Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
   
Form 10-Q
 
   
 
ýQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 3, 2015July 2, 2016
or
 
¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                     
Commission File Number 0-7087
 
   
ASTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
 
   

New York
(State or other jurisdiction of
incorporation or organization)
16-0959303
(IRS Employer
Identification Number)
  
130 Commerce Way, East Aurora, New York
(Address of principal executive offices)
14052
(Zip code)
(716) 805-1599
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)
  
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    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 filerý Accelerated filer¨
     
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  ý
As of October 3, 2015, 25,531,907July 2, 2016, 25,294,641 shares of common stock were outstanding consisting of 17,396,33819,265,232 shares of common stock ($.01 par value) and 8,135,5696,029,409 shares of Class B common stock ($.01 par value).
 



TABLE OF CONTENTS
     PAGE
PART I  
      
  Item 1  
      
    
      
    
      
    
      
    
      
    
7-17
      
  Item 2 
18 – 2523
      
  Item 3 
      
  Item 4 
      
PART II  
      
  Item 1 
      
  Item 1a 
      
  Item 2 
      
  Item 3 
      
  Item 4 
      
  Item 5 
      
  Item 6 
      

2


Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
October 3, 2015July 2, 2016 with Comparative Figures for December 31, 20142015
(In thousands)
 
October 3,
2015
 December 31,
2014
July 2,
2016
 December 31,
2015
(Unaudited)  (Unaudited)  
Current Assets:      
Cash and Cash Equivalents$22,433
 $21,197
$20,411
 $18,561
Accounts Receivable, Net of Allowance for Doubtful Accounts124,663
 88,888
106,316
 95,277
Inventories119,811
 115,053
119,329
 115,467
Prepaid Expenses and Other Current Assets19,501
 20,680
11,308
 20,662
Total Current Assets286,408
 245,818
257,364
 249,967
Property, Plant and Equipment, Net of Accumulated Depreciation125,940
 116,316
123,709
 124,742
Other Assets8,907
 5,632
11,966
 10,889
Intangible Assets, Net of Accumulated Amortization111,196
 94,991
103,598
 108,276
Goodwill115,942
 100,153
115,614
 115,369
Total Assets$648,393
 $562,910
$612,251
 $609,243
Current Liabilities:      
Current Maturities of Long-term Debt$2,745
 $2,796
$2,691
 $2,579
Accounts Payable27,763
 27,903
27,240
 27,138
Accrued Expenses and Other Current Liabilities42,076
 33,465
33,588
 35,758
Customer Advance Payments and Deferred Revenue40,565
 45,052
28,729
 38,757
Total Current Liabilities113,149
 109,216
92,248
 104,232
Long-term Debt205,789
 180,212
163,898
 167,210
Other Liabilities45,469
 45,305
37,661
 37,576
Total Liabilities364,407
 334,733
293,807
 309,018
Shareholders’ Equity:      
Common Stock255
 252
257
 256
Accumulated Other Comprehensive Loss(14,875) (11,949)(13,498) (15,064)
Other Shareholders’ Equity298,606
 239,874
331,685
 315,033
Total Shareholders’ Equity283,986
 228,177
318,444
 300,225
Total Liabilities and Shareholders’ Equity$648,393
 $562,910
$612,251
 $609,243
See notes to consolidated condensed financial statements.

3


ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and NineSix Months Ended October 3, 2015July 2, 2016 With Comparative Figures for 20142015
(Unaudited)
(In thousands, except per share data)
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Sales$534,939
 $494,956
 $200,145
 $179,442
$323,956
 $334,794
 $164,426
 $173,156
Cost of Products Sold385,898
 370,439
 140,718
 128,132
239,638
 245,180
 119,591
 123,704
Gross Profit149,041
 124,517
 59,427
 51,310
84,318
 89,614
 44,835
 49,452
Selling, General and Administrative Expenses66,213
 62,638
 22,297
 25,539
44,108
 43,916
 22,224
 21,297
Income from Operations82,828
 61,879
 37,130
 25,771
40,210
 45,698
 22,611
 28,155
Interest Expense, Net of Interest Income3,600
 7,183
 1,243
 2,301
2,143
 2,357
 1,056
 1,111
Income Before Income Taxes79,228
 54,696
 35,887
 23,470
38,067
 43,341
 21,555
 27,044
Provision for Income Taxes26,161
 16,965
 11,193
 6,390
11,602
 14,968
 6,575
 9,354
Net Income$53,067
 $37,731
 $24,694
 $17,080
$26,465
 $28,373
 $14,980
 $17,690
Earnings Per Share:              
Basic$2.09
 $1.51
 $0.97
 $0.68
$1.04
 $1.12
 $0.59
 $0.70
Diluted$2.02
 $1.45
 $0.94
 $0.65
$1.00
 $1.08
 $0.57
 $0.67
See notes to consolidated condensed financial statements.

4


ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income
Three and NineSix Months Ended October 3, 2015July 2, 2016 With Comparative Figures for 20142015
(Unaudited)
(In thousands)
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Net Income$53,067
 $37,731
 $24,694
 $17,080
$26,465
 $28,373
 $14,980
 $17,690
Other Comprehensive (Loss) Income:       
Other Comprehensive Income (Loss):       
Foreign Currency Translation Adjustments(3,410) (2,943) (196) (2,375)1,305
 (3,214) (511) 432
Change in Accumulated Loss on Derivatives – Net of Tax
 19
 
 27
Retirement Liability Adjustment – Net of Tax484
 318
 161
 110
261
 323
 130
 162
Other Comprehensive (Loss) Income(2,926) (2,606) (35) (2,238)
Other Comprehensive Income (Loss)1,566
 (2,891) (381) 594
Comprehensive Income$50,141
 $35,125
 $24,659
 $14,842
$28,031
 $25,482
 $14,599
 $18,284
See notes to consolidated condensed financial statements.

5


ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
NineSix Months Ended October 3, 2015July 2, 2016
With Comparative Figures for 20142015
(Unaudited)
(In thousands)
 
Six Months Ended
October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
Cash Flows From Operating Activities:      
Net Income$53,067
 $37,731
$26,465
 $28,373
Adjustments to Reconcile Net Income to Cash Provided By Operating Activities:      
Depreciation and Amortization18,831
 21,168
13,146
 12,545
Provisions for Non-Cash Losses on Inventory and Receivables1,513
 733
928
 957
Stock Compensation Expense1,740
 1,304
1,256
 1,143
Deferred Tax Benefit(243) (4,598)(980) (576)
Non-Cash Earnout Liability Adjustment(1,576) (477)
Non-cash Earnout Liability Adjustment

 (1,268)
Other21
 (618)320
 158
Cash Flows from Changes in Operating Assets and Liabilities:      
Accounts Receivable(29,796) (41,562)(10,860) (3,797)
Inventories(4,805) 16,184
(4,145) (16,786)
Accounts Payable(1,656) 7,923
(10) 9,192
Accrued Expenses5,662
 7,660
(3,643) (857)
Other Current Assets and Liabilities(498) (2,461)32
 (352)
Customer Advanced Payments and Deferred Revenue(5,396) 22,593
(9,992) (13,287)
Income Taxes5,072
 2,048
10,107
 4,610
Supplemental Retirement and Other Liabilities1,238
 921
695
 820
Cash Provided By Operating Activities43,174
 68,549
23,319
 20,875
Cash Flows From Investing Activities:      
Acquisition of Business, Net of Cash Acquired(52,606) (70,028)
 (52,615)
Capital Expenditures(15,857) (29,971)(6,176) (12,277)
Other Investing Activities(2,677) 
(850) (2,678)
Cash Used For Investing Activities(71,140) (99,999)(7,026) (67,570)
Cash Flows From Financing Activities:      
Proceeds from Long-term Debt55,000
 245,414
15,000
 55,000
Payments for Long-term Debt(29,008) (245,761)(18,279) (6,331)
Purchase of Outstanding Shares for Treasury(12,154) 
Debt Acquisition Costs
 (573)(164) 
Proceeds from Exercise of Stock Options557
 638
Acquisition Earnout Payments(2) (37)
 (2)
Proceeds from Exercise of Stock Options3,308
 1,290
Income Tax Benefit from Exercise of Stock Options619
 2,041
529
 708
Cash Provided By Financing Activities29,917
 2,374
Cash (Used For) Provided By Financing Activities(14,511) 50,013
Effect of Exchange Rates on Cash(715) (631)68
 (748)
Increase (Decrease) in Cash and Cash Equivalents1,236
 (29,707)
Increase in Cash and Cash Equivalents1,850
 2,570
Cash and Cash Equivalents at Beginning of Period21,197
 54,635
18,561
 21,197
Cash and Cash Equivalents at End of Period$22,433
 $24,928
$20,411
 $23,767
See notes to consolidated condensed financial statements.

6


ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
October 3, 2015July 2, 2016
(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 2015 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 ninesix months ended October 3, 2015July 2, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.2016.
The balance sheet at December 31, 20142015 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 20142015 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 semiconductor industries. Our products and services include advanced, high-performance electrical power generation, & distribution and motion systems, lighting & safety systems, avionics products, aircraft structures, engineering design and systems certification and automated test systems.
We have operations in the United States (“U.S.”), Canada and France. We design and build our products through our wholly owned subsidiaries Armstrong Aerospace, Inc. (“Armstrong”); Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); 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”); PGA Electronic s.a. (“PGA”); and 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 automated test systems, subsystems and instruments for commercial electronics and semiconductor products to both the commercial and defense industries. ATS is included in our Test Systems segment.
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 development 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 $22.5$21.9 million and $19.1$21.3 million for the three months ended October 3, 2015 and September 27, 2014, respectively, and $66.1$45.2 million and $57.1$43.6 million for the ninesix months ended October 3,July 2, 2016 and July 4, 2015, and September 27, 2014, respectively. Selling, general and administrative expenses include costs primarily

7


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 ninesix months ended October 3, 2015July 2, 2016 and September 27, 2014.
Derivatives
In November 2014, the Company terminated its interest rate swap. Ineffectiveness was not significant for the three and nine months ended September 27, 2014. The Company classified the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items. No derivative instruments were outstanding at or for the three or nine months ended October 3,July 4, 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 three and ninesix months ended October 3, 2015July 2, 2016 and September 27, 2014.July 4, 2015.
Loss 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 20152016
There have been no recent accounting pronouncements that have had an impact on the Company’s financial statements.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the 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)October 3,
2015
 December 31,
2014
July 2,
2016
 December 31,
2015
Finished Goods$32,208
 $28,763
$28,383
 $27,770
Work in Progress25,030
 28,488
26,307
 23,977
Raw Material62,573
 57,802
64,639
 63,720
$119,811
 $115,053
$119,329
 $115,467


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3) Property, Plant and Equipment
The following table summarizes Property, Plant and Equipment as follows:
(In thousands)October 3,
2015
 December 31,
2014
July 2,
2016
 December 31,
2015
Land$11,171
 $10,008
$11,164
 $11,145
Buildings and Improvements78,209
 74,755
79,434
 78,989
Machinery and Equipment86,088
 73,062
94,623
 89,514
Construction in Progress5,644
 4,757
3,397
 3,282
181,112
 162,582
188,618
 182,930
Less Accumulated Depreciation55,172
 46,266
64,909
 58,188
$125,940
 $116,316
$123,709
 $124,742
4) Intangible Assets
The following table summarizes acquired intangible assets as follows:
 
 October 3, 2015 December 31, 2014  July 2, 2016 December 31, 2015
(In thousands)
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents6 Years $2,146
 $1,217
 $2,146
 $1,077
5 Years $2,146
 $1,357
 $2,146
 $1,264
Non-compete Agreement5 Years 2,500
 354
 
 
4 Years 2,500
 729
 2,500
 479
Trade Names8 Years 10,237
 1,982
 8,304
 1,288
7 Years 10,232
 2,685
 10,217
 2,216
Completed and Unpatented Technology7 Years 24,092
 6,190
 18,107
 4,396
6 Years 24,083
 8,006
 24,056
 6,795
Backlog and Customer Relationships12 Years 107,739
 25,775
 93,448
 20,253
BacklogLess than 1 Year 11,627
 11,202
 11,202
 10,793
Customer Relationships12 Years 96,946
 19,957
 96,472
 16,770
Total Intangible Assets7 Years $146,714
 $35,518
 $122,005
 $27,014
6 Years $147,534
 $43,936
 $146,593
 $38,317
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 EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Amortization Expense$8,534
 $12,673
 $2,761
 $7,769
$5,607
 $5,772
 $2,799
 $2,920

Amortization expense for acquired intangible assets expected for 20152016 and for each of the next five years is summarized as follows:
 
(In thousands)  
2015$11,341
201610,762
$11,013
201710,336
10,591
201810,023
10,066
20199,622
9,664
20209,088
9,130
20219,085


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

Table of Contents

5) Goodwill
The following table summarizes the changes in the carrying amount of goodwill for 2015:the six months ended July 2, 2016:
 
(In thousands)December 31,
2014
 Acquisition 
Foreign
Currency
Translation
 October 3,
2015
December 31,
2015
 Acquisition 
Foreign
Currency
Translation
 July 2,
2016
Aerospace$100,153
 $16,567
 $(778) $115,942
$115,369
 $
 $245
 $115,614
Test Systems
 
 
 

 
 
 
$100,153
 $16,567
 $(778) $115,942
$115,369
 $
 $245
 $115,614

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 RestatedCompany's Credit Agreement (the “Agreement”). On the closing date, there were $180.5 millionconsists 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 inOn January 13, 2016, the Original Facility were rolled intoCompany amended the Agreement on the date of entry. In addition,to add a new lender and extend the maturity date of the loans under the Agreement is nowcredit facility from September 26, 2019.2019 to January 13, 2021. At October 3, 2015July 2, 2016 there was $193.0$153.0 million outstanding on the revolving credit facility and there remains $155.9$195.9 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,July 2, 2016, outstanding letters of credit totaled $1.1 million.
Covenants in the Agreement have been modified to where theThe maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is 3.5 to 1, increasing to 4.0 to 1 for up to 2two 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-, three- or six-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 been replaced withCompany must also maintain a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement. The Company’s interest coverage ratio was 39.634.5 to 1 at October 3, 2015.July 2, 2016. The Company’s leverage ratio was 1.51.30 to 1 at October 3, 2015.July 2, 2016.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the 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, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.

10


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 12 to 60 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 EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Balance at Beginning of Period$4,884
 $2,796
 $5,319
 $3,925
$5,741
 $4,884
 $5,122
 $5,472
Acquisitions500
 564
 
 (226)
 500
 
 
Warranties Issued1,553
 2,842
 414
 1,966
1,206
 1,139
 545
 401
Warranties Settled(2,164) (1,323) (737) (520)(1,290) (1,427) (405) (701)
Reassessed Warranty Exposure1,130
 271
 907
 5
(296) 223
 99
 147
Balance at End of Period$5,903
 $5,150
 $5,903
 $5,150
$5,361
 $5,319
 $5,361
 $5,319
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.
ASC Topic 740-10 Overall - 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 October 3, 2015 or December 31, 2014, nor were any penalties or interest costs included in expense for the three or nine months ended October 3, 2015 and September 27, 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 2014 for federal purposes and 2011 through 2014 for state purposes.
The effective tax rates were approximately 33.0%30.5% and 31.0%34.5% for the ninesix months ended and 31.2%30.5% and 27.2%34.6% for the three months ended October 3,July 2, 2016 and July 4, 2015, and September 27, 2014, respectively. The effective tax rate forrates in 2016 were favorably impacted by the third quarter and first nine monthsinclusion of 2015 and 2014 were 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.

11

Tablecredit due to its permanent reinstatement in the fourth quarter of Contents2015. 


9) Shareholders’ Equity
The changes in shareholders’ equity for the ninesix months ended October 3, 2015July 2, 2016 are summarized as follows:
 
  Number of Shares  Number of Shares
(Dollars and Shares in thousands)Amount 
Common
Stock
 
Convertible
Class B Stock
Amount 
Common
Stock
 
Convertible
Class B Stock
Shares Authorized  40,000
 10,000
  40,000
 15,000
Share Par Value  $0.01
 $0.01
  $0.01
 $0.01
COMMON STOCK          
Beginning of Period$252
 16,608
 8,651
$256
 19,349
 6,220
Conversion of Class B Shares to Common Shares
 623
 (623)
 239
 (239)
Exercise of Stock Options3
 165
 108
1
 37
 48
End of Period$255
 17,396
 8,136
$257
 19,625
 6,029
ADDITIONAL PAID IN CAPITAL          
Beginning of Period$49,626
    $57,865
    
Stock Compensation Expense1,740
    1,256
    
Exercise of Stock Options3,925
    1,085
    
End of Period$55,291
    $60,206
    
ACCUMULATED OTHER COMPREHENSIVE LOSS          
Beginning of Period$(11,949)    $(15,064)    
Foreign Currency Translation Adjustment(3,410)    1,305
    
Retirement Liability Adjustment – Net of Tax484
    261
    
End of Period$(14,875)    $(13,498)    
RETAINED EARNINGS          
Beginning of Period$190,248
    $257,168
    
Net Income53,067
    26,465
    
End of Period$243,315
    $283,633
    
TREASURY STOCK     
Beginning of Period$
 
  
Purchase(12,154) (360)  
End of Period$(12,154) (360)  
TOTAL SHAREHOLDERS’ EQUITY          
Beginning of Period$228,177
    $300,225
    
          
End of Period$283,986
    $318,444
 19,265
 6,029

On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock (the “Buyback Program”). The Buyback Program allows the Company to purchase shares of its common stock in accordance with applicable securities laws on the open market or through privately negotiated transactions. The Buyback Program may be suspended or discontinued at any time. Under this program the Company has repurchased approximately 360,000 shares for $12.2 million.


10) Earnings Per Share
Basic and diluted weighted-average shares outstanding are as follows:
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Weighted Average Shares - Basic25,394
 24,910
 25,456
 25,011
25,500
 25,363
 25,444
 25,415
Net Effect of Dilutive Stock Options843
 1,147
 761
 1,068
839
 880
 840
 846
Weighted Average Shares - Diluted26,237
 26,057
 26,217
 26,079
26,339
 26,243
 26,284
 26,261
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 at October 3, 2015July 2, 2016 was insignificant.approximately 230,000 shares.

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Table of Contents

11) Accumulated Other Comprehensive Loss and Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
 
(In thousands)October 3,
2015
 December 31,
2014
July 2,
2016
 December 31,
2015
Foreign Currency Translation Adjustments$(6,764) $(3,354)$(6,666) $(7,971)
Retirement Liability Adjustment – Before Tax(12,477) (13,223)(10,510) (10,912)
Tax Benefit4,366
 4,628
3,678
 3,819
Retirement Liability Adjustment – After Tax(8,111) (8,595)(6,832) (7,093)
Accumulated Other Comprehensive Loss$(14,875) $(11,949)$(13,498) $(15,064)
The components of other comprehensive lossincome (loss) are as follows:
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Foreign Currency Translation Adjustments$(3,410) $(2,943) $(196) $(2,375)$1,305
 $(3,214) $(511) $432
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
219
 260
 109
 130
Amortization of Net Actuarial Losses356
 80
 119
 27
183
 237
 92
 119
Tax Benefit(262) (170) (88) (53)(141) (174) (71) (87)
Retirement Liability Adjustment484
 318
 161
 110
261
 323
 130
 162
       
Other Comprehensive Loss$(2,926) $(2,606) $(35) $(2,238)
Other Comprehensive Income (Loss)$1,566
 $(2,891) $(381) $594

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 EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Service Cost$145
 $187
 $49
 $62
$86
 $97
 $43
 $48
Interest Cost633
 565
 211
 188
450
 422
 225
 211
Amortization of Prior Service Cost371
 390
 123
 130
207
 247
 103
 124
Amortization of Net Actuarial Losses336
 80
 113
 27
172
 225
 86
 112
Net Periodic Cost$1,485
 $1,222
 $496
 $407
$915
 $991
 $457
 $495

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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 EndedSix Months Ended Three Months Ended
(In thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Service Cost$3
 $3
 $1
 $1
$2
 $3
 $1
 $2
Interest Cost30
 24
 10
 8
20
 19
 10
 10
Amortization of Prior Service Cost19
 18
 7
 6
12
 13
 6
 6
Amortization of Net Actuarial Losses20
 
 6
 
11
 12
 6
 7
Net Periodic Cost$72
 $45
 $24
 $15
$45
 $47
 $23
 $25
13) Sales to Major Customers
The Company has a significant concentration of business with threetwo 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 threetwo customers represented 21%, 16%22% and 13%15% of consolidated sales for the ninesix months ended October 3, 2015 and 19%, 25%21% and 12%16% for the three months ended October 3, 2015.July 2, 2016. Sales to these customers were in the Aerospace and Test Systems segments.segment. Accounts receivable from these customers at October 3, 2015July 2, 2016 was approximately $58.9$25.9 million.
The Company had sales Sales to threethese two customers in the Aerospace and Test Systems segments that represented 17%, 20%22% and 14% of consolidated sales for the ninesix months ended September 27, 2014July 4, 2015 and 17%, 25%20% and 13% of consolidated sales for the three months ended September 27, 2014.July 4, 2015.
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.

On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement 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 a 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 estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement. The value of the dispute has been set by the Court to be €2 million. This is an estimate of the commercial value of the matter.


On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent 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 guaranteesguarantee specified in the decision, the Company may be required to ceaseoffer a recall of products which are in the distribution of infringing productschannels in Germany (if any).Germany. No such bank guarantee has been issued to date regarding this provision.date.

The Company appealed and believes it has valid defenses to refute the decision. The appeal process is estimatedscheduled to extend upbe heard on October 12, 2016 at the Higher Regional Court. Should that ruling be unfavorable, the Company may choose to two years.appeal to the Federal Supreme Court. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the appeals process. As a result, 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.July 2, 2016.

14


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 based on technology similar to that involved in the German action. However,On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and unenforceable. On July 20, 2016 the U.S. courtDistrict Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice. Lufthansa has indicated that it will not be bound byappeal the ultimate determination made byCourt's dismissal to the German court.U.S. Court of Appeals for the Federal Circuit. The Company believes that it has valid defenses to refute Lufthansa’s claims and intends towill vigorously 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.appeal. 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.July 2, 2016.

15) Segment Information
Below are the sales and operating profit by segment for the three and ninesix months ended October 3,July 2, 2016 and July 4, 2015 and September 27, 2014 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 EndedSix Months Ended Three Months Ended
(Dollars in thousands)October 3,
2015
��September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Sales              
Aerospace$413,250
 $366,128
 $138,728
 $122,233
$281,177
 $274,522
 $142,528
 $132,170
Less Intersegment Sales(367) 
 (27) 
Total Aerospace Sales280,810
 274,522
 142,501
 132,170
       
Test Systems121,744
 129,065
 61,417
 57,209
$43,146
 $60,327
 $21,925
 $40,986
Less Intersegment Sales(55) (237) 
 

 (55) 
 
121,689
 128,828
 61,417
 57,209
Total Test Systems Sales43,146
 60,272
 21,925
 40,986
Total Consolidated Sales$534,939
 $494,956
 $200,145
 $179,442
$323,956
 $334,794
 $164,426
 $173,156
Operating Profit and Margins              
Aerospace$66,728
 $60,308
 $23,055
 $22,057
$43,542
 $43,673
 $24,851
 $20,271
16.1% 16.5% 16.6% 18.0%15.5% 15.9% 17.4% 15.3%
Test Systems24,618
 8,034
 16,980
 5,699
3,284
 7,638
 1,074
 9,863
20.2% 6.2% 27.6% 10.0%7.6% 12.7% 4.9% 24.1%
Total Operating Profit91,346
 68,342
 40,035
 27,756
46,826
 51,311
 25,925
 30,134
17.1% 13.8% 20.0% 15.5%14.5% 15.3% 15.8% 17.4%
Deductions from Operating Profit              
Interest Expense, Net of Interest Income3,600
 7,183
 1,243
 2,301
2,143
 2,357
 1,056
 1,111
Corporate Expenses and Other8,518
 6,463
 2,905
 1,985
6,616
 5,613
 3,314
 1,979
Income Before Income Taxes$79,228
 $54,696
 $35,887
 $23,470
$38,067
 $43,341
 $21,555
 $27,044
Identifiable Assets
Total Assets: 
(In thousands)October 3,
2015
 
December 31,
2014
July 2,
2016
 December 31,
2015
Aerospace$531,136
 $468,481
$505,612
 $510,884
Test Systems87,909
 69,247
81,361
 64,934
Corporate29,348
 25,182
25,278
 33,425
Total Assets$648,393
 $562,910
$612,251
 $609,243



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
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 fairFair value is 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 establishesThe Company follows 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 asconsisted of October 3, 2015contingent consideration related to certain prior acquisitions, valued at zero at July 2, 2016 and December 31, 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)
Our2015, determined using 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 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 change in the balance of contingent consideration 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.inputs.
Contingent consideration payments related to 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 350 Intangibles – Goodwill and Other, theThe 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


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.
At October 3, 2015, the fair value of goodwill and intangible assets classified using Level 3 inputs are comprised of the Armstrong goodwill and intangible assets acquired on 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 discounted cash flow 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,July 2, 2016, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed.

17) Recent Accounting Pronouncements

In May 2014,March 2016, the Financial Accounting Standards Board (“("FASB”) issued authoritativeAccounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions.  The guidance regarding revenue recognition.makes several modifications to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. In addition, ASU 2016-09 clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently assessing how the adoption of this standard will impact the financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is currently assessing the impact on the financial statements.

In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers. This new standard is effective for reporting periods beginning after December 15, 2017, pursuant to the issuance of ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date issued in August 2015. 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 earlyEarly adoption of the standard, butis 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.permitted. The Company is currently evaluating the impact thatimpacts of adoption of this guidance will have on its consolidated financial statements and disclosures.the implementation approach to be used.
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 direct deduction from the carrying value of the 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 in 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 financial position or results of operations.
Astronics Test Systems
On February 28, 2014, our wholly owned subsidiary, ATS, purchased substantially all All of the goodwill and

purchased intangible assets and liabilities of the Test and Services Division of EADS North America, Inc.are expected to be deductible for $69.4 million in cash, including a net working capital adjustment of $16.4 million. Located in Irvine, California, ATS is a leading provider of highly-engineered automated test systems, subsystems and instruments for the semiconductor, 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 strengthens our service offerings and expertise in the test market. This subsidiary is included in our Test Systems segment.tax purposes over 
15 years. The purchase price allocation for this acquisition has been finalized. Purchased intangible assets are deductible for tax purposes.

17


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, 2014.2015.)
OVERVIEW
Astronics Corporation (“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 and motion systems, lighting & safety systems, avionics products, aircraft structures, engineering design & systems certification and automated test systems.
Our Aerospace segment designs and manufactures products for the global aerospace industry. Product lines include lighting & safety systems, electrical power generation, distribution and motionsmotion systems, aircraft structures, engineering design &avionics products, systems certification and avionicsother products. Our Aerospace customers are the airframe manufacturers (OEM’s)("OEM") that build aircraft for the commercial, 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 the Federal Aviation Administration and airport operators. Our Test Systems segment designs, develops, manufactures and maintains automated test systems that support the semiconductor, aerospace, communications and aerospace & defense markets.weapons test systems as well as training and simulation devices for both commercial and military applications. In the Test Systems segment, Astronics’ products are sold to a global customer base including OEM's and prime government contractors for both semiconductorelectronics and aerospace & defensemilitary products.
Our strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and using those capabilities to provide innovative solutions to the aerospace and defense, commercial electronics, semiconductor and 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, futureFuture growth and profitability of the testTest Systems business is dependent on developing and procuring new and follow-on business in commercial electronics and semiconductor markets as well as with the military. The nature of our Test Systems business is such that it pursues large multi-year projects. There can be significant periods of time between orders in this business which may result in large fluctuations of sales and profit levels and backlog from period to period.
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 automated test systems, subsystems and instruments for the semiconductor, commercial electronics, commercial aerospace and defense industries. The purchase price was $69.4 million in cash. The addition of ATS complements products and technologies that the Test Systems segment offers.

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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
(Dollars in thousands)October 3,
2015
 September 27,
2014
 October 3,
2015
 September 27,
2014
July 2,
2016
 July 4,
2015
 July 2,
2016
 July 4,
2015
Sales$534,939
 $494,956
 $200,145
 $179,442
$323,956
 $334,794
 $164,426
 $173,156
Gross Profit (sales less cost of products sold)$149,041
 $124,517
 $59,427
 $51,310
$84,318
 $89,614
 $44,835
 $49,452
Gross Margin27.9% 25.2% 29.7% 28.6%26.0% 26.8% 27.3% 28.6%
Selling, General and Administrative Expenses$66,213
 $62,638
 $22,297
 $25,539
$44,108
 $43,916
 $22,224
 $21,297
SG&A Expenses as a Percentage of Sales12.4% 12.7% 11.1% 14.2%13.6% 13.1% 13.5% 12.3%
Interest Expense, Net of Interest Income$3,600
 $7,183
 $1,243
 $2,301
$2,143
 $2,357
 $1,056
 $1,111
Effective Tax Rate33.0% 31.0% 31.2% 27.2%30.5% 34.5% 30.5% 34.6%
Net Income$53,067
 $37,731
 $24,694
 $17,080
$26,465
 $28,373
 $14,980
 $17,690
A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.
CONSOLIDATED QUARTERLYSECOND QUARTER RESULTS
Consolidated sales for the thirdsecond quarter of 20152016 were $200.1$164.4 million, updown from $179.4$173.2 million for the same period last year. The 2015 third quarter included $6.5Record Aerospace segment sales of $142.5 million in sales from Armstrong Aerospace, Inc. (“Armstrong”), acquired on January 14, 2015. Organic sales for the quarter increased $14.2 million, or 7.9%, and were achieved with increases across both the Aerospace andoffset lower Test Systems segments.segment sales.
Consolidated cost of products sold increased $12.6decreased $4.1 million to $140.7$119.6 million in the third quarter of 2015 from $128.1$123.7 million for the same period last year, primarily due largely to the incremental costs of products sold on increased organiclower sales volumes. The acquisition of Armstrong resulted in an incremental $5.8 million in cost of products sold in the third quarter of 2015.volume. Engineering and development (“E&D”) costs were $22.5$21.9 million in the thirdsecond quarter of 2015, including $1.8 million for Armstrong.2016. E&D costs in last year’s thirdsecond quarter were $19.1$21.3 million. As a percent of sales, E&D was 11.3%13.3% and 10.7%12.3% in the thirdsecond quarters of 2016 and 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$22.2 million, or 11.1%13.5% of sales, in the third quarter of 2015 compared with $25.5$21.3 million, or 14.2%12.3% of sales, in the same period last year. The thirdsecond quarter of 2014 included intangible asset amortization expense2015 benefited from a $1.3 million reduction to the contingent consideration liability related to Astronics Test Systems, Inc. (acquiredprior acquisitions.
The effective tax rate for the second quarter was 30.5%, compared with 34.6% in February 2014)the second quarter of $5.32015. The tax rate in the second quarter of 2016 was favorably impacted by the permanent reinstatement of the federal research and development tax credit in the fourth quarter of 2015. 
Net income for the 2016 second quarter was $15.0 million compared with $0.3$17.7 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.
prior-year period. Diluted earnings per share for the 2015 third2016 second quarter were $0.94$0.57 compared with $0.65$0.67 in the prior year period, and increase of 44.6%.prior-year period.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated sales for the first ninesix months of 2015 increased2016 decreased by $40.0$10.8 million, or 8.1%3.2%, to $534.9$ 324.0 million from $494.9$334.8 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 costcosts of products sold increased $15.5decreased $5.6 million to $385.9$239.6 million from $245.2 million in the first ninesix months of 2015 from $370.4 million for2015. The decrease was the same period last year.  The increase was due primarily to the incremental costresult of products sold associated with Armstrong of $16.2 million, incremental costs of products sold on increased organiclower sales volumes and increased E&D costsvolume partially offset by lower step-up expense when compared to the same period last year.$1.6 million higher E&D costs. E&D costs were 12.4%14.0% of sales, or $66.1$45.2 million, which included $4.8 million for Armstrong, compared with $57.1$43.6 million, or 11.5%13.0% of sales, in the prior year’s first ninesix months.  Cost of products sold in the first nine months of 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 72.1% in the first nine months of 2015 compared with 74.8% in the first nine months of 2014.

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Selling, general and administrative (“SG&A”)&A expenses were $66.2$44.1 million, or 12.4%13.6% of sales, in the first ninesix months of 20152016 compared with $62.6$43.9 million, or 12.7%13.1% of sales, in the same period last year. The increase was due primarily to the incremental SG&A costssecond quarter of Armstrong, which added approximately $4.1 million to SG&A in the first nine months of 2015. Organically, higher SG&A expense reflected increased headcount and compensation costs to support growth. These increases were partially offset by2015 benefited from a decrease of amortization expense for acquired intangible assets of ATS of $4.4 million, and a $1.1$1.3 million reduction into the contingent consideration liability related to prior acquisitions.
The effective tax rate for the first six months of 2016 was 30.5%, compared with 34.5% in the first six months of 2015. The tax rate in the first six months of 2016 was favorably impacted by the permanent reinstatement of the federal research and development tax credit in the fourth quarter of 2015. 
Net income for the first half of 2016 was $26.5 million compared with $28.4 million in the prior-year period. Diluted earnings per share for the first ninesix months of 20152016 were $2.02$1.00 compared with $1.45$1.08 for the same period last year period, an increase of 39.3%.
The effective tax rates were approximately 33.0% and 31.0% for the nine months and 31.2% and 27.2% for the three months ended October 3, 2015 and September 27, 2014, respectively. The effective tax rate for the third quarter and first nine months of 2015 and 2014 were 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.year.

For both the three and nine months ended October 3, 2015, the earnings per share increase, as comparedCONSOLIDATED OUTLOOK
Consolidated sales in 2016 are forecasted to the respective periodsbe in the prior year,is due primarilyrange of $655 million to the increasein net income.
We expect consolidated sales in 2015 to be between $690 million and $705$685 million. Approximately $553$560 million to $564$580 million of forecasted 2015 revenue is expected from the Aerospace segment. Expectations for Test Systems segment whilerevenue in 2016 remains relatively unchanged at approximately $137$95 million to $141 million of the forecasted revenue is expected from the Test Systems segment.$105 million.
Our consolidatedConsolidated backlog at October 3, 2015July 2, 2016 was $297.0$293.8 million, of which $147.9$199.9 million is expected to ship in 2015.2016.
We expect our capitalThe effective tax rate for 2016 is expected to be approximately 29% to 32%.
Capital equipment spending in 20152016 is planned to be in the range of $20$17 million to $25$20 million.
The Company is establishing initial revenue guidance for 2016 of $690 million to $750 million. The Aerospace segment is E&D costs are expected to generate $572 millionbe similar to $616 million of revenue, and the Test Systems segment is expected to generate $118 million to $134 million.2015.
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.

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AEROSPACE SEGMENT
 Six Months Ended Three Months Ended
(In thousands)July 2, 2016 July 4, 2015 July 2, 2016 July 4, 2015
Sales       
Aerospace$281,177
 $274,522
 $142,528
 $132,170
Less Intersegment Sales(367) 
 (27) 
Total Aerospace Sales$280,810
 $274,522
 $142,501
 $132,170
Operating Profit$43,542
 $43,673
 $24,851
 $20,271
Operating Margin15.5% 15.9% 17.4% 15.3%
        
Aerospace Sales by Market       
(In thousands)       
Commercial Transport$229,818
 $227,823
 $116,423
 $107,629
Military26,254
 19,827
 13,973
 10,569
Business Jet14,232
 17,153
 7,707
 9,061
Other10,506
 9,719
 4,398
 4,911
 $280,810
 $274,522
 $142,501
 $132,170
Aerospace Sales by Product Line       
(In thousands)       
Electrical Power & Motion$150,957
 $137,415
 $75,564
 $67,844
Lighting & Safety82,544
 79,985
 41,979
 37,907
Avionics16,818
 29,030
 9,344
 11,663
Systems Certification9,997
 10,344
 5,391
 5,771
Structures9,988
 8,029
 5,825
 4,074
Other10,506
 9,719
 4,398
 4,911
 $280,810
 $274,522
 $142,501
 $132,170
 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)July 2, 2016 December 31, 2015
Total Assets$505,612
 $510,884
Backlog$235,800
 $212,651

(In thousands)October 3, 2015 December 31, 2014
Total Assets$531,136
 $468,481
Backlog$227,343
 $223,769

AEROSPACE QUARTERLYSECOND QUARTER RESULTS
Aerospace segment sales increased by $16.5$10.3 million, or 13.5%7.8%, when compared with the prior year’s thirdsecond quarter to $138.7 million. Organic$142.5 million, which represents a record level for the Aerospace sales grew 8.2%, or $10.0 million. Sales from Armstrong added $6.5 million.segment.
Sales growth in the third quarter of 2015 was driven by increased Electrical Power & Motion sales which were up $9.3grew $7.7 million, or 15%.  Sales11.4%, largely driven by higher sales of in-seat power products, grew at an even stronger rate, helpingwhich were up 13.1%. Additionally, lighting & safety products increased by $4.1 million, or 10.7%. These increases were offset by a $2.3 million decline in Avionics products, which was largely due to offset reducedlower sales of seat motion products in this product line.  The Electrical Power & Motion product lines are sold mostly to Commercial Transport customers, with lesser sales to Business Jetssatellite antenna systems and Military customers.  Sales of Lighting & Safety products increased $2.9 million, as higher production rates of Commercial Transport customers were complemented by a number of aftermarket retrofit sales of passenger service units, or PSUs.  The 2015 third quarter included $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 deal with component problems from a certain supplier.  Sales in this product line are expected to rebound somewhat in the fourth quarter. in-flight entertainment system and cabin management systems for VVIP aircraft.
Aerospace operating profit for the thirdsecond quarter of 2015 was $23.12016 also set an all-time high of $24.9 million, or 16.6%17.4% of sales, compared with $22.1$20.3 million, or 18.0%15.3% of sales, in the same period last year. Operating margins gained on higher volume were negatively affectedpartially offset by increased E&D spending and lowera general increase in operating margin from the Armstrong business, partially offset by operating leverage gained on increased organic sales volumes. Organiccosts. Aerospace E&D costs increased $1.7were $19.0 million in the quarter compared with $18.5 million in the same period 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.year.


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AEROSPACE YEAR-TO-DATE RESULTS
Aerospace segment sales increased by $47.1$6.3 million, or 12.9%2.3%, when compared with the prior year’s first ninesix months to $413.3 million. Organic sales grew 7.3%, or $26.8 million, and sales from Armstrong added $20.3$280.8 million.
Aerospace sales growth year-to-date was driven by increased Electrical Power & Motion sales which were up $20.2grew $13.5 million, or 10.7%.  This product group is dominated9.9%, largely driven by higher sales of in-seat power products, which were up 18% through three quarters.  The Lighting & Safety product line10.2%. This increase was up $8.2offset by a $12.2 million or 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 milliondecline in Avionics products, which was largely due to the January acquisitionlower sales of Armstrong.  The other Aerospace product lines made up the remainder of the increase. satellite antenna systems.
Aerospace operating profit for the first ninesix months of 20152016 was $66.7$43.5 million, or 16.1%15.5% of sales, compared with $60.3$43.7 million, or 16.5%15.9% of sales, in the same period last year. Operating leverage gained on increased volume for the organic business was partially offset by higher organic E&D costs of approximately $3.9$1.4 million. E&D costs for Aerospace were $39.4 million and $38.0 million in the first half of 2016 and 2015, respectively. Aerospace SG&A expense increased $5.4$0.7 million in the first ninesix months of 20152016 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.2015. The first ninesix months of 20142015 included inventory step-up costs of $2.6$0.7 million that reduced normal operating margins for that period.
AEROSPACE OUTLOOK
We expect 20152016 sales for our Aerospace segment to be in the range of $553$560 million to $564$580 million. The Aerospace segment’s backlog at the end of the thirdsecond quarter of 20152016 was $227.3$235.8 million with approximately $128.8$159.6 million expected to be shipped over the remaining part of 20152016 and $210.3$205.7 million is expected to ship over the next 12 months.
TEST SYSTEMS SEGMENT
 
Nine Months Ended Three Months EndedSix Months Ended Three Months Ended
(In thousands)October 3, 2015 September 27, 2014 October 3, 2015 September 27, 2014July 2, 2016 July 4, 2015 July 2, 2016 July 4, 2015
Sales$121,744
 $129,065
 $61,417
 $57,209
$43,146
 $60,327
 $21,925
 $40,986
Less Intersegment Sales(55) (237) 
 

 (55) 
 
Net Sales$121,689
 $128,828
 $61,417
 $57,209
$43,146
 $60,272
 $21,925
 $40,986
Operating profit (loss)$24,618
 $8,034
 $16,980
 $5,699
$3,284
 $7,638
 $1,074
 $9,863
Operating Margin20.2% 6.2% 27.6% 10.0%7.6% 12.7% 4.9% 24.1%
              
Test Systems Sales by Market              
(In thousands)              
Semiconductor$86,224
 $106,384
 $49,966
 $48,927
$16,985
 $36,258
 $9,848
 $31,507
Aerospace & Defense35,465
 22,444
 11,451
 8,282
26,161
 24,014
 12,077
 9,479
$121,689
 $128,828
 $61,417
 $57,209
$43,146
 $60,272
 $21,925
 $40,986
(In thousands)October 3, 2015 December 31, 2014July 2, 2016 December 31, 2015
Total Assets$87,909
 $69,247
$81,361
 $64,934
Backlog$69,705
 $146,964
$58,011
 $61,713

TEST SYSTEMS QUARTERLYSECOND QUARTER RESULTS
Sales in the thirdsecond quarter of 2015 increased $4.22016 decreased approximately $19.0 million or 7.4%, to $61.4 million compared with sales of $57.2 million 2014. Sales to the Semiconductor market increased $1.0$21.9 million compared with the same period in 2014 and2015, a decrease of 46.5%. Sales to the Semiconductor market decreased $21.6 million compared with the same period in 2015, which was partially offset by increased sales of $2.6 million to the Aerospace & Defense sales increased $3.2 million.market.

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Operating profit was $17.0$1.1 million, or 27.6%4.9% of sales, compared with $5.7$9.9 million or 10.0%24.1% of sales in last year’s third quarter, due in part to operating leverage on the sales increase. Amortization expense associated with acquisitions was $0.3second quarter. E&D costs remained relatively consistent at $2.9 million and $2.8 million in the second quarters of 2016 and 2015, third quarter. Last year's third quarter included non-recurring purchase accounting related inventory step-up costs of $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 associated with work force reductions as we realigned segment personnel. E&D costs were approximately $3.2 million in the third quarter of 2015 and $3.3 million in the prior-year period.respectively.
TEST SYSTEMS YEAR-TO-DATE RESULTS
Sales in the first ninesix months of 20152016 decreased 5.5%28.4% to $121.7$43.1 million compared with sales of $128.8$60.3 million for the same period in 2014,2015, due to lower salesshipments to the Semiconductor market. Sales to the Semiconductor market decreased $20.1$19.3 million compared with the same period in 2014,2015, which was partially offset by increased sales of $13.0$2.1 million to the Aerospace & Defense market.
Operating profit was $24.6$3.3 million, or 20.2%7.6% of sales, compared with $8.0$7.6 million, or 6.2%12.7% of sales, in the first nine months of 2014. The acquisition of ATS added approximately $1.6 million in SG&A expense in the first 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 Company realigned segment personnel which impacted operating margin. Additionally, amortization expense in the first nine months of 2014 related to the ATS acquisition was approximately $5.4 million compared with $1.0 million in the first ninesix months of 2015. E&D costs were approximately $8.8$5.9 million in the first ninesix months of 2015, and $8.52016 compared with $5.6 million in the prior-yearprior year period.
TEST SYSTEMS OUTLOOK
We expect sales for the Test Systems segment for 20152016 to be in the range of $137$95 million to $141$105 million. The Test Systems segment’s backlog at the end of the second quarter of 20152016 was $69.7$58.0 million with approximately $19.1$40.3 million expected to be shipped over the remaining part of 20152016 and approximately $52.6$48.8 million scheduled to ship over the next 12 months.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
Cash provided by operating activities totaled $43.2$23.3 million for the first ninesix months of 2015,2016, as compared with $68.5$20.9 million during the same period in 2014.2015. Cash flow from operating activities decreasedincreased primarily due to the impact of increasesdecreases in net operating assets for the first ninesix months of 20152016 when compared with the first ninesix months of 2014.2015.
Investing Activities:
Cash used for investing activities was $71.1$7.0 million for the first ninesix months of 20152016 compared with $100.0$67.6 million used in the same period of 2014.2015. Cash used for capital expenditures was $6.2 million in the first six months of 2016 compared with $12.3 million in the prior year period. The Company expects capital spending in 2016 to be in the range of $17 million to $20 million. Cash used for the acquisition of Armstrong in January 2015 was $52.6 million. Cash used for capital expenditures was $15.9 million. The Company expects capital spending in 2015 to be in the range of $20 million to $25 million.
Financing Activities:
The primary financing activities in 20152016 relate to borrowings and payments on our senior credit facility to fund operations, and purchases of treasury stock as part of the acquisitionbuyback program announced on February 24, 2016, under which the Board of Armstrong.Directors authorized the repurchase of up to $50 million of common stock.
On February 28, 2014, in connection withThe Company’s obligations under the fundingCredit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of ATS, the Company amended its existing credit facility (the “Original Facility”) to exercise its option to increaseother than a non-material subsidiary. The obligations are secured by a first priority lien on substantially all of the revolving credit commitment. Company’s and the guarantors’ assets.
The Company's Credit Agreement provided for a $125 million five-year revolving credit facility maturing on June 30, 2018,consists of which $58.0 million was drawn to finance the acquisition.
On September 26, 2014, we modified and extended 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 inOn January 13, 2016, the Original Facility were rolled intoCompany amended the Agreement on the date of entry. In addition,to add a new lender and extend the maturity date of the loans under the Agreement is nowcredit facility from September 26, 2019.

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2019 to January 13, 2021. At October 3, 2015,July 2, 2016 there was $193.0$153.0 million outstanding on the revolving credit facility and there remains $155.9$195.9 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,July 2, 2016, outstanding letters of credit totaled $1.1 million.

The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is 3.5 to 1, increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LiborLIBOR 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 was replaced withCompany must also maintain a minimum interest coverage ratio (EBITDA(Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement. At October 3, 2015, the Company was in compliance with all of the covenants pursuant to the credit facility. OurThe Company’s interest coverage ratio was 39.634.5 to 1 and theat July 2, 2016. The Company’s leverage ratio was 1.51.30 to 1 at October 3, 2015.
The Company’s cash needs for working capital, debt service and capital equipment during 2015 are expected to be met by cash flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.July 2, 2016.
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, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all such amounts immediately due and payable.
BACKLOG
The Company’s backlog at October 3, 2015July 2, 2016 was $297.0$293.8 million compared with $370.7$274.4 million at December 31, 20142015 and $301.4$352.0 million at September 27, 2014.July 4, 2015.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table representsCompany's contractual obligations as of 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’sand commercial commitments for goods and serviceshave not changed materially from those disclosed in the normal course of business.Company's Form 10-K for the year ended December 31, 2015.
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.


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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 20152016 have not been significant.
CRITICAL ACCOUNTING POLICIES
Refer to the Company’s annual report on Form 10-K for the year ended December 31, 20142015 for a complete discussion of the Company’s critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014,March 2016, the Financial Accounting Standards Board (“("FASB”) issued authoritativeAccounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) which simplifies several aspects of the accounting for employee share-based payment transactions.  The guidance regarding revenue recognition.makes several modifications to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. In addition, ASU 2016-09 clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently assessing how the adoption of this standard will impact the financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is currently assessing how the adoption of the standard will impact the financial statements.

In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers. This new standard is effective for reporting periods beginning after December 15, 2017, pursuant to the issuance of ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date issued in August 2015. 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 earlyEarly adoption of the standard, butis 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.permitted. The Company is currently evaluating the impact thatimpacts of adoption of this guidance will have on its consolidated financial statements and disclosures.the implementation approach to be used.
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 direct deduction from the carrying value of the 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.
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 are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. 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 October 3, 2015.July 2, 2016. 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 October 3, 2015.July 2, 2016.

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.

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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.

On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, AESAstronics Advanced Electronic Systems ("AES") sold, marketed and brought into use in Germany a 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 estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement. The value of the dispute has been set by the Court to be €2 million. This is an estimate of the commercial value of the matter.

On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent 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 guaranteesguarantee specified in the decision, the Company may be required to ceaseoffer a recall of products which are in the distribution of infringing productschannels in Germany (if any).Germany. No such bank guarantee has been issued to date regarding this provision.date.

The Company appealed and believes it has valid defenses to refute the decision. The appeal process is estimatedscheduled to extend upbe heard on October 12, 2016 at the Higher Regional Court. Should that ruling be unfavorable, the Company may choose to two years.appeal to the Federal Supreme Court. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the appeals process. As a result, 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.July 2, 2016.

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 based on technology similar to that involved in the German action. However,On April 25, 2016, the Court issued its ruling on claim construction, holding that the sole independent claim in the patent is indefinite, rendering all claims in the patent indefinite. Based on this ruling, AES filed a motion for summary judgment on the grounds that the Court’s ruling that the patent is indefinite renders the patent invalid and unenforceable. On July 20, 2016 the U.S. courtDistrict Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice. Lufthansa has indicated that it will not be bound byappeal the ultimate determination made byCourt's dismissal to the German court.U.S. Court of Appeals for the Federal Circuit. The Company believes that it has valid defenses to refute Lufthansa’s claims and intends towill vigorously 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.appeal. 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.July 2, 2016.
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, 2014,2015, 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.

Item 2. Unregistered sales of equity securities and use of proceeds
None(c) The following table summarizes our purchases of our common stock for the quarter ended July 2, 2016.


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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 Dollar Value of Shares that may yet be Purchased Under the Program (1)
April 3, 2016 -
July 2, 2016
231,021$34.17231,021$37,846,000

(1) On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock.
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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
*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
   (Registrant)
Date:November 10, 2015August 4, 2016 By:/s/ David C. Burney
    
David C. Burney
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

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