There have been no recent accounting pronouncements that would apply in settlement of the uncertain tax positions. Unrecognized tax benefits are required to be netted against all available same-jurisdiction loss or other tax carryforwards, rather than only against carryforwards that are created by the unrecognized tax benefits. This ASU did not have had an impact on the Company’s financial statements.

On January 1, 2014,

Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the Company adopted the new provisions of Accounting Standards Update ASU 2013-12, Definition of a Public Business Entity – An Addition to the Master Glossary. The ASU amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP and identifies the types of business entities that are excluded from the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. This ASU did not have an impactcurrent year presentation. These reclassifications had no effect on the Company’s financial statements.

reported results of operations.

2) 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)  September 27,
2014
   December 31,
2013
 

Finished Goods

  $27,028    $21,627  

Work in Progress

   39,761     15,017  

Raw Material

   59,775     48,625  
  

 

 

   

 

 

 
  $126,564    $85,269  
  

 

 

   

 

 

 

The Company records valuation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower

(In thousands)October 3,
2015
 December 31,
2014
Finished Goods$32,208
 $28,763
Work in Progress25,030
 28,488
Raw Material62,573
 57,802
 $119,811
 $115,053


8

Table of cost or market value. In determining the appropriate reserve, the Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving for specifically identified inventory that the Company believes is no longer salable.

Contents


3) Property, Plant and Equipment

The following table summarizes Property, Plant and Equipment as follows:

(In thousands)  September 27,
2014
   December 31,
2013
 

Land

  $10,061    $6,742  

Buildings and Improvements

   59,485     45,551  

Machinery and Equipment

   70,858     54,369  

Construction in Progress

   15,955     1,527  
  

 

 

   

 

 

 
   156,359     108,189  

Less Accumulated Depreciation

   44,997     37,289  
  

 

 

   

 

 

 
  $111,362    $70,900  
  

 

 

   

 

 

 

(In thousands)October 3,
2015
 December 31,
2014
Land$11,171
 $10,008
Buildings and Improvements78,209
 74,755
Machinery and Equipment86,088
 73,062
Construction in Progress5,644
 4,757
 181,112
 162,582
Less Accumulated Depreciation55,172
 46,266
 $125,940
 $116,316
4) Intangible Assets

The following table summarizes acquired intangible assets as follows:

       September 27, 2014   December 31, 2013 
(In thousands)  Weighted
Average Life
   Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
 

Patents

   7 Years    $2,146    $1,031    $2,146    $891  

Trade Names

   9 Years     8,344     1,104     7,453     552  

Completed and Unpatented Technology

   7 Years     16,958     3,743     15,377     2,620  

Backlog and Customer Relationships

   11 Years     91,771     18,056     88,998     7,210  
    

 

 

   

 

 

   

 

 

   

 

 

 

Total Intangible Assets

   9 Years    $119,219    $23,934    $113,974    $11,273  
    

 

 

   

 

 

   

 

 

   

 

 

 

  October 3, 2015 December 31, 2014
(In thousands)
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents6 Years $2,146
 $1,217
 $2,146
 $1,077
Non-compete Agreement5 Years 2,500
 354
 
 
Trade Names8 Years 10,237
 1,982
 8,304
 1,288
Completed and Unpatented Technology7 Years 24,092
 6,190
 18,107
 4,396
Backlog and Customer Relationships12 Years 107,739
 25,775
 93,448
 20,253
Total Intangible Assets7 Years $146,714
 $35,518
 $122,005
 $27,014
All acquired intangible assets other than goodwill and one trade name are being amortized. Amortization expense for acquired intangibles is summarized as follows:

   Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Amortization Expense

  $12,673    $2,429    $7,769    $1,494  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Amortization Expense$8,534
 $12,673
 $2,761
 $7,769
Amortization expense for acquired intangible assets expected for 20142015 and for each of the next five years is summarized as follows:

(In thousands)    

2014

  $15,651  

2015

   8,554  

2016

   8,092  

2017

   7,677  

2018

   7,585  

2019

   7,433  

(In thousands) 
2015$11,341
201610,762
201710,336
201810,023
20199,622
20209,088


The Company also incurs amortization expense related to other assets. Such amortization expense was not significant in the three or nine months ended October 3, 2015 and September 27, 2014.

9


5) Goodwill

The following table summarizes the changes in the carrying amount of goodwill for 2014:

(In thousands)  December 31,
2013
   Acquisition   Foreign
Currency
Translation
  September 27,
2014
 

Aerospace

  $100,998    $512    $(968 $100,542  

Test Systems

   —       —       —      —    
  

 

 

   

 

 

   

 

 

  

 

 

 
  $100,998    $512    $(968 $100,542  
  

 

 

   

 

 

   

 

 

  

 

 

 

2015:

(In thousands)December 31,
2014
 Acquisition 
Foreign
Currency
Translation
 October 3,
2015
Aerospace$100,153
 $16,567
 $(778) $115,942
Test Systems
 
 
 
 $100,153
 $16,567
 $(778) $115,942

During the three months ended October 3, 2015, approximately $1.4 million was reclassified from inventory to goodwill as the Company continues the evaluation of the purchase price allocation of Armstrong.
6) Long-term Debt and Notes Payable

The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Company other than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the Company’s and the guarantors’ assets.
In connection with the funding of the acquisition of ATS, the Company amended its existing credit facility to exercise its option to increase the revolving credit commitment. The credit agreement provided for a $125 million, five-year revolving credit facility maturing on June 30, 2018, of which $58.0 million was drawn to finance the acquisition. In addition, the Company was required to pay a commitment fee quarterly at a rate of between 25 and 50 basis points on the unused portion of the total revolving credit commitment, based on the Company’s leverage ratio.
On September 26, 2014, the Company modified and extended its existing credit facility (the “Original Facility”) by entering into the Fourth Amended and Restated Credit Agreement (the “Agreement”). On the closing date, there were $180.5 million of term loans outstanding and $6 million of revolving loans outstanding under the Original Facility. Pursuant to the Agreement, the Original Facility was replaced with a $350 million revolving credit line with the option to increase the line by up to $150 million. The outstanding balances in the Original Facility were rolled into the Agreement on the date of entry. In addition, the maturity date of the loans under the Agreement is now September 26, 2019.

At October 3, 2015 there was $193.0 million outstanding on the revolving credit facility and there remains $155.9 million available, net of outstanding letters of credit. The credit facility allocates up to $20 million of the $350 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At October 3, 2015, outstanding letters of credit totaled $1.1 million.

Covenants in the Agreement have been modified to where the maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the agreement)Agreement) is 3.5 to 1, increasing to 4.0 to 1 for up to two2 fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one, threeone-, three- or six month Liborsix-month LIBOR plus between 137.5 basis points and 225 basis points based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the Lenderslenders in an amount equal to between 17.5 basis points and 35 basis points on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The fixed charge coverage ratio under the Original Facility has been replaced with a minimum interest coverage ratio (EBITDA(Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement. EBITDA, as defined inThe Company’s interest coverage ratio was 39.6 to 1 at October 3, 2015. The Company’s leverage ratio was 1.5 to 1 at October 3, 2015.
In the agreement, isevent of voluntary or involuntary bankruptcy of the sum of consolidated net income plus feesCompany or any subsidiary, all unpaid principal and expenses incurred in connection with a permitted acquisition for financing to the extent reducing consolidated net income, consolidated interest expense, provisions for taxes based on income, total depreciation expense, total amortization expense, other non-cash items reducing consolidated net income and any reduction of consolidated net income resulting from the fair valuation adjustment to inventory cost in connection with any permitted acquisition, less other non-cash items increasing consolidated net income for such period. Extraordinary gains, whether cash or non-cash, and earn-out adjustments in the purchase price for permitted acquisitions shall not be included in the calculation of EBITDA.

At September 27, 2014, there was $186.5 million outstanding on the revolving credit facility. There remains approximately $154.8 million availableamounts owing under the revolving credit facility on September 27, 2014, netAgreement automatically become due and payable. Other events of outstanding lettersdefault, such as failure to make payments as they become due and breach of credit. The credit facility allocates upfinancial and other covenants, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to $20 milliondeclare all such amounts immediately due and payable.


10

Table of the $350 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At September 27, 2014, outstanding letters of credit totaled $8.7 million.

In September 2014, the Company directed the optional redemption in whole of its approximately $7.9 million of Industrial Revenue Bonds. Pursuant to the optional redemption, all of the principal and interest due on such Industrial Revenue Bonds will be paid and all letters of credit in support of the obligations cancelled in the fourth quarter of 2014.

Scheduled principal payments for the next 12 months on all long term debt amount to approximately $10.2 million. Remaining scheduled principal maturities of long-term debt each year are approximately:

(In thousands)    

2014

  $8,294  

2015

   2,698  

2016

   2,798  

2017

   2,733  

2018

   2,729  

2019

   188,407  

Thereafter

   4,984  
  

 

 

 
  $212,643  
  

 

 

 

Contents


7) Product Warranties

In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from twelve12 to sixty60 months. The Company determines warranty reserves needed by product line based on experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:

   Nine Months Ended  Three Months Ended 

(In thousands)

  September 27,
2014
  Sept. 28,
2013
  September 27,
2014
  Sept. 28,
2013
 

Balance at beginning of period

  $2,796   $2,551   $3,925   $2,584  

Acquisitions

   564    —      (226  —    

Warranties issued

   2,842    356    1,966    23  

Warranties settled

   (1,323  (618  (520  (202

Reassessed warranty exposure

   271    (133  5    (249
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of period

  $5,150   $2,156   $5,150   $2,156  
  

 

 

  

 

 

  

 

 

  

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Balance at Beginning of Period$4,884
 $2,796
 $5,319
 $3,925
Acquisitions500
 564
 
 (226)
Warranties Issued1,553
 2,842
 414
 1,966
Warranties Settled(2,164) (1,323) (737) (520)
Reassessed Warranty Exposure1,130
 271
 907
 5
Balance at End of Period$5,903
 $5,150
 $5,903
 $5,150
8) Income Taxes

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

ASC Topic 740-10Overall - Uncertainty in Income Taxes (“ASC Topic 740-10”) clarifies the accounting and disclosure for uncertainty in tax positions. ASC Topic 740-10 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of ASC Topic 740-10 and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest associated with that liability will be recorded as interest expense. Penalties, if any, would be recognized as operating expenses. There were no penalties or interest liability accrued as of September 27, 2014October 3, 2015 or December 31, 2013,2014, nor were any penalties or interest costs included in expense for the three andor nine month periods endingmonths ended October 3, 2015 and September 27, 2014 and September 28, 2013.2014. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2012 through 20132014 for federal purposes and 2011 through 20132014 for state purposes.

The effective tax rates were approximately 27.2%33.0% and 33.4%31.0% for the nine months and 31.2% and 27.2% for the three months ended October 3, 2015 and 31.0% and 28.8% for the nine months ended September 27, 2014, and September 28, 2013, respectively. The effective tax rate for the third quarter and first nine months of 2015 and 2014 waswere lower than the federal statutory rate due to the domestic production activity deduction, domestic research and development tax credits and lower effective tax rates on foreign income and the recognitionincome.

11

Table of $0.9 million in domestic Research and Development (“R&D”) tax credits related to prior years that was recognized in the third quarter of 2014. The effective tax rate for the nine months of 2013 was impacted primarily by the domestic production activity deduction, the recognition of approximately $1.1 million in domestic 2012 R&D tax credits and $0.6 million in domestic 2013 R&D tax credits. The effective tax rate for the three months ended September 28, 2013 was impacted primarily by the recognition of approximately $0.2 million in domestic 2013 R&D tax credits.

Contents


9) Shareholders’ Equity

The changes in shareholders’ equity for the nine months ended September 27, 2014October 3, 2015 are summarized as follows as adjusted to reflect the impact of the one-for-five distribution of Class B Stock as discussed in Note 10:

      Number of Shares 
(Dollars and Shares in thousands)  Amount  Common
Stock
   Convertible
Class B Stock
 

Shares Authorized

    40,000     10,000  

Share Par Value

   $0.01    $0.01  

COMMON STOCK

     

Beginning of Period

  $214    13,268     8,221  

Conversion of Class B Shares to Common Shares

   —      1,261     (1,261

Exercise of Stock Options

   4    166     133  
  

 

 

  

 

 

   

 

 

 

End of Period

  $218    14,695     7,093  
  

 

 

  

 

 

   

 

 

 

ADDITIONAL PAID IN CAPITAL

     

Beginning of Period

  $40,791     

Stock Compensation Expense

   1,304     

Exercise of Stock Options

   3,365     
  

 

 

    

End of Period

  $45,460     
  

 

 

    

ACCUMULATED OTHER COMPREHENSIVE LOSS

     

Beginning of Period

  $(3,611   

Foreign Currency Translation Adjustment

   (2,943   

Change in Accumulated (Loss) Income on Derivatives – Net of Tax

   19     

Retirement Liability Adjustment – Net of Tax

   318     
  

 

 

    

End of Period

  $(6,217   
  

 

 

    

RETAINED EARNINGS

     

Beginning of Period

  $134,115     

Cash Paid in Lieu of Fractional Shares from Stock Distribution

   (38   

Net Income

   37,731     
  

 

 

    

End of Period

  $171,808     
  

 

 

    

TOTAL SHAREHOLDERS’ EQUITY

     
  

 

 

    

Beginning of Period

  $171,509     
  

 

 

    
     
  

 

 

    

End of Period

  $211,269     
  

 

 

    

follows:

   Number of Shares
(Dollars and Shares in thousands)Amount 
Common
Stock
 
Convertible
Class B Stock
Shares Authorized  40,000
 10,000
Share Par Value  $0.01
 $0.01
COMMON STOCK     
Beginning of Period$252
 16,608
 8,651
Conversion of Class B Shares to Common Shares
 623
 (623)
Exercise of Stock Options3
 165
 108
End of Period$255
 17,396
 8,136
ADDITIONAL PAID IN CAPITAL     
Beginning of Period$49,626
    
Stock Compensation Expense1,740
    
Exercise of Stock Options3,925
    
End of Period$55,291
    
ACCUMULATED OTHER COMPREHENSIVE LOSS     
Beginning of Period$(11,949)    
Foreign Currency Translation Adjustment(3,410)    
Retirement Liability Adjustment – Net of Tax484
    
End of Period$(14,875)    
RETAINED EARNINGS     
Beginning of Period$190,248
    
Net Income53,067
    
End of Period$243,315
    
TOTAL SHAREHOLDERS’ EQUITY     
Beginning of Period$228,177
    
      
End of Period$283,986
    
10) Earnings Per Share

Basic and diluted weighted-average shares outstanding are as follows:

   Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Weighted average shares – Basic

   21,661     20,905     21,749     20,948  

Net effect of dilutive stock options

   997     1,015     928     1,113  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares – Diluted

   22,658     21,920     22,677     22,061  
  

 

 

   

 

 

   

 

 

   

 

 

 

The above information has been adjusted to reflect the impact of the one-for-five distribution of Class B Stock for shareholders of record on September 5, 2014.

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Weighted Average Shares - Basic25,394
 24,910
 25,456
 25,011
Net Effect of Dilutive Stock Options843
 1,147
 761
 1,068
Weighted Average Shares - Diluted26,237
 26,057
 26,217
 26,079
Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation of diluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares covered by out-of-the-money stock options were insignificant at September 27, 2014.

October 3, 2015 was insignificant.


12


11) Accumulated Other Comprehensive Loss and Other Comprehensive Loss

The components of accumulated other comprehensive income (loss)loss are as follows:

(In thousands)  September 27,
2014
  December 31,
2013
 

Foreign Currency Translation Adjustments

  $(1,659 $1,284  
  

 

 

  

 

 

 

Accumulated (Loss) Income on Derivatives – Before Tax

   (77  (107

Tax Benefit

   27    38  
  

 

 

  

 

 

 

Accumulated (Loss) Income on Derivatives – After Tax

   (50  (69
  

 

 

  

 

 

 

Retirement Liability Adjustment – Before Tax

   (6,935  (7,423

Tax Benefit

   2,427    2,597  
  

 

 

  

 

 

 

Retirement Liability Adjustment – After Tax

   (4,508  (4,826
  

 

 

  

 

 

 
   
  

 

 

  

 

 

 

Accumulated Other Comprehensive Loss

  $(6,217 $(3,611
  

 

 

  

 

 

 

(In thousands)October 3,
2015
 December 31,
2014
Foreign Currency Translation Adjustments$(6,764) $(3,354)
Retirement Liability Adjustment – Before Tax(12,477) (13,223)
Tax Benefit4,366
 4,628
Retirement Liability Adjustment – After Tax(8,111) (8,595)
Accumulated Other Comprehensive Loss$(14,875) $(11,949)
The components of other comprehensive (loss) incomeloss are as follows:

   Nine Months Ended  Three Months Ended 
(In thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Foreign Currency Translation Adjustments

  $(2,943 $(260 $(2,375 $129  
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in Accumulated (Loss) Income on Derivatives:

     

Reclassification to Interest Expense

   45    90    11    20  

Net (Decrease) Increase in Fair Value of Derivatives

   (15  11    31    22  

Tax Benefit (Expense)

   (11  (36  (15  (15
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in Accumulated (Loss) Income on Derivatives

   19    65    27    27  
  

 

 

  

 

 

  

 

 

  

 

 

 

Retirement Liability Adjustments:

     

Reclassifications to General and Administrative Expense:

     

Amortization of prior service cost

   408    388    136    127  

Amortization of net actuarial losses

   80    95    27    32  

Tax Benefit

   (170  (167  (53  (54
  

 

 

  

 

 

  

 

 

  

 

 

 

Retirement Liability Adjustment

   318    316    110    105  
  

 

 

  

 

 

  

 

 

  

 

 

 
     
  

 

 

  

 

 

  

 

 

  

 

 

 

Other Comprehensive (Loss) Income

  $(2,606 $121   $(2,238 $261  
  

 

 

  

 

 

  

 

 

  

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Foreign Currency Translation Adjustments$(3,410) $(2,943) $(196) $(2,375)
Change in Accumulated Income on Derivatives:       
Reclassification to Interest Expense
 45
 
 11
Mark to Market Adjustments for Derivatives
 (15) 
 31
Tax Expense
 (11) 
 (15)
Change in Accumulated Income on Derivatives
 19
 
 27
Retirement Liability Adjustments:       
Reclassifications to General and Administrative Expense:       
Amortization of Prior Service Cost390
 408
 130
 136
Amortization of Net Actuarial Losses356
 80
 119
 27
Tax Benefit(262) (170) (88) (53)
Retirement Liability Adjustment484
 318
 161
 110
        
Other Comprehensive Loss$(2,926) $(2,606) $(35) $(2,238)
12) Supplemental Retirement Plan and Related Post Retirement Benefits

The Company has two non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain executive officers. The following table sets forth information regarding the net periodic pension cost for the plans.

   Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Service cost

  $187    $222    $62    $74  

Interest cost

   565     465     188     155  

Amortization of prior service cost

   390     370     130     121  

Amortization of net actuarial losses

   80     95     27     32  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost

  $1,222    $1,152    $407    $382  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Service Cost$145
 $187
 $49
 $62
Interest Cost633
 565
 211
 188
Amortization of Prior Service Cost371
 390
 123
 130
Amortization of Net Actuarial Losses336
 80
 113
 27
Net Periodic Cost$1,485
 $1,222
 $496
 $407

13

Table of Contents

Participants in the SERP 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:

   Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Service cost

  $3    $3    $1    $1  

Interest cost

   24     18     8     6  

Amortization of prior service cost

   18     18     6     6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic cost

  $45    $39    $15    $13  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Service Cost$3
 $3
 $1
 $1
Interest Cost30
 24
 10
 8
Amortization of Prior Service Cost19
 18
 7
 6
Amortization of Net Actuarial Losses20
 
 6
 
Net Periodic Cost$72
 $45
 $24
 $15
13) Sales to Major Customers

The Company has a significant concentration of business with three major customers, each in excess of 10% of consolidated sales. The loss of any of these customers would significantly, negatively impact our sales and earnings.

Sales to these three customers represented 21%, 16% and 13% of consolidated sales for the nine months ended October 3, 2015 and 19%, 25% and 12% for the three months ended October 3, 2015. Sales to these customers were in the Aerospace and Test Systems segments. Accounts receivable from these customers at October 3, 2015 was approximately $58.9 million.
The Company had sales to three customers in the Aerospace and Test Systems segments that represented 20%17%, 17%20% and 14% of consolidated sales for the nine months ended September 27, 2014 and 25%17%, 17%25% and 13% of consolidated sales for the three months ended September 27, 2014. Sales to these customers were in the Aerospace and Test Systems segments.

The Company had sales to two customers in the Aerospace segment that represented 30% and 12% of consolidated sales for the nine months ended September 28, 2013 and 28% and 20% of consolidated sales for the three months ended September 28, 2013.

Accounts receivable from these customers at September 27, 2014 was approximately $57.0 million.

14) Legal Proceedings

The Company is subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the results of these matters cannot be predicted with certainty. Should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially adversely affected.

We are


On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a defendant in an action filedStatement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES sold, marketed and brought into use in Germany (Lufthansa Technik AG v. Astronics Advanced Electronics Systems Corp.) relatinga power supply system which infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an allegationestimate of patentdamages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement. The damages sought include injunctive relief, as well as monetary damages. We dispute the allegation and are vigorously defending ourselves in this action. We have filed a nullity action with the Federal Patent Court in Munich, Germany, requesting the court to revoke the German part of the European patent that is subject to the claim. In November 2011,

On February 6, 2015, the Regional State Court of Manheim,Mannheim, Germany issued an interimrendered its decision to the effect that the infringement litigation proceedingspatent was infringed. The judgment does not require AES to recall products which are already installed in aircraft or have been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which require AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. AES is currently evaluating the information requirements. Additionally, if Lufthansa provides the additional required bank guarantees specified in the decision, the Company may be stayed untilrequired to cease distribution of infringing products in Germany (if any). No such bank guarantee has been issued to date regarding this provision.

The Company appealed and believes it has valid defenses to refute the Federal Patent Court decidesdecision. The appeal process is estimated to extend up to two years. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the concurrent nullity action. In February 2014, the Federal Patent Court issued a written judgment upholding the validity of a portion of the patent. This judgment is being appealed by both litigants. However, asappeals process. As a result, the judgment proclaimed by the Federal Patent Court the stay of the infringement litigation proceedings is no longer effective. A hearing has been scheduled for November 2014. The process thereafter could take several years to conclude. At this time we are unabledo not currently have sufficient information to provide a reasonablean estimate of ourAES’s potential liability or the potential amount of lossexposure related to this action, if any. Ifmatter. As loss exposure is neither probable nor estimable at this time, the outcome ofCompany has not recorded any liability with respect to this litigation as of October 3, 2015.

14

Table of Contents

On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in this action alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is adversebased on technology similar to us, our resultsthat involved in the German action. However, the U.S. court will not be bound by the ultimate determination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and financial condition could be materially affected.

intends to contest this matter vigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of October 3, 2015.

15) Segment Information

Below are the sales and operating profit by segment for the three and nine months ended October 3, 2015 and September 27, 2014 and September 28, 2013 and a reconciliation of segment operating profit to income before income taxes. Operating profit is net sales less cost of products sold and other operating expenses excluding interest and corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment.

   Nine Months Ended  Three Months Ended 
(Dollars in thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Sales

     

Aerospace

  $366,128   $227,870   $122,233   $87,525  
  

 

 

  

 

 

  

 

 

  

 

 

 

Test Systems

   129,065    7,207    57,209    2,660  

Less Intersegment Sales

   (237  (596  —      (504
  

 

 

  

 

 

  

 

 

  

 

 

 
   128,828    6,611    57,209    2,156  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total Consolidated Sales

  $494,956   $234,481   $179,442   $89,681  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating Profit (Loss) and Margins

     

Aerospace

  $60,308   $41,112   $22,057   $15,377  
   16.5  18.0  18.0  17.6

Test Systems

   8,034    (2,880  5,699    (745
   6.2  (40.0)%   10.0  (28.0)% 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total Operating Profit

   68,342    38,232    27,756    14,632  
   13.8  16.3  15.5  16.3

Deductions from Operating Profit

     

Interest Expense, net of interest income

   7,183    2,085    2,301    1,605  

Corporate Expenses and Other

   6,463    6,838    1,985    2,280  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income Before Income Taxes

  $54,696   $29,309   $23,470   $10,747  
  

 

 

  

 

 

  

 

 

  

 

 

 

 Nine Months Ended Three Months Ended
(Dollars in thousands)October 3,
2015
��September 27,
2014
 October 3,
2015
 September 27,
2014
Sales       
Aerospace$413,250
 $366,128
 $138,728
 $122,233
Test Systems121,744
 129,065
 61,417
 57,209
Less Intersegment Sales(55) (237) 
 
 121,689
 128,828
 61,417
 57,209
Total Consolidated Sales$534,939
 $494,956
 $200,145
 $179,442
Operating Profit and Margins       
Aerospace$66,728
 $60,308
 $23,055
 $22,057
 16.1% 16.5% 16.6% 18.0%
Test Systems24,618
 8,034
 16,980
 5,699
 20.2% 6.2% 27.6% 10.0%
Total Operating Profit91,346
 68,342
 40,035
 27,756
 17.1% 13.8% 20.0% 15.5%
Deductions from Operating Profit       
Interest Expense, Net of Interest Income3,600
 7,183
 1,243
 2,301
Corporate Expenses and Other8,518
 6,463
 2,905
 1,985
Income Before Income Taxes$79,228
 $54,696
 $35,887
 $23,470
Identifiable Assets

(In thousands)  September 27,
2014
   December 31,
2013
 

Aerospace

  $454,322    $428,619  

Test Systems

   114,551     11,035  

Corporate

   22,034     51,617  
  

 

 

   

 

 

 

Total Assets

  $590,907    $491,271  
  

 

 

   

 

 

 

(In thousands)October 3,
2015
 
December 31,
2014
Aerospace$531,136
 $468,481
Test Systems87,909
 69,247
Corporate29,348
 25,182
Total Assets$648,393
 $562,910



15


16) Fair Value

ASC Topic 820,Fair value Measurements and Disclosures, (“ASC Topic 820”) defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC Topic 820 defines fair value based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or liability.

ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

On a Recurring Basis:

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of September 27, 2014October 3, 2015 and December 31, 2013:

(In thousands)  Classification  Total  Level 1   Level 2  Level 3 

Interest rate swaps

        

September 27, 2014

  Current Liabilities  $(77 $—      $(77 $—    

December 31, 2013

  Other Liabilities   (107  —       (107  —    

Acquisition contingent consideration

        

September 27, 2014

  Current Liabilities  $(2,280 $—      $—     $(2,280

December 31, 2013

  Current Liabilities   (137  —       —      (137

September 27, 2014

  Other Liabilities  $(3,784 $—      $—     $(3,784

December 31, 2013

  Other Liabilities   (5,709  —       —      (5,709

Interest rate swaps are securities with no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using the income approach (See Note 17).

2014:

(In thousands)Classification Total Level 1 Level 2 Level 3
Acquisition contingent consideration         
October 3, 2015Current Liabilities $
 
 
 $
December 31, 2014Current Liabilities 
 
 
 
October 3, 2015Other Liabilities $(175) 
 
 $(175)
December 31, 2014Other Liabilities $(1,651) 
 
 $(1,651)
Our Level 3 fair value liabilities represent contingent consideration recorded related to the 2011 Ballard acquisition, to be paid up to a maximum of $5.5 million if annual revenue growth targets are met in the years 2012 - 2016 the 2012Max-Viz acquisition, to be paid up to a maximum of $8.0 million if annual revenue targets are met in the years 2013 – 2015 and the 2013 AeroSat acquisition, to be paid up to a maximum of $53.0 million if annual revenue targets are met in the years 2014 and 2015. The calculationchange in the balance of additional purchasecontingent consideration (“Earn Out”)during the nine months ended October 3, 2015 is primarily due to fair value adjustments of $1.6 million, resulting from the re-evaluation of the probability of the achievement of the contingent consideration targets. This adjustment was recorded within SG&A expenses in the statement of operations.
Contingent consideration payments related to the acquisition of AeroSat is as follows:

AeroSat RevenueEarn Out Formula
2014<$30 millionNo Earn Out
>$30 million < $50 million(AeroSat Revenue X 15%) x ((AeroSat Revenue-$30 million)/$20 million)
>$50 millionAeroSat Revenue X 15%
2015<$40 millionNo Earn Out
>$40 million < $60 million(AeroSat Revenue X 15%) x ((AeroSat Revenue-$40 million)/$20 million)
>$60 millionAeroSat Revenue X 15%

2014 were insignificant.

The amounts recorded were calculated using an estimate of the probability of future revenue. The varying contingent payments were then discounted to the present value utilizing a discounted cash flow methodology. The contingent consideration liabilities have no observable Level 1 or Level 2 inputs.

On a Non-recurring Basis:

In accordance with the provisions of ASC Topic 350Intangibles – Goodwill and Other, the Company estimates the fair value of reporting units, utilizing unobservable Level 3 inputs. Level 3 inputs require significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. The Company utilizes a discounted cash flow analysis to estimate the fair value of reporting units utilizing unobservable inputs. The fair value measurement of the reporting unit under the step-one and step-two analysis of the quantitative goodwill impairment test are classified as Level 3 inputs.

Intangible assets that are amortized are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted

16

Table of Contents

projected cash flows with the carrying amount. Should the carrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value. For the Company’s indefinite-lived intangible asset, the impairment test consists of comparing the fair value, determined using the relief from royalty method, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value.

The

At October 3, 2015, the fair value of goodwill and intangible assets classified using Level 3 inputs are comprised of the Max-Viz, Peco, AeroSat, PGA and ATSArmstrong goodwill and intangible assets acquired were measured at fair valueon January 14, 2015, which are currently valued based on management’s best estimates. When the accounting for the acquisition is finalized, these intangible assets will be valued using a discounted cash flow methodology and are classified as Level 3 inputs. As of September 27, 2014, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed.

methodology.

Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments also approximates fair value due to the variable rate feature of these instruments.

As of October 3, 2015, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed.


17) DerivativeRecent Accounting Pronouncements
In May 2014, the Financial Instruments

At September 27, 2014, we had an interest rate swapAccounting Standards Board (“FASB”) issued authoritative guidance regarding revenue recognition. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Therefore, this authoritative guidance will be effective as of the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements and disclosures.

In April 2015, the FASB issued authoritative guidance regarding the presentation of debt issuance costs. The authoritative guidance requires that all costs incurred to issue debt be presented in the balance sheet as a notional amountdirect deduction from the carrying value of approximately $1.5the debt. This authoritative guidance, which will be applied on a retrospective basis, will be effective as of the Company’s first quarter of fiscal 2016, with early adoption permitted. The Company plans to early adopt by the end of fiscal 2015 with no material impact on its consolidated financial statements and disclosures.
18) Acquisitions
Armstrong Aerospace, Inc.
On January 14, 2015, the Company purchased 100% of the equity of Armstrong for $52.6 million entered into on February 6, 2006, relatedin cash. Armstrong, located in Itasca, Illinois, is a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems. Armstrong is included in our Aerospace segment. This transaction was not considered material to the Company’s Series 1999 New York Industrial Revenue Bond, which effectively fixes the rate at 3.99% plus a spread based on the Company’s leverage ratio on this obligation through February 1, 2016.

An interest rate swap entered into on March 19, 2009 related to the Company’s term note issued January 30, 2009, was terminated in the third quarter of 2013 with no significant impact to thefinancial position or results of our operations.

At September 27, 2014 and December 31, 2013, the fair value of the interest rate swap was a liability of $0.1 million which is included in other liabilities (See Note 16 – Fair Value). On September 18, 2014, the Company gave notice of its intention to terminate the interest rate swap in the fourth quarter of 2014 in connection with the redemption of the underlying Series 1999 New York Industrial Revenue bonds (See Note 6 – Long-term Debt and Notes Payable).

Activity in AOCI related to these derivatives is summarized below:

   Nine Months Ended  Three Months Ended 
(In thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Derivative balance at the beginning of the period in AOCI

  $(69 $(142 $(77 $(104

Net deferral in AOCI of derivatives:

     

Net (decrease) increase in fair value of derivatives

   (15  11    31    22  

Tax effect

   4    (4  (12  (8
  

 

 

  

 

 

  

 

 

  

 

 

 
   (11  7    19    14  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net reclassification from AOCI into earnings:

     

Reclassification from AOCI into earnings – interest expense

   45    90    11    20  

Tax effect

   (15  (32  (3  (7
  

 

 

  

 

 

  

 

 

  

 

 

 
   30    58    8    13  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in derivatives for the period

   19    65    27    27  
  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative balance at the end of the period in AOCI

  $(50 $(77 $(50 $(77
  

 

 

  

 

 

  

 

 

  

 

 

 

18) Recent Accounting Pronouncements

The Company’s management has reviewed recent accounting pronouncements issued through the date of the issuance of financial statements. In management’s opinion, none of these new pronouncements apply or will have a material effect on the Company’s financial statements.

19) Acquisitions

Astronics Test Systems

On January 20,February 28, 2014, we entered into an agreement to purchaseour wholly owned subsidiary, ATS, purchased substantially all of the assets and liabilities of the Test and Services Division of EADS North America, Inc. for approximately $69.4 million in cash, including a net working capital adjustment of approximately $16.4 million. On February 28, 2014, the assets were acquired by our wholly owned subsidiary Astronics Test Systems, Inc. (“ATS”). Located in Irvine, California, ATS is a leading provider of highly engineered automatichighly-engineered automated test systems, subsystems and instruments for the semi-conductor, consumersemiconductor, commercial electronics, commercial aerospace and defense industries. ATS provides fully customized testing systems and support services for these markets. It also designs and manufactures test equipment under the test instrument brands known as Racal and Talon. The acquisition will strengthenstrengthens our service offerings and expertise in the test market. This subsidiary is reported as part ofincluded in our Test Systems segment. The purchase price allocation for this acquisition is not finalized as the fair value determination of assets and liabilities is not complete.

A preliminary allocation of purchase price based on appraised fair values was as follows (In thousands):

Accounts Receivable

  $10,593  

Inventory

   59,013  

Other Current Assets

   677  

Fixed Assets

   19,425  

Purchased Intangible Assets

   7,103  

Current Portion of Long Term Debt

   (1,124

Accounts Payable

   (10,777

Accrued Expenses and Other Current Liabilities

   (3,489

Long Term Debt

   (11,976
  

 

 

 

Total Purchase Price

  $69,445  
  

 

 

 

Intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed.has been finalized. Purchased intangible assets are deductible for tax purposes.

PGA Electronic s.a.

On December 5, 2013 we acquired 100%


17

Table of the stock of PGA, a designer and manufacturer of seat motion and lighting systems primarily for business and first class aircraft seats and is Europe’s leading provider of in-flight entertainment/communication systems as well as cabin management systems for private VVIP aircraft. The addition of PGA further diversifies the products and technologies that Astronics offers. The purchase price was approximately $31.3 million for which approximately $9.1 million, net of cash acquired, was paid in cash and the balance paid with 264,168 shares of Astronics stock valued at $51.00 per share. PGA is included in our Aerospace reporting segment.

The allocation of the purchase price paid for PGA is based on fair values of the acquired assets and liabilities assumed of PGA as of December 5, 2013.

The allocation of purchase price based on appraised fair values was as follows (In thousands):

Cash

  $8,699  

Accounts Receivable

   9,015  

Inventory

   12,542  

Other Current Assets

   1,429  

Fixed Assets

   10,741  

Purchased Intangible Assets

   5,592  

Goodwill

   7,440  

Other Assets

   74  

Current Portion of Long Term Debt

   (1,672

Accounts Payable

   (6,179

Accrued Expenses and Other Current Liabilities

   (3,387

Customer Deposits

   (4,601

Long Term Debt

   (5,115

Other Long term Liabilities

   (3,315
  

 

 

 

Total Purchase Price

  $31,263  
  

 

 

 

The amounts allocated to the purchased intangible assets consist of the following:

(In thousands)

  Weighted
Average Life
  Acquisition
Fair Value
 

Trademark

  15 Years  $955  

Technology

  5-10 Years   1,637  

Customer Relationships

  16-19 Years   3,000  
    

 

 

 
    $5,592  
    

 

 

 

Goodwill and other intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed. The goodwill is primarily attributable to expected synergies and the assembled workforce.

Astronics AeroSat Corporation

On October 1, 2013, we acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraft antenna systems for $12.5 million in cash, plus the potential additional purchase consideration of up to $53 million based upon the achievement of certain revenue targets in 2014 and 2015. The addition of AeroSat further diversifies the products and technologies that Astronics offers. The additional contingent purchase consideration is recorded at its estimated fair value of approximately $5.0 million at the date of acquisition based upon the Company’s assessment of the probability of AeroSat achieving the revenue growth targets. Substantially all of the goodwill and purchased intangible assets are expected to be deductible for tax purposes over 15 years. AeroSat is included in our Aerospace reporting segment.

The allocation of the purchase price paid for AeroSat is based on fair values of the acquired assets and liabilities assumed of AeroSat as of October 1, 2013.

The allocation of purchase price based on appraised fair values was as follows (In thousands):

Accounts Receivable

  $1,712  

Inventory

   4,009  

Prepaid Deposits

   687  

Fixed Assets

   448  

Purchased Intangible Assets

   13,800  

Goodwill

   1,610  

Other Assets

   65  

Accounts Payable

   (286

Accrued Expenses

   (543

Customer Deposits

   (4,048
  

 

 

 

Total Purchase Price

  $17,454  
  

 

 

 

The amounts allocated to the purchased intangible assets consist of the following:

(In thousands)

  Weighted
Average Life
  Acquisition
Fair Value
 

Trademark

  10 Years  $800  

Technology

  10 Years   5,300  

Customer Relationships

  12 Years   7,700  
    

 

 

 
    $13,800  
    

 

 

 

Goodwill and other intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed. The goodwill is primarily attributable to expected synergies and the assembled workforce. Purchased intangible assets and goodwill are deductible for tax purposes.

Peco, Inc.

On July 18, 2013, we acquired 100% of the stock of Peco which designs and manufactures highly engineered commercial aerospace interior components and systems for the aerospace industry. The company specializes in Passenger Service Units (PSUs) which incorporate air handling, emergency oxygen, electrical power management and cabin lighting systems. It also manufactures a wide range of fuel access doors that meet stringent strength, fuel sealing and anti-corrosion requirements. The addition of Peco diversifies the products and technologies that Astronics offers. We purchased the outstanding stock of Peco for $136.0 million in cash. Peco is included in our Aerospace reporting segment.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of Peco as if the acquisition took place on January 1, 2012. The pro forma consolidated results include the impact of certain adjustments, including increased interest expense on acquisition debt, amortization of purchased intangible assets and income taxes.

   Nine Months Ended   Three Months Ended 

(in thousands, except earnings per share)

  Sept. 27, 2014
as Reported
   Sept. 28, 2013
Pro Forma
   Sept. 27, 2014
as Reported
   Sept. 28, 2013
Pro Forma
 

Sales

  $494,956    $280,714    $179,442    $93,517  

Net Income

   37,731     23,034     17,080     7,230  

Basic earnings per share

   1.74     1.10     0.79     0.35  

Diluted earnings per share

   1.67     1.05     0.75     0.33  

The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the three months and nine months ended September 28, 2013. In addition, they are not intended to be a projection of future results.

Contents


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, 2013.2014.)

OVERVIEW

Astronics Corporation through our subsidiaries,(“Astronics” or the “Company”) is a leading supplier of products to the global aerospace, defense, consumer electronics and semiconductor industries. Our products and services include advanced, high-performance electrical power generation & distribution systems, lighting & safety systems, avionics products, aircraft structures, engineering design & systems certification and automated test systems.
Our Aerospace segment designs and manufactures advanced, high-performanceproducts for the global aerospace industry. Product lines include lighting and& safety systems, electrical power generation, distribution and distributionmotions systems, aircraft structures, engineering design & systems certification and avionics productsproducts. Our Aerospace customers are the airframe manufacturers (OEM’s) that build aircraft for the global aerospace industrycommercial, military and general aviation markets, suppliers to those OEM’s, aircraft operators such as airlines and branches of the U.S. Department of Defense as well as test, trainingthe Federal Aviation Administration and simulation systems for the military, semi-conductor and consumer electronics markets. On February 28, 2014 we completed the acquisition of substantially all of the assets and liabilities of EADS North America’s Test and Services division (“Astronics Test Systems” or “ATS”) which is included in our Test Systems segment.

airport operators. Our Aerospace segment serves four primary markets. They are the commercial transport, military, business jet and other aerospace markets. The Test Systems segment servesdesigns, develops, manufactures and maintains automated test systems that support the militarysemiconductor and aerospace & defense markets and with the addition of ATS in 2014,markets. In the Test Systems segment, also serves the commercial electronicsAstronics’ products are sold to a global customer base including OEM's and semi-conductor markets.

prime government contractors for both semiconductor and aerospace & defense products.

Our strategy is to invest significantly in engineering, research and development to develop and maintain positions of technical leadership. We expect to leverage those positions to increase our ship set content, growingvalue by developing technologies and capabilities either internally or through acquisition, and using those capabilities to provide innovative solutions to the amount of contentaerospace and volume of products we selldefense, commercial electronics, semiconductor and to selectively acquire businesses with similar technical capabilities.

other markets where our technology can be beneficial.

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, future growth and profitability of the test business is dependent on developing and procuring new and follow-on business in commercial electronics and semi-conductorsemiconductor markets as well as with the military. The nature of our test systemsTest 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.

ACQUISITIONS

On January 14, 2015, the Company purchased 100% of the equity of Armstrong Aerospace, Inc. (“Armstrong”) for $52.6 million in cash. Specializing in connectivity, in-flight entertainment, and electrical power systems, Armstrong is a leading provider of engineering design and certification solutions for commercial aircraft, and is located in Itasca, Illinois. Armstrong is included in our Aerospace segment.
On February 28, 2014, Astronics completed the acquisition of substantially all of the assets and liabilities of EADS North America’s Test and Services division. ATS is located in Irvine, California and is a leading provider of highly engineered automaticautomated test systems, subsystems and instruments for the semi-conductor, consumersemiconductor, commercial electronics, commercial aerospace and defense industries. The purchase price was approximately $69.4 million in cash. The addition of ATS complimentscomplements products and technologies that the Test Systems segment offers.

On December 5, 2013 we completed the acquisition


18

Table of 100% of the stock of PGA Electronic s.a. (“PGA”) located in Chateauroux, France. PGA designs and manufactures seat motion and lighting systems primarily for premium class aircraft seats and is a provider of in-flight entertainment/communication systems as well as cabin management systems for private VVIP aircraft. The addition of PGA further diversifies the products and technologies that Astronics offers. The purchase price was approximately $31.3 million comprised of $9.1 million of cash and the balance paid with 264,168 shares of Astronics stock valued at $51.00/share at the closing date. PGA is included in our Aerospace reporting segment.

On October 1, 2013, we acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraft antenna systems for $12 million in cash, plus contingent purchase consideration of up to a maximum of $53.0 million based upon the achievement of certain revenue levels in 2014 and 2015. The fair value of the estimated contingent consideration at September 27, 2014 was $5.5 million. The addition of AeroSat further diversifies the products and technologies that Astronics offers. AeroSat is included in our Aerospace reporting segment.

On July 18, 2013, we completed the acquisition of 100% of the stock of Peco, Inc. which designs and manufacturers highly engineered commercial aerospace interior components and systems for the aerospace industry. The company specializes in overhead Passenger Service Units (“PSUs”) which incorporate air handling, emergency oxygen, electrical power management and cabin lighting systems. It also manufactures a wide range of fuel access doors that meet stringent strength, fuel sealing and anti-corrosion requirements. The addition of Peco diversifies the products and technologies that Astronics offers. We purchased the outstanding stock of Peco for $136.0 million in cash. Peco is included in our Aerospace reporting segment.

Contents


CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

   Nine Months Ended  Three Months Ended 
(Dollars in thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Sales

  $494,956   $234,481   $179,442   $89,681  

Gross Profit (sales less cost of products sold)

  $124,517   $62,685   $51,310   $23,785  

Gross Profit Percentage

   25.2  26.7  28.6  26.5

Selling, General and Administrative Expenses

  $62,638   $31,291   $25,539   $11,433  

SG&A Expenses as a Percentage of Sales

   12.7  13.3  14.2  12.7

Interest Expense, net of interest income

  $7,183   $2,085   $2,301   $1,605  

Effective Tax Rate

   31.0  28.8  27.2  33.4

Net Earnings

  $37,731   $20,877   $17,080   $7,155  

 Nine Months Ended Three Months Ended
(Dollars in thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
Sales$534,939
 $494,956
 $200,145
 $179,442
Gross Profit (sales less cost of products sold)$149,041
 $124,517
 $59,427
 $51,310
Gross Margin27.9% 25.2% 29.7% 28.6%
Selling, General and Administrative Expenses$66,213
 $62,638
 $22,297
 $25,539
SG&A Expenses as a Percentage of Sales12.4% 12.7% 11.1% 14.2%
Interest Expense, Net of Interest Income$3,600
 $7,183
 $1,243
 $2,301
Effective Tax Rate33.0% 31.0% 31.2% 27.2%
Net Income$53,067
 $37,731
 $24,694
 $17,080
A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.

Financial results include the effect of four business acquisitions Astronics completed from July 2013 through the end of the 2014 first quarter, of which three were in its Aerospace segment and one was in the Test Systems segment.

CONSOLIDATED QUARTERLY RESULTS

Consolidated sales for the third quarter of 2014 increased 100.1% to2015 were $200.1 million, up from $179.4 million compared with $89.7 million for the same period last year. The 2015 third quarter included $6.5 million in sales from Armstrong Aerospace, segmentInc. (“Armstrong”), acquired on January 14, 2015. Organic sales for the quarter increased $34.7$14.2 million, to $122.2 millionor 7.9%, and were achieved with increases across both the Aerospace and Test Systems segment sales increased $55.1 million to $57.2 million. The 2014 third quarter included sales of $74.1 million from businesses acquired after September 28, 2013 (see Notes to Consolidated Condensed Financial Statements, Note 19), while organic sales increased $15.6 million, or 17.4% to $105.3 million.

segments.

Consolidated cost of products sold increased $62.2$12.6 million to $128.1$140.7 million in the third quarter of 2015 from $128.1 million for the same period last year, due largely to the incremental costs of products sold on increased organic sales volumes. The acquisition of Armstrong resulted in an incremental $5.8 million in cost of products sold in the third quarter of 2015. Engineering and development (“E&D”) costs were $22.5 million in the third quarter of 2015, including $1.8 million for Armstrong. E&D costs in last year’s third quarter were $19.1 million. As a percent of sales, E&D was 11.3% and 10.7% in the third quarters of 2015 and 2014, respectively. The third quarter of 2014 included $1.3 million of inventory fair value step-up expense of acquired businesses compared with $0.3 million in the third quarter of 2015. Consolidated cost of products sold as a percentage of sales was 70.3% in the third quarter of 2015 compared with 71.4% in the third quarter of 2014.
Selling, general and administrative (“SG&A”) expenses were $22.3 million, or 11.1% of sales, in the third quarter of 2015 compared with $25.5 million, or 14.2% of sales, in the same period last year. The third quarter of 2014 included intangible asset amortization expense related to Astronics Test Systems, Inc. (acquired in February 2014) of $5.3 million, compared with $0.3 million in the third quarter of 2015. This decrease was partially offset by the incremental SG&A costs of Armstrong, which added approximately $1.4 million to SG&A in the third quarter of 2015, including $0.5 million of amortization expense for acquired intangible assets of that business.
Diluted earnings per share for the 2015 third quarter were $0.94 compared with $0.65 in the prior year period, and increase of 44.6%.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated sales for the first nine months of 2015 increased by $40.0 million, or 8.1%, to $534.9 million from $65.9$494.9 million for the same period last year. The acquisition of Armstrong contributed $20.3 million to consolidated sales, while consolidated organic sales increased $19.7 million, or 4.0%.
Consolidated cost of products sold increased $15.5 million to $385.9 million in the first nine months of 2015 from $370.4 million for the same period last year.  The increase was due primarily to the incremental cost of products sold associated with Armstrong of $16.2 million, incremental costs of products sold on increased organic sales volumes and costincreased E&D costs offset by lower step-up expense when compared to the same period last year.  E&D costs were 12.4% of sales, or $66.1 million, which included $4.8 million for Armstrong, compared with $57.1 million, or 11.5% of sales, in the prior year’s first nine months.  Cost of products sold associated with sales from businesses acquired afterin the third quarterfirst nine months of 2013 totaling $51.9 million.2014 included $18.6 million related to inventory step-up expense, as compared to $1.0 million in the first nine months of 2015. Consolidated cost of products sold as a percentage of sales was 71.4%72.1% in the third quarterfirst nine months of 20142015 compared with 73.5%74.8% in the third quarterfirst nine months of 2013. Margin leverage achieved from increased organic sales volume was offset by costs2014.

19

Table of approximately $1.3 million relating to the fair value step-up of inventory from acquired businesses, increased warranty costs of $2.4 million and increased engineering and development (“E&D”) costs. E&D costs were $19.1 million in the third quarter of 2014, including $5.1 million for businesses acquired after the third quarter of 2013. E&D costs in last year’s third quarter were $12.4 million.

Contents


Selling, general and administrative (“SG&A”) expenses were $25.5$66.2 million, or 14.2%12.4% of sales, in the third quarterfirst nine months of 20142015 compared with $11.4$62.6 million, or 12.7% of sales, in the same period last year. The increase was due primarily to the incremental SG&A costs of acquired businesses,Armstrong, which added $12.5approximately $4.1 million to SG&A in the third quarterfirst nine months of 2014 including $5.7 million2015. Organically, higher SG&A expense reflected increased headcount and compensation costs to support growth. These increases were partially offset by a decrease of amortization expense for acquired intangible assets of those acquired businesses.

ATS of $4.4 million, and a $1.1 million reduction in the contingent consideration liability related to prior acquisitions.

Diluted earnings per share for the first nine months of 2015 were $2.02 compared with $1.45 for the same period last year period, an increase of 39.3%.
The effective tax rates were approximately 27.2%33.0% and 33.4%31.0% for the nine months and 31.2% and 27.2% for the three months ended October 3, 2015 and September 27, 2014, and September 28, 2013, respectively. The effective tax rate for the third quarter and first nine months of 2015 and 2014 waswere lower than the federal statutory rate due to the domestic production activity deduction, domestic research and development tax credits and lower effective tax rates on foreign income and the recognition of $0.9 million in domestic R&D tax credits related to prior years. The effective tax rate for the three months ended September 28, 2013 was impacted primarily by the recognition of approximately $0.2 million in domestic 2013 R&D tax credits.

CONSOLIDATED YEAR-TO-DATE RESULTS

Consolidated sales for the first nine months of 2014 increased by 111.1% to $495.0 million compared with $234.5 million for the same period last year, an increase of $260.5 million. Aerospace sales increased $138.3 million to $366.1 million and Test Systems sales increased $122.2 million to $128.8 million. For the first nine months of 2014, sales from acquired businesses were $226.8 million and organic sales increased $33.7 million, or 14.4% to $268.2 million.

Consolidated cost of products sold increased $198.6 million to $370.4 million in the first nine months of 2014 from $171.8 million for the same period last year. The increase was due to the cost of products sold associated with increased organic sales volumes and the cost of products sold associated with sales from acquired businesses totaling $175.9 million. Consolidated cost of products sold as a percentage of sales was 74.8% in the first nine months of 2014 compared with 73.3% in the first nine months of 2013. Margin leverage achieved from increased organic sales volume was offset by costs of $18.6 million relating to the fair value step-up of inventory from acquired businesses, increased warranty costs of $3.1 million and increased E&D costs. Additionally, we recorded charges totaling $1.7 million relating to work force reductions as we realigned our Test Systems segment personnel. Total E&D costs were $57.1 million in the first nine months of 2014, including $15.1 million from businesses acquired after last year’s third quarter. E&D expense in last year’s first nine months was $38.6 million.

Selling, general and administrative (“SG&A”) expenses were $62.6 million, or 12.7% of sales, in the first nine months of 2014 compared with $31.3 million, or 13.3% of sales, in the same period last year. The increase was due primarily to the incremental SG&A costs of acquired businesses, which added $30.0 million to SG&A in the first nine months of 2014 including $9.8 million of amortization expense for acquired intangible assets.

The effective tax rates were approximately 31.0% and 28.8% for the nine months ended September 27, 2014 and September 28, 2013, respectively. The effective tax rate for the first nine months of 2014 was lower than the federal statutory rate, due to the domestic production activity deduction, lower effective tax rates on foreign income and the recognition of $0.9 million in domestic R&D tax credits related to prior years. The effective tax rate for the nine months of 2013 was impacted primarily by the domestic production activity deduction, the recognition of approximately $1.1 million in domestic 2012 R&D tax credits and $0.6 million in domestic 2013 R&D tax credits. Assuming that the R&D tax credit is not extended we expect our effective tax rate for the full year of 2014 to be in the range of 31% to 32%.

EARNINGS PER SHARE

income.


For both the three and nine months ended September 27, 2014,October 3, 2015, the earnings per share increase, as compared to the respective periods in the prior year,is due primarily to the increasein net income. Earnings per share for all periods presented have been calculated reflecting
We expect consolidated sales in 2015 to be between $690 million and $705 million. Approximately $553 million to $564 million of forecasted 2015 revenue is expected from the effectAerospace segment, while approximately $137 million to $141 million of the one-for-five Class B share distributionforecasted revenue is expected from the Test Systems segment.
Our consolidated backlog at October 3, 2015 was $297.0 million, of which $147.9 million is expected to ship in 2015.
We expect our capital equipment spending in 2015 to be in the range of $20 million to $25 million.
The Company is establishing initial revenue guidance for shareholders2016 of record on September 5, 2014.

$690 million to $750 million. The Aerospace segment is expected to generate $572 million to $616 million of revenue, and the Test Systems segment is expected to generate $118 million to $134 million.

SEGMENT RESULTS OF OPERATIONS AND OUTLOOK

Operating profit, as presented below, is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate expenses. Cost of products sold and other operating expenses are directly identifiable to the respective segment. Operating profit is reconciled to earnings before income taxes in Note 15 of the Notes to Consolidated Condensed Financial Statements included in this report.


20


AEROSPACE SEGMENT

   Nine Months Ended  Three Months Ended 
(In thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Sales

  $366,128   $227,870   $122,233   $87,525  

Operating profit

  $60,308   $41,112   $22,057   $15,377  

Operating Margin

   16.5  18.0  18.0  17.6

   September 27,
2014
   December 31,
2013
 

Total Assets

  $454,322    $428,619  

Backlog

  $221,797    $207,101  

Aerospace Sales by Market  Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Commercial Transport

  $293,051    $161,806    $97,260    $64,580  

Military

   31,589     33,400     10,279     12,702  

Business Jet

   28,740     22,336     10,565     6,705  

Other

   12,748     10,328     4,129     3,538  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $366,128    $227,870    $122,233    $87,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

Aerospace Sales by Product Line

  Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Electrical Power & Motion

  $188,368    $133,793    $61,885    $47,142  

Lighting & Safety

   111,702     67,218     37,104     30,009  

Avionics

   40,601     13,553     15,351     3,857  

Structures

   10,868     2,801     3,526     2,801  

Other

   14,589     10,505     4,367     3,716  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $366,128    $227,870    $122,233    $87,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3, 2015 September 27, 2014 October 3, 2015 September 27, 2014
Sales$413,250
 $366,128
 $138,728
 $122,233
Operating Profit$66,728
 $60,308
 $23,055
 $22,057
Operating Margin16.1% 16.5% 16.6% 18.0%
        
Aerospace Sales by Market       
(In thousands)       
Commercial Transport$342,839
 $293,051
 $115,016
 $97,260
Military31,929
 31,589
 12,102
 10,279
Business Jet25,196
 28,740
 8,043
 10,565
Other13,286
 12,748
 3,567
 4,129
 $413,250

$366,128
 $138,728
 $122,233
Aerospace Sales by Product Line       
(In thousands)       
Electrical Power & Motion$208,578
 $188,368
 $71,164
 $61,885
Lighting & Safety119,949
 111,702
 39,965
 37,104
Avionics41,628
 40,601
 12,598
 15,351
Systems Certification16,465
 
 6,120
 
Structures12,418
 10,868
 4,388
 3,526
Other14,212
 14,589
 4,493
 4,367
 $413,250
 $366,128
 $138,728
 $122,233
(In thousands)October 3, 2015 December 31, 2014
Total Assets$531,136
 $468,481
Backlog$227,343
 $223,769
AEROSPACE QUARTERLY RESULTS

Aerospace segment sales increased by $34.7$16.5 million, or 39.7%13.5%, when compared with the prior year’s third quarter to $122.2$138.7 million. Organic Aerospace sales grew 18.4%8.2%, or $16.1 million, and sales$10.0 million. Sales from acquired businessesArmstrong added $18.6$6.5 million.

Sales togrowth in the Commercial Transport marketthird quarter of 2015 was driven by increased $32.7 million, of which $14.0 million was related to the acquired businesses with the remaining increase primarily related to higher organic sales of Electrical Power & Motion and Lighting & Safety products. Organicsales, which were up $9.3 million or 15%.  Sales of in-seat power products grew at an even stronger rate, helping to offset reduced sales of seat motion products in this product line.  The Electrical Power & Motion productsproduct lines are sold mostly to the Commercial Transport marketcustomers, with lesser sales to Business Jets and Military customers.  Sales of Lighting & Safety products increased approximately $9.6$2.9 million, as global demand for passenger power systems continued to be strong. Organic Lighting and Safety producthigher production rates of Commercial Transport customers were complemented by a number of aftermarket retrofit sales to the Commercial transport market increased by $7.4 million due to higher demand forof passenger service units, and aircraft lighting products.

Military sales decreased $2.4 million when compared with the prior year’sor PSUs.  The 2015 third quarter dueincluded $6.1 million of Systems Certification sales from Armstrong, which was acquired in January 2015.  These gains offset a reduction of $2.7 million in the Avionics product lines, as the Company continued to reduced military spending as compareddeal with component problems from a certain supplier.  Sales in this product line are expected to rebound somewhat in the prior year thirdfourth quarter.

Sales to the Business Jet market increased $3.9 million when compared with last year’s third quarter. Sales from the acquired businesses were $4.7 million and were partially offset by lower organic sales to this market.

Aerospace operating profit for the third quarter of 20142015 was $22.1$23.1 million, or 18.0%16.6% of sales, compared with $15.4 million, or 17.6% of sales, in the same period last year. Approximately $2.0 million in operating profit was related to the acquired aerospace businesses. Operating leverage gained on volume for the organic business was partially offset by approximately $1.6 million of higher organic E&D costs and an increase of warranty costs of $2.3 million. Aerospace SG&A expense increased $4.4 million in the third quarter of 2014 as compared with 2013. The increase was due primarily to the incremental SG&A of the acquired businesses which added $3.2 million and increased amortization expense for acquired intangible assets.

AEROSPACE YEAR-TO-DATE RESULTS

Year to date Aerospace segment sales increased by $138.3 million, or 60.7%, to $366.1 million compared with the prior year’s first nine months. Organic sales grew 15.7%, or $35.7 million. Sales from acquired businesses were $102.6 million.

Sales to the Commercial Transport market increased $131.2 million. Organic sales to this market increased $43.6 million and sales from acquired businesses added $87.6 million. The organic sales increase to this market was primarily from Electrical Power & Motion products which increased approximately $32.4 million as global demand for passenger power systems continued to be strong. Additionally, organic sales of Lighting and Safety products to this market increased approximately $9.7 million.

Military aircraft sales decreased $1.8 million when compared with the first nine months of 2013. The acquired businesses added $1.8 million while organic sales were $3.6 million lower due to reduced military spending.

Sales to the Business Jet market increased $6.4 million when compared with last year’s first nine months. The acquired businesses added $8.6 million in sales to this market, more than offsetting lower organic sales which decreased $2.2 million, primarily from the Lighting & Safety and Electrical Power & Motion product lines.

The $2.4 million increase in the first nine months of 2014 to Other markets reflected approximately $4.5 million from acquired businesses offset by a $ 2.1 million decrease of organic sales.

Aerospace operating profit for the first nine months of 2014 was $60.3 million, or 16.5% of sales, compared with $41.1$22.1 million, or 18.0% of sales, in the same period last year. Operating margins were negatively affected by increased E&D spending and lower operating margin from the Armstrong business, partially offset by operating leverage gained on increased organic sales volumes. Organic Aerospace E&D costs increased $1.7 million compared with last year’s third quarter. Incremental SG&A from Armstrong was $1.4 million, including $0.5 million of purchased intangible asset amortization expense for acquired intangible assets.



21

Table of Contents

AEROSPACE YEAR-TO-DATE RESULTS
Aerospace segment sales increased by $47.1 million, or 12.9%, when compared with the prior year’s first nine months to $413.3 million. Organic sales grew 7.3%, or $26.8 million, and sales from Armstrong added $20.3 million.
Aerospace sales growth year-to-date was driven by increased Electrical Power & Motion sales, which were up $20.2 million or 10.7%.  This product group is dominated by in-seat power products, which were up 18% through three quarters.  The acquired businesses contributed approximatelyLighting & Safety product line was up $8.2 million, inor 7.4%, on a year-to-date basis, based on higher production rates of Commercial Transport aircraft and greater retrofit activity.  Systems Certification sales were up $16.5 million due to the January acquisition of Armstrong.  The other Aerospace product lines made up the remainder of the increase. 
Aerospace operating profit for the first nine months of 2015 was $66.7 million, or 16.1% of sales, compared with $60.3 million, or 16.5% of sales, in the period. Leverage achieved from highersame period last year. Operating leverage gained on increased volume for the organic sales volumebusiness was partially offset by increasedhigher organic E&D costs of approximately $3.5 million and an increase of warranty costs of $2.8$3.9 million. Additionally impacting year-to date aerospace operating margins, cost of products sold had approximately $2.6 million of expense related to the fair value step-up of inventory from acquired businesses. Aerospace SG&A expense increased $16.3$5.4 million in the first nine months of 2015 as compared with the corresponding period in 2014. Incremental SG&A from Armstrong was $4.1 million, including $1.6 million of purchased intangible asset amortization expense for acquired intangible assets. The first nine months of 2014 as compared with 2013. The increase was due primarily to the incremental SG&Aincluded inventory step-up costs of the acquired businesses which added $15.6 million.

$2.6 million that reduced normal operating margins for that period.

AEROSPACE OUTLOOK

2014 Outlook for Aerospace –

We expect 20142015 sales for our Aerospace segment to be in the range of $485$553 million to $490$564 million. The Aerospace segment’s backlog at the end of the third quarter of 20142015 was $221.8$227.3 million with approximately $120.5$128.8 million expected to be shipped over the remaining part of 20142015 and $202.7$210.3 million is expected to ship over the next 12 months.

TEST SYSTEMS SEGMENT

   Nine Months Ended  Three Months Ended 
(In thousands)  Sept. 27,
2014
  Sept. 28,
2013
  Sept. 27,
2014
  Sept. 28,
2013
 

Sales

  $129,065   $7,207   $57,209   $2,660  

Less Intersegment Sales

   (237  (596  —      (504
  

 

 

  

 

 

  

 

 

  

 

 

 

Net Sales

   128,828    6,611    57,209    2,156  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit (loss)

  $8,034   $(2,880 $5,699   $(745

Operating Margin

   6.2  (40.0)%   10.0  (28.0)% 

   September 27,
2014
   December 31,
2013
 

Total Assets

  $114,551    $11,035  

Backlog

  $79,648    $7,062  

Test Systems Sales by Market

  Nine Months Ended   Three Months Ended 
(In thousands)  Sept. 27,
2014
   Sept. 28,
2013
   Sept. 27,
2014
   Sept. 28,
2013
 

Commercial Electronics

  $106,384    $—      $48,927    $—    

Military

   22,444     6,611     8,282     2,156  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $128,828    $6,611    $57,209    $2,156  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Nine Months Ended Three Months Ended
(In thousands)October 3, 2015 September 27, 2014 October 3, 2015 September 27, 2014
Sales$121,744
 $129,065
 $61,417
 $57,209
Less Intersegment Sales(55) (237) 
 
Net Sales$121,689
 $128,828
 $61,417
 $57,209
Operating profit (loss)$24,618
 $8,034
 $16,980
 $5,699
Operating Margin20.2% 6.2% 27.6% 10.0%
        
Test Systems Sales by Market       
(In thousands)       
Semiconductor$86,224
 $106,384
 $49,966
 $48,927
Aerospace & Defense35,465
 22,444
 11,451
 8,282
 $121,689
 $128,828
 $61,417
 $57,209
(In thousands)October 3, 2015 December 31, 2014
Total Assets$87,909
 $69,247
Backlog$69,705
 $146,964

TEST SYSTEMS QUARTERLY RESULTS

Sales in the 2014 third quarter of 2015 increased $55.1$4.2 million, or 7.4%, to $57.2$61.4 million compared with sales of $2.2$57.2 million for2014. Sales to the Semiconductor market increased $1.0 million compared with the same period in 2013. The incremental2014 and Aerospace & Defense sales increased $3.2 million.

22

Table of Contents

Operating profit was $17.0 million, or 27.6% of sales, compared with $5.7 million, or 10.0% of sales, in last year’s third quarter, due in part to bothoperating leverage on the Commercial Electronics and Military marketssales increase. Amortization expense associated with acquisitions was from Astronics Test Systems (“ATS”), acquired on February 28, 2014. Sales from the acquired business were $55.5$0.3 million in the 2015 third quarter. Last year's third quarter included non-recurring purchase accounting related inventory step-up costs of 2014; organic test systems sales were$1.0 million that reduced normal operating margins for that period, $5.3 million in amortization expense related to the ATS acquisition, and $1.7 million for the quarter. Sales from ATS’s largest customer were $45.6 million in the third quarter.

Operating profit for the third quarter of 2014 was $5.7 million comparedassociated with an operating loss of $0.7 million in the same period last year. The improvement was a result of the operating profit from the acquired ATS business and charges totaling $1.7 million relating to work force reductions as we realigned segment personnel. Test Systems third quarter operating profit was negatively impacted by $1.0E&D costs were approximately $3.2 million relating to the expensing of the fair value step-up of inventory from the acquired ATS business. Additionally, amortization expense in the third quarter relating to the acquisition was $5.3 million. We expect amortization expenseof 2015 and $3.3 million in the fourth quarter will be lower as we have liquidated a substantial amount of our acquired backlog and the value associated with it. We expect fourth quarter amortization expense for the test systems segment to be in the range of $0.5 million to $1.0 million.

prior-year period.

TEST SYSTEMS YEAR-TO-DATE RESULTS

Sales in the first nine months of 2015 decreased 5.5% to $121.7 million compared with sales of $128.8 million for the same period in 2014, were up $122.2due to lower sales to the Semiconductor market. Sales to the Semiconductor market decreased $20.1 million compared with the same period in 2014, which was partially offset by increased sales of $13.0 million to $128.8the Aerospace & Defense market.
Operating profit was $24.6 million, overor 20.2% of sales, compared with $8.0 million, or 6.2% of sales, in the prior year period. Incremental sales to both the Commercial Electronics and Military markets from thefirst nine months of 2014. The acquisition of ATS droveadded approximately $1.6 million in SG&A expense in the growth. Year-to-date sales fromfirst nine months of 2015. The first nine months of 2014 included non-recurring purchase accounting related inventory step-up costs of $16.0 million, and $1.7 million of charges related to work force reductions as the acquired business were $124.3 million. Year-to-date sales to ATS’s largest customer were $99.5 million.

Operating profit forCompany realigned segment personnel which impacted operating margin. Additionally, amortization expense in the first nine months of 2014 related to the ATS acquisition was $8.0approximately $5.4 million compared with an operating loss of $2.9$1.0 million in the same period last year. Allfirst nine months of the improvement was due to the margin provided by the ATS acquisition. Included in the year-to date cost of products sold was the impact of $16.0 million related to the fair value step-up of acquired inventory. Incremental SG&A costs of the acquired business was approximately $14.5 million and incremental2015. E&D costs were approximately $6.4 million.

$8.8 million in the first nine months of 2015, and $8.5 million in the prior-year period.

TEST SYSTEMS OUTLOOK

We expect sales for the Test Systems segment for 20142015 to be in the range of $160$137 million to $165$141 million. The Test Systems segment’s backlog at the end of the thirdsecond quarter of 20142015 was $79.6$69.7 million with approximately $37.7$19.1 million expected to be shipped over the remaining part of 20142015 and approximately $59.8$52.6 million scheduled to ship over the next 12 months. By the end of the fourth quarter we expect to have delivered the final unit under our current contract with our major customer. We are optimistic that there will be follow on orders from this customer however it is likely that any follow on orders, if any may not be received by the end of 2014.

LIQUIDITY AND CAPITAL RESOURCES

Operations:

Operating Activities:
Cash provided by operating activities totaled $68.5$43.2 million for the first nine months of 2014,2015, as compared with $34.1$68.5 million during the same period in 2013.2014. Cash flow from operating activities increaseddecreased primarily due to higher net income as adjusted for non-cash expenses and by the impact of decreasesincreases in net operating assets for the first nine months of 20142015 when compared with the first nine months of 2013.

2014.

Investing Activities:

Cash used for investing activities was $100.0$71.1 million for the first nine months of 20142015 compared with $140.7$100.0 million used in the same period of 2013.2014. Cash used for the acquisition of ATSArmstrong in February of 2014January 2015 was $69.4$52.6 million. Cash used for capital expenditures of $30.0 million related primarily to the acquisition and modifications of the new buildings in Clackamas, Oregon of $19.0 million as of the end of the third quarter.was $15.9 million. The Company expects capital spending in 20142015 to be in the range of $44$20 million to $47$25 million.

Financing Activities:

The primary financing activities in 20142015 relate to borrowings on our senior credit facility to fund the acquisition of Armstrong.
On February 28, 2014, in connection with the funding of ATS, and principal payments against our outstanding balancethe Company amended its existing credit facility (the “Original Facility”) to exercise its option to increase the revolving credit commitment. The Credit Agreement provided for a $125 million five-year revolving credit facility maturing on the senior facility. In February 2014 we borrowedJune 30, 2018, of which $58.0 million was drawn to fundfinance the acquisition of ATS. Year-to-date through the end of the third quarter of 2014 we made principal payments of $59.3 million, primarily from funds generated by operations. In 2013 we borrowed $190.0 million to fund the acquisitions of PECO, AeroSat and PGA and made principal payments of $21.3 million through the third quarter of 2013.

acquisition.

On September 26, 2014, we modified and extended our existing credit facility (the “Original Facility”)the Original Facility by entering into the Fourth Amended and Restated Credit Agreement (the “Agreement”). On the closing date, there were $180.5 million of term loans outstanding, $6 million of revolving loans outstanding and letters of credit with a face amount of $8.7 million outstanding under the Original Facility. Pursuant to the Agreement, the Original Facility was replaced with a $350 million revolving credit line with the option to increase the line by up to $150 million. The outstanding balances in the Original Facility were rolled into the Agreement on the date of entry. In addition, the maturity date of the loans under the Agreement is now September 26, 2019.

Covenants in


23

Table of Contents

At October 3, 2015, there was $193.0 million outstanding on the Agreement have been modifiedrevolving credit facility and there remains $155.9 million available, net of outstanding letters of credit. The credit facility allocates up to where$20 million of the $350 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At October 3, 2015, outstanding letters of credit totaled $1.1 million.
The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the agreement)Agreement) is 3.5 to 1, subjectincreasing to an increase of 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one, threeone-, three- or six monthsix-month Libor plus between 137.5 basis points and 225 basis points based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between 17.5 basis points and 35 basis points on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The fixed charge coverage ratio under the Original Facility has beenwas replaced with a minimum interest coverage ratio EBITDA (as defined in the agreement)(EBITDA to interest expenseexpense) of 3.0 to 1 for the term of the Agreement.

EBITDA as defined in the agreement as the sum of consolidated net income plus fees and expenses incurred in connection with a permitted acquisition for financing to the extent reducing consolidated net income, consolidated interest expense, provisions for taxes based on income, total depreciation expense, total amortization expense, other non-cash items reducing consolidated net income and any reduction of consolidated net income resulting from the fair valuation adjustment to inventory cost in connection with any permitted acquisition, less other non-cash items increasing consolidated net income for such period. Extraordinary gains, whether cash or non-cash, and earn-out adjustments in the purchase price for permitted acquisitions shall not be included in the calculation of EBITDA.

At September 27, 2014,October 3, 2015, the Company was in compliance with all of the covenants pursuant to the credit facility. Our calculated leverage ratio was 1.56:1 and our calculated minimum interest coverage ratio was 15.05:1.

39.6 to 1 and the leverage ratio was 1.5 to 1 at October 3, 2015.

The Company’s cash needs for working capital, debt service and capital equipment during 20142015 are expected to be met by cash flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.

In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, give the agentAgent the option to declare all such amounts immediately due and payable.

BACKLOG

The Company’s backlog at September 27, 2014October 3, 2015 was $301.4$297.0 million compared with $214.2$370.7 million at December 31, 20132014 and $168.2$301.4 million at September 28, 2013.

27, 2014.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table represents contractual obligations as of September 27, 2014:

   Payments Due by Period 
(In thousands)  Total   2014   2015-2016   2017-2018   After 2018 

Long-term Debt

  $212,643    $8,294    $5,496    $5,462    $193,391  

Purchase Obligations

   57,181     41,607     15,283     291     —    

Interest on Long-term Debt

   23,124     1,230     9,383     8,901     3,610  

Supplemental Retirement Plan and Post Retirement Obligations

   14,802     99     782     782     13,139  

Operating Leases

   11,313     1,070     4,962     3,642     1,639  

Other Long-term Liabilities

   6,268     2     5,938     264     64  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Contractual Obligations

  $325,331    $52,302    $41,844    $19,342    $211,843  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

October 3, 2015:

 Payments Due by Period
(In thousands)Total 2015 2016-2017 2018-2019 After 2019
Long-term Debt$208,534
 $639
 $5,351
 $197,579
 $4,965
Purchase Obligations94,013
 63,535
 29,972
 506
 
Interest on Long-term Debt19,147
 3,697
 8,238
 6,881
 331
Supplemental Retirement Plan and Post Retirement Obligations22,481
 101
 807
 804
 20,769
Operating Leases8,938
 1,329
 4,267
 3,194
 148
Other Long-term Liabilities310
 17
 195
 26
 72
Total Contractual Obligations$353,423
 $69,318
 $48,830
 $208,990
 $26,285
Notes to Contractual Obligations Table

Purchase Obligations Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.

Long-Term Debt See Part 1 Financial Information, Item 1 Financial Statements, Note 6, Long-Term Debt and Notes Payable included in this report.

Operating Leases Operating lease obligations are primarily related to the Company's facility leases for our AES, AeroSat, Ballard, DME, Max-Viz, Peco and Luminescent Systems Canada.

leases.



24


MARKET RISK

The Company believes that there have been no material changes in the current year regarding the market risk information for its exposure to interest rate fluctuations. Although the majority of our sales, expenses and cash flows are transacted in U.S. dollars, we have exposure to changes in foreign currency exchange rates related to the Euro and the Canadian dollar. The Company believes that the impact of changes in foreign currency exchange rates in 20142015 have not been significant.

CRITICAL ACCOUNTING POLICIES

Refer to the Company’s annual report on Form 10-K for the year ended December 31, 20132014 for a complete discussion of the Company’s critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes theauthoritative guidance regarding revenue recognition. The comprehensive new standard will supersede existing revenue recognition requirements in ASC 605, Revenue Recognition. This ASU requiresguidance and require revenue recognition to depict the transfer ofbe recognized when promised goods or services are transferred to customers in an amountamounts that reflectsreflect the consideration to which the entitycompany expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures aboutAdoption of the nature, amount,new rules could affect the timing and uncertainty of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and cash flows arising from customer contracts, including significant judgmentsone requiring prospective application of the new standard with disclosure of results under old standards. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and assets recognized fromannual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Therefore, this authoritative guidance will be effective as of the Company’s first quarter of fiscal 2018. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements and disclosures.
In April 2015, the FASB issued authoritative guidance regarding the presentation of debt issuance costs. The authoritative guidance requires that all costs incurred to obtain or fulfillissue debt be presented in the balance sheet as a contract.direct deduction from the carrying value of the debt. This ASU canauthoritative guidance, which will be applied using oneon a retrospective basis, will be effective as of two prescribed retrospective methods, and nothe Company’s first quarter of fiscal 2016, with early adoption is permitted. The provisions of this ASU are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. We are currently evaluating the adoption of this standard 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 identifiedCompany plans to early adopt by the useend of thefiscal 2015 with no material impact on its consolidated financial statements and disclosures.

FORWARD-LOOKING STATEMENTS
Information included in this report that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and wordsare subject to several factors, risks and uncertainties, the impact or occurrence of similar import. Readers are cautioned not to place undue reliance on these forward looking statements as various uncertainties and riskswhich could cause actual results to differ materially from those anticipatedthe expected results described in thesethe forward-looking statements. These uncertainties and risks include the success of the Company with effectively executing its plans; successfully integrating its acquisitions; 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. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Market Risk in Item 2, above.


Item 4. Controls and Procedures

a)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 September 27, 2014.October 3, 2015. 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 September 27, 2014.October 3, 2015.


b)Changes in Internal Control over Financial Reporting - There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


25


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. However, the results of these matters cannot be predicted with certainty. Should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could be materially adversely affected.

We are


On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a defendant in an action filedStatement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AES sold, marketed and brought into use in Germany (Lufthansa Technik AG v. Astronics Advanced Electronics Systems Corp.) relatinga power supply system which infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an allegationestimate of patentdamages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement. The damages sought include injunctive relief, as well as monetary damages. We dispute the allegation and are vigorously defending ourselves in this action. We have filed a nullity action with the Federal Patent Court in Munich, Germany, requesting the court to revoke the German part of the European patent that is subject to the claim. In November 2011,

On February 6, 2015, the Regional State Court of Manheim,Mannheim, Germany issued an interimrendered its decision to the effect that the infringement litigation proceedingspatent was infringed. The judgment does not require AES to recall products which are already installed in aircraft or have been sold to other end users. On July 15, 2015, Lufthansa advised AES of their intention to enforce the accounting provisions of the decision, which require AES to provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. AES is currently evaluating the information requirements. Additionally, if Lufthansa provides the additional required bank guarantees specified in the decision, the Company may be stayed untilrequired to cease distribution of infringing products in Germany (if any). No such bank guarantee has been issued to date regarding this provision.

The Company appealed and believes it has valid defenses to refute the Federal Patent Court decidesdecision. The appeal process is estimated to extend up to two years. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the concurrent nullity action. In February 2014, the Federal Patent Court issued a written judgment upholding the validity of a portion of the patent. This judgment is being appealed by both litigants. However, asappeals process. As a result, the judgment proclaimed by the Federal Patent Court the stay of the infringement litigation proceedings is no longer effective. A hearing has been scheduled in November 2014. The process thereafter could take 2 to 3 years depending on the outcome of the Infringement case and if the Company should chose to appeal. At this time we are unabledo not currently have sufficient information to provide a reasonablean estimate of ourAES’s potential liability or the potential amount of lossexposure related to this action, if any. Ifmatter. As loss exposure is neither probable nor estimable at this time, the outcome ofCompany has not recorded any liability with respect to this litigation as of October 3, 2015.
On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in this action alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is adversebased on technology similar to us, our resultsthat involved in the German action. However, the U.S. court will not be bound by the ultimate determination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and financial condition could be materially affected.

intends to contest this matter vigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of October 3, 2015.

Other than this proceeding, we are not party to any significant pending legal proceedings that management believes will result in material adverse effect on our financial condition or results of operations.

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, 2013,2014, which could materially affect our business, financial condition or results of operations. The risks described in our Annual Report on 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.

The Company has a significant concentration of business with three customers, each in excess of 10% of consolidated sales, where a significant reduction in sales to any one of these customers would negatively impact our sales and earnings. Combined sales to these customers were approximately 55.3% and 51.1% of consolidated revenue during the three and nine month periods ending September 27, 2014, respectively.

Our Test Systems Segment is highly dependent on winning large contract awards in both the military and commercial markets. Our future revenue stream and profits may be impacted significantly if we are not successful in developing new customers or are not selected for new programs by existing customers.

Our Test Systems segment has a high concentration of sales to one customer, it is anticipated that the deliveries under the current contract with that customer will conclude by the end of 2014. If we are unable to procure follow on orders from that customer or replace the business activity with new customers our future earnings will be negatively impacted.

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

(c) The following table summarizes the Company’s purchases

None


26

Table of its common stock for the quarter ended September 27, 2014:

Period 

(a)

Total number
of shares
Purchased

  (b)
Average
Price Paid
per Share
  

(c)

Total number of
shares Purchased
as part of Publicly
Announced Plans
or Programs

  (d)
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 

June 28, 2014 – July 26, 2014(1)

  320   $54.02    —      —    

July 27, 2014 – August 23, 2014

  —      —      —      —    

August 24, 2014 – September 27, 2014

  —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

 

Total

  320   $54.02    —      —    
 

 

 

  

 

 

  

 

 

  

 

 

 

In connection with the exercise of stock options, we accept, from time to time, delivery of shares to pay the exercise price of stock options.

(1)On August 19, 2014 we accepted delivery of 320 shares at $54.02 in connection with the exercise of stock options.
Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. 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
Exhibit 101.1* Instance Document
Exhibit 101.2* Schema Document
Exhibit 101.3* Calculation Linkbase Document
Exhibit 101.4* Labels Linkbase Document
Exhibit 101.5* Presentation Linkbase Document
Exhibit 101.6* Definition Linkbase Document

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.Submitted electronically herewith.


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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
  

ASTRONICS CORPORATION

 (Registrant)
Date:

Date: November 4, 2014

10, 2015 By:

/s/ David C. Burney

David C. Burney
  

David C. Burney
Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

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