10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
 
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 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 filer
ý
 
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 April 2, 2016, 25,520,160 shares of common stock were outstanding consisting of 19,428,339 shares of common stock ($.01 par value) and 6,091,821 shares of Class B common stock ($.01 par value).
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
PAGE
PART I
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7-17
 
 
 
 
 
 
 
 
Item 2
 
18 – 23
 
 
 
 
 
 
 
 
Item 3
 
 
 
 
 
 
 
 
 
Item 4
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
Item 1a
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
 
 
 
 
 
 
Item 3
 
 
 
 
 
 
 
 
 
Item 4
 
 
 
 
 
 
 
 
 
Item 5
 
 
 
 
 
 
 
 
 
Item 6
 
 
 
 
 
 
 

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Table of Contents

Part I – Financial Information
Item 1. Financial Statements
ASTRONICS CORPORATION
Consolidated Condensed Balance Sheets
April 2, 2016 with Comparative Figures for December 31, 2015
(In thousands)
 
 
April 2,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
15,791

 
$
18,561

Accounts Receivable, Net of Allowance for Doubtful Accounts
106,177

 
95,277

Inventories
118,666

 
115,467

Prepaid Expenses and Other Current Assets
16,403

 
20,662

Total Current Assets
257,037

 
249,967

Property, Plant and Equipment, Net of Accumulated Depreciation
123,971

 
124,742

Other Assets
11,438

 
10,889

Intangible Assets, Net of Accumulated Amortization
105,633

 
108,276

Goodwill
115,742

 
115,369

Total Assets
$
613,821

 
$
609,243

Current Liabilities:
 
 
 
Current Maturities of Long-term Debt
$
2,664

 
$
2,579

Accounts Payable
30,089

 
27,138

Accrued Expenses and Other Current Liabilities
27,516

 
35,758

Customer Advance Payments and Deferred Revenue
34,878

 
38,757

Total Current Liabilities
95,147

 
104,232

Long-term Debt
169,682

 
167,210

Other Liabilities
38,019

 
37,576

Total Liabilities
302,848

 
309,018

Shareholders’ Equity:
 
 
 
Common Stock
257

 
256

Accumulated Other Comprehensive Loss
(13,117
)
 
(15,064
)
Other Shareholders’ Equity
323,833

 
315,033

Total Shareholders’ Equity
310,973

 
300,225

Total Liabilities and Shareholders’ Equity
$
613,821

 
$
609,243

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three Months Ended April 2, 2016 With Comparative Figures for 2015
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended
 
April 2,
2016
 
April 4,
2015
Sales
$
159,530

 
$
161,638

Cost of Products Sold
120,047

 
121,476

Gross Profit
39,483

 
40,162

Selling, General and Administrative Expenses
21,884

 
22,619

Income from Operations
17,599

 
17,543

Interest Expense, Net of Interest Income
1,087

 
1,246

Income Before Income Taxes
16,512

 
16,297

Provision for Income Taxes
5,027

 
5,614

Net Income
$
11,485

 
$
10,683

Earnings Per Share:
 
 
 
Basic
$
0.45

 
$
0.42

Diluted
$
0.44

 
$
0.41

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income
Three Months Ended April 2, 2016 With Comparative Figures for 2015
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
April 2,
2016
 
April 4,
2015
Net Income
$
11,485

 
$
10,683

Other Comprehensive Income (Loss):
 
 
 
Foreign Currency Translation Adjustments
1,816

 
(3,646
)
Retirement Liability Adjustment – Net of Tax
131

 
161

Other Comprehensive Income (Loss)
1,947

 
(3,485
)
Comprehensive Income
$
13,432

 
$
7,198

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Three Months Ended April 2, 2016
With Comparative Figures for 2015
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
April 2,
2016
 
April 4,
2015
Cash Flows From Operating Activities:
 
 
 
Net Income
$
11,485

 
$
10,683

Adjustments to Reconcile Net Income to Cash Provided By Operating Activities:
 
 
 
Depreciation and Amortization
6,546

 
6,127

Provisions for Non-Cash Losses on Inventory and Receivables
563

 
(74
)
Stock Compensation Expense
597

 
506

Deferred Tax Benefit
(468
)
 
(40
)
Other
119

 
110

Cash Flows from Changes in Operating Assets and Liabilities:
 
 
 
Accounts Receivable
(10,384
)
 
18,563

Inventories
(3,117
)
 
(3,474
)
Accounts Payable
2,755

 
5,517

Accrued Expenses
(8,522
)
 
(4,535
)
Other Current Assets and Liabilities
214

 
(633
)
Customer Advanced Payments and Deferred Revenue
(3,831
)
 
(8,796
)
Income Taxes
4,245

 
2,416

Supplemental Retirement and Other Liabilities
341

 
409

Cash Provided By Operating Activities
543

 
26,779

Cash Flows From Investing Activities:
 
 
 
Acquisition of Business, Net of Cash Acquired

 
(52,615
)
Capital Expenditures
(2,450
)
 
(7,059
)
Other Investing Activities

 
(300
)
Cash Used For Investing Activities
(2,450
)
 
(59,974
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from Long-term Debt
10,000

 
40,000

Payments for Long-term Debt
(7,604
)
 
(5,663
)
Purchase of Outstanding Shares for Treasury
(4,261
)
 

Debt Acquisition Costs
(164
)
 

Proceeds from Exercise of Stock Options
451

 
402

Income Tax Benefit from Exercise of Stock Options
529

 
708

Cash (Used For) Provided By Financing Activities
(1,049
)
 
35,447

Effect of Exchange Rates on Cash
186

 
(886
)
(Decrease) Increase in Cash and Cash Equivalents
(2,770
)
 
1,366

Cash and Cash Equivalents at Beginning of Period
18,561

 
21,197

Cash and Cash Equivalents at End of Period
$
15,791

 
$
22,563

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
April 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 months ended April 2, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
The balance sheet at December 31, 2015 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 2015 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, 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 Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Ballard Technology, Inc. (“Ballard”); 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”); Astronics Test Systems, Inc. (“ATS”) and Armstrong Aerospace, Inc. (“Armstrong”).
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 $23.3 million and $22.2 million for the three months ended April 2, 2016 and April 4, 2015, respectively. Selling, general and administrative expenses include costs primarily 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 months ended April 2, 2016 and April 4, 2015.
Foreign Currency Translation
The aggregate transaction gain or loss included in operations was insignificant for the three months ended April 2, 2016 and April 4, 2015.
Accounting Pronouncements Adopted in 2016
There have been no recent accounting pronouncements that have had an impact on the Company’s financial statements.

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Table of Contents

2) Inventories
Inventories are as follows:
 
(In thousands)
April 2,
2016
 
December 31,
2015
Finished Goods
$
28,295

 
$
27,770

Work in Progress
23,482

 
23,977

Raw Material
66,889

 
63,720

 
$
118,666

 
$
115,467

3) Property, Plant and Equipment
The following table summarizes Property, Plant and Equipment as follows:
(In thousands)
April 2,
2016
 
December 31,
2015
Land
$
11,187

 
$
11,145

Buildings and Improvements
79,514

 
78,989

Machinery and Equipment
91,656

 
89,514

Construction in Progress
3,294

 
3,282

 
185,651

 
182,930

Less Accumulated Depreciation
61,680

 
58,188

 
$
123,971

 
$
124,742

4) Intangible Assets
The following table summarizes acquired intangible assets as follows: 
 
 
April 2, 2016
 
December 31, 2015
(In thousands)
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Patents
5 Years
 
$
2,146

 
$
1,311

 
$
2,146

 
$
1,264

Non-compete Agreement
4 Years
 
2,500

 
604

 
2,500

 
479

Trade Names
8 Years
 
10,250

 
2,451

 
10,217

 
2,216

Completed and Unpatented Technology
6 Years
 
24,115

 
7,401

 
24,056

 
6,795

Backlog
Less than 1 Year
 
11,202

 
10,997

 
11,202

 
10,793

Customer Relationships
12 Years
 
96,577

 
18,393

 
96,472

 
16,770

Total Intangible Assets
6 Years
 
$
146,790

 
$
41,157

 
$
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:
 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Amortization Expense
$
2,808

 
$
2,852


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Table of Contents

Amortization expense for acquired intangible assets expected for 2016 and for each of the next five years is summarized as follows:
 
(In thousands)
 
2016
$
10,770

2017
10,336

2018
10,023

2019
9,622

2020
9,088

2021
9,042

5) Goodwill
The following table summarizes the changes in the carrying amount of goodwill for the three months ended April 2, 2016:
 
(In thousands)
December 31,
2015
 
Acquisition
 
Foreign
Currency
Translation
 
April 2,
2016
Aerospace
$
115,369

 
$

 
$
373

 
$
115,742

Test Systems

 

 

 

 
$
115,369

 
$

 
$
373

 
$
115,742

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.
The Company's Credit Agreement consists of a $350 million revolving credit line with the option to increase the line by up to $150 million. On January 13, 2016, the Company amended the Agreement to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021. At April 2, 2016 there was $158.0 million outstanding on the revolving credit facility and there remains $190.9 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 April 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 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 Company 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 35.6 to 1 at April 2, 2016. The Company’s leverage ratio was 1.29 to 1 at April 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.

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Table of Contents

7) Product Warranties
In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periods ranging from 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: 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Balance at Beginning of Period
$
5,741

 
$
4,884

Acquisitions

 
500

Warranties Issued
661

 
738

Warranties Settled
(885
)
 
(726
)
Reassessed Warranty Exposure
(395
)
 
76

Balance at End of Period
$
5,122

 
$
5,472

8) Income Taxes
The effective tax rates were approximately 30.4% and 34.4% for the three months ended April 2, 2016 and April 4, 2015, respectively. The tax rate in the first quarter of 2016 was favorably impacted by the inclusion of the federal research and development tax credit due to its permanent reinstatement in the fourth quarter of 2015. 

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Table of Contents

9) Shareholders’ Equity
The changes in shareholders’ equity for the three months ended April 2, 2016 are summarized as follows:
 
 
 
 
Number of Shares
(Dollars and Shares in thousands)
Amount
 
Common
Stock
 
Convertible
Class B Stock
Shares Authorized
 
 
40,000

 
10,000

Share Par Value
 
 
$
0.01

 
$
0.01

COMMON STOCK
 
 
 
 
 
Beginning of Period
$
256

 
19,349

 
6,220

Conversion of Class B Shares to Common Shares

 
174

 
(174
)
Exercise of Stock Options
1

 
34

 
46

End of Period
$
257

 
19,557

 
6,092

ADDITIONAL PAID IN CAPITAL
 
 
 
 
 
Beginning of Period
$
57,865

 
 
 
 
Stock Compensation Expense
597

 
 
 
 
Exercise of Stock Options
979

 
 
 
 
End of Period
$
59,441

 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
Beginning of Period
$
(15,064
)
 
 
 
 
Foreign Currency Translation Adjustment
1,816

 
 
 
 
Retirement Liability Adjustment – Net of Tax
131

 
 
 
 
End of Period
$
(13,117
)
 
 
 
 
RETAINED EARNINGS
 
 
 
 
 
Beginning of Period
$
257,168

 
 
 
 
Net Income
11,485

 
 
 
 
End of Period
$
268,653

 
 
 
 
TREASURY STOCK
 
 
 
 
 
Beginning of Period
$

 

 
 
Purchase
(4,261
)
 
129

 
 
End of Period
$
(4,261
)
 
129

 
 
TOTAL SHAREHOLDERS’ EQUITY
 
 
 
 
 
Beginning of Period
$
300,225

 
 
 
 
 
 
 
 
 
 
End of Period
$
310,973

 
 
 
 

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 129,000 shares for $4.3 million.


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Table of Contents

10) Earnings Per Share
Basic and diluted weighted-average shares outstanding are as follows:
 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Weighted Average Shares - Basic
25,561

 
25,313

Net Effect of Dilutive Stock Options
838

 
914

Weighted Average Shares - Diluted
26,399

 
26,227

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 April 2, 2016 was approximately 102,000 shares.
11) Accumulated Other Comprehensive Loss and Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows: 
(In thousands)
April 2,
2016
 
December 31,
2015
Foreign Currency Translation Adjustments
$
(6,155
)
 
$
(7,971
)
Retirement Liability Adjustment – Before Tax
(10,711
)
 
(10,912
)
Tax Benefit
3,749

 
3,819

Retirement Liability Adjustment – After Tax
(6,962
)
 
(7,093
)
Accumulated Other Comprehensive Loss
$
(13,117
)
 
$
(15,064
)
The components of other comprehensive income (loss) are as follows: 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Foreign Currency Translation Adjustments
$
1,816

 
$
(3,646
)
Retirement Liability Adjustments:
 
 
 
Reclassifications to General and Administrative Expense:
 
 
 
Amortization of Prior Service Cost
110

 
130

Amortization of Net Actuarial Losses
91

 
118

Tax Benefit
(70
)
 
(87
)
Retirement Liability Adjustment
131

 
161

 
 
 
 
Other Comprehensive Income (Loss)
$
1,947

 
$
(3,485
)

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Table of Contents

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.
 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Service Cost
$
44

 
$
48

Interest Cost
225

 
211

Amortization of Prior Service Cost
104

 
124

Amortization of Net Actuarial Losses
86

 
112

Net Periodic Cost
$
459

 
$
495

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:
 
 
Three Months Ended
(In thousands)
April 2,
2016
 
April 4,
2015
Service Cost
$
1

 
$
2

Interest Cost
11

 
10

Amortization of Prior Service Cost
6

 
6

Amortization of Net Actuarial Losses
5

 
6

Net Periodic Cost
$
23

 
$
24

13) Sales to Major Customers
The Company has a significant concentration of business with two 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 two customers represented 22% and 15% of consolidated sales for the three months ended April 2, 2016. Sales to these customers were in the Aerospace segment. Accounts receivable from these customers at April 2, 2016 was approximately $31.1 million.
14) Legal Proceedings

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

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.



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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. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company may be required to offer a recall of products which are in the distribution channels in Germany. No such bank guarantee has been issued to date.

The Company appealed and believes it has valid defenses to refute the decision. The appeal process is estimated to extend up to two years. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the 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 April 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. 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 intends to seek an order dismissing the case on the grounds that the patent is invalid and unenforceable.   Lufthansa may appeal the Court’s ruling.   The Company believes that it has valid defenses to Lufthansa’s claims and would vigorously contest any 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 April 2, 2016.

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15) Segment Information
Below are the sales and operating profit by segment for the three months ended April 2, 2016 and April 4, 2015 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.
 
 
Three Months Ended
(Dollars in thousands)
April 2,
2016
 
April 4,
2015
Sales
 
 
 
Aerospace
$
138,649

 
$
142,352

Less Intersegment Sales
(340
)
 

Total Aerospace Sales
138,309

 
142,352

 
 
 
 
Test Systems
$
21,221

 
$
19,341

Less Intersegment Sales

 
(55
)
Total Test Systems Sales
21,221

 
19,286

Total Consolidated Sales
$
159,530

 
$
161,638

Operating Profit and Margins
 
 
 
Aerospace
$
18,691

 
$
23,402

 
13.5
%
 
16.4
 %
Test Systems
2,210

 
(2,225
)
 
10.4
%
 
(11.5
)%
Total Operating Profit
20,901

 
21,177

 
13.1
%
 
13.1
 %
Deductions from Operating Profit
 
 
 
Interest Expense, Net of Interest Income
1,087

 
1,246

Corporate Expenses and Other
3,302

 
3,634

Income Before Income Taxes
$
16,512

 
$
16,297

Identifiable Assets: 
(In thousands)
April 2,
2016
 
December 31,
2015
Aerospace
$
513,756

 
$
510,884

Test Systems
75,051

 
64,934

Corporate
25,014

 
33,425

Total Assets
$
613,821

 
$
609,243

16) Fair Value

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. Fair 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.
The 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.

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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 financial liabilities carried at fair value measured on a recurring basis consisted of contingent consideration related to certain prior acquisitions, valued at zero at April 2, 2016 and December 31, 2015, determind using Level 3 inputs.

On a Non-recurring Basis:
The Company estimates the fair value of reporting units, utilizing unobservable Level 3 inputs. Level 3 inputs require significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. The Company utilizes a discounted cash flow analysis to estimate the fair value of reporting units utilizing unobservable inputs. The fair value measurement of the reporting unit under the step-one and step-two analysis of the quantitative goodwill impairment test are classified as Level 3 inputs.
Intangible assets that are amortized are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability test consists of comparing the undiscounted 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.
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 April 2, 2016, the Company concluded that no indicators of impairment relating to intangible assets or goodwill existed and an interim test was not performed.

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17) Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB”) issued Accounting 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 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. Early adoption is not permitted. The Company is currently evaluating the impacts of adoption and the implementation approach to be used.
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. All of the goodwill and

purchased intangible assets are expected to be deductible for tax purposes over 
15 years. The purchase price allocation for this acquisition has been finalized.

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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, 2015.)
OVERVIEW
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, 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 motion systems, aircraft structures, avionics products, systems certification and other products. Our Aerospace customers are the airframe manufacturers ("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 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 electronics and military 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, 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. Future growth and profitability of the Test 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.

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Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK 
 
Three Months Ended
(Dollars in thousands)
April 2,
2016
 
April 4,
2015
Sales
$
159,530

 
$
161,638

Gross Profit (sales less cost of products sold)
$
39,483

 
$
40,162

Gross Margin
24.7
%
 
24.8
%
Selling, General and Administrative Expenses
$
21,884

 
$
22,619

SG&A Expenses as a Percentage of Sales
13.7
%
 
14.0
%
Interest Expense, Net of Interest Income
$
1,087

 
$
1,246

Effective Tax Rate
30.4
%
 
34.4
%
Net Income
$
11,485

 
$
10,683

A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.
FIRST QUARTER RESULTS
Consolidated sales for the first quarter of 2016 were $159.5 million, down 1.3% over the same period last year. Aerospace sales decreased 2.8% to $138.3 million, while Test Systems sales were $21.2 million, an increase of 10% year over year.
Consolidated cost of products sold decreased $1.5 million to $120.0 million from $121.5 million for the same period last year, primarily due to lower sales volume. Engineering and development (“E&D”) costs were $23.3 million, up from $22.2 million in the 2015 first quarter. As a percent of sales, E&D was 14.6% and 13.8% in the first quarters of 2016 and 2015, respectively.
Selling, general and administrative (“SG&A”) expenses were $21.9 million, or 13.7% of sales, compared with $22.6 million, or 14.0% of sales, in the same period last year.
The effective tax rate for the first quarter was 30.4%, compared with 34.4% in the first quarter of 2015. The tax rate in the first quarter of 2016 was favorably impacted by the inclusion of the federal research and development tax credit due to its permanent reinstatement in the fourth quarter of 2015. 
Diluted earnings per share for the 2016 first quarter were $0.44 compared with $0.41 in the prior-year period.
CONSOLIDATED OUTLOOK
Consolidated sales in 2016 are forecasted to be in the range of $665 million to $710 million. Approximately $572 million to $600 million of revenue is expected from the Aerospace segment, which represents a decline in the high end of our previous range of $16 million. Expectations for Test Systems segment revenue in 2016 remains relatively unchanged at approximately $93 million to $110 million.
Consolidated backlog at April 2, 2016 was $276.8 million, of which $229.8 million is expected to ship in 2016.
The effective tax rate for 2016 is expected to be approximately 29% to 32%.
Capital equipment spending in 2016 is planned to be in the range of $20 million to $25 million. E&D costs are estimated to continue at roughly the same rate as 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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Table of Contents

AEROSPACE SEGMENT
 
Three Months Ended
(In thousands)
April 2, 2016
 
April 4, 2015
Sales
 
 
 
Aerospace
$
138,649

 
$
142,352

Less Intersegment Sales
(340
)
 

Total Aerospace Sales
$
138,309

 
$
142,352

Operating Profit
$
18,691

 
$
23,402

Operating Margin
13.5
%
 
16.4
%
 
 
 
 
Aerospace Sales by Market
 
 
 
(In thousands)
 
 
 
Commercial Transport
$
113,396

 
$
120,194

Military
12,280

 
9,258

Business Jet
6,525

 
8,092

Other
6,108

 
4,808

 
$
138,309

 
$
142,352

Aerospace Sales by Product Line
 
 
 
(In thousands)
 
 
 
Electrical Power & Motion
$
75,392

 
$
69,570

Lighting & Safety
40,566

 
42,077

Avionics
7,474

 
17,367

Systems Certification
4,606

 
4,574

Structures
4,163

 
3,956

Other
6,108

 
4,808

 
$
138,309

 
$
142,352

(In thousands)
April 2, 2016
 
December 31, 2015
Total Assets
$
513,756

 
$
510,884

Backlog
$
214,769

 
$
212,651

AEROSPACE FIRST QUARTER RESULTS
Aerospace segment sales decreased by $4.0 million, or 2.8%, to $138.3 million when compared with the prior year’s first quarter.
Electrical Power & Motion sales grew $5.8 million, or 8.4%, largely driven by higher sales of in-seat power products, which were up 7.3%. This increase was offset by a $9.9 million decline in Avionics products, which is largely due to lower sales of satellite antenna systems.
Aerospace operating profit was $18.7 million, or 13.5% of sales, compared with $23.4 million, or 16.4% of sales in the prior year’s first quarter. Compared with the prior year, operating margins were negatively affected by lower sales volume in the Avionics product line as well an increase in E&D expenses of $0.9 million to $20.3 million.
AEROSPACE OUTLOOK
We expect 2016 sales for our Aerospace segment to be in the range of $572 million to $600 million. The Aerospace segment’s backlog at the end of the first quarter of 2016 was $214.8 million with approximately $184.2 million expected to be shipped over the remaining part of 2016 and $195.9 million is expected to ship over the next 12 months.


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TEST SYSTEMS SEGMENT 
 
Three Months Ended
(In thousands)
April 2, 2016
 
April 4, 2015
Sales
$
21,221

 
$
19,341

Less Intersegment Sales

 
(55
)
Net Sales
$
21,221

 
$
19,286

Operating profit (loss)
$
2,210

 
$
(2,225
)
Operating Margin
10.4
%
 
(11.5
)%
 
 
 
 
Test Systems Sales by Market
 
 
 
(In thousands)
 
 
 
Semiconductor
$
7,137

 
$
4,752

Aerospace & Defense
14,084

 
14,534

 
$
21,221

 
$
19,286

(In thousands)
April 2, 2016
 
December 31, 2015
Total Assets
$
75,051

 
$
64,934

Backlog
$
61,995

 
$
61,713


TEST SYSTEMS FIRST QUARTER RESULTS
Test Systems segment sales increased $1.9 million to $21.2 million when compared with the first quarter of 2015. Semiconductor test sales were up $2.4 million to $7.1 million, more than offsetting the $0.5 million, or 3%, decline in Aerospace & Defense test sales.
Operating profit in the first quarter of 2016 was $2.2 million, or 10.4% of sales, compared with an operating loss of $2.2 million, or (11.5%) of sales, in the first quarter of 2015. Operating margins were positively affected by higher volume and initiatives to improve operating efficiencies. E&D costs were approximately $3.0 million in the first quarter of 2016 and $2.8 million in the prior-year period.
TEST SYSTEMS OUTLOOK
We expect sales for the Test Systems segment for 2016 to be in the range of $93 million to $110 million. The Test Systems segment’s backlog at the end of the first quarter of 2016 was $62.0 million with approximately $45.7 million expected to be shipped over the remaining part of 2016 and approximately $50.4 million scheduled to ship over the next 12 months.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
Cash provided by operating activities totaled $0.5 million for the first three months of 2016, as compared with $26.8 million during the same period in 2015. Cash flow from operating activities decreased primarily due to the impact of increases in net operating assets for the first three months of 2016 when compared with the first three months of 2015.
Investing Activities:
Cash used for investing activities was $2.5 million for the first three months of 2016 compared with $60.0 million used in the same period of 2015. Cash used for capital expenditures was $2.5 million in the first quarter of 2016 compared with $7.1 million in the prior year period. The Company expects capital spending in 2016 to be in the range of $20 million to $25 million. Cash used for the acquisition of Armstrong in January 2015 was $52.6 million.


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Financing Activities:
The primary financing activities in 2016 relate to borrowings and payments on our senior credit facility to fund operations, and purchases of treasury stock as part of the buyback program announced on February 24, 2016, under which the Board of Directors authorized the repurchase of up to $50 million of common stock.
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.
The Company's Credit Agreement consists of a $350 million revolving credit line with the option to increase the line by up to $150 million. On January 13, 2016, the Company amended the Agreement to add a new lender and extend the maturity date of the credit facility from September 26, 2019 to January 13, 2021. At April 2, 2016 there was $158.0 million outstanding on the revolving credit facility and there remains $190.9 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 April 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 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 Company must 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 35.6 to 1 at April 2, 2016. The Company’s leverage ratio was 1.3 to 1 at April 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.
The Company’s cash needs for working capital, debt service and capital equipment during 2016 are expected to be met by cash flows from operations and cash balances and, if necessary, utilization of the revolving credit facility.
In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the Credit Agreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial and other covenants, give the Agent the option to declare all such amounts immediately due and payable.
BACKLOG
The Company’s backlog at April 2, 2016 was $276.8 million compared with $274.4 million at December 31, 2015 and $378.5 million at April 4, 2015.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company's contractual obligations and commercial commitments have not changed materially from those disclosed in the Company's Form 10-K for the year ended December 31, 2015.
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 2016 have not been significant.

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Table of Contents

CRITICAL ACCOUNTING POLICIES
Refer to the Company’s annual report on Form 10-K for the year ended December 31, 2015 for a complete discussion of the Company’s critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS

In March 2016, the Financial Accounting Standards Board ("FASB”) issued Accounting 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 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. Early adoption is not permitted. The Company is currently evaluating the impacts of adoption and the implementation approach to be used.
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 April 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 April 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, Astronics Advanced Electonic 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. Additionally, if Lufthansa provides the required bank guarantee specified in the decision, the Company may be required to offer a recall of products which are in the distribution channels in Germany. No such bank guarantee has been issued to date.

The Company appealed and believes it has valid defenses to refute the decision. The appeal process is estimated to extend up to two years. The enforcement of the accounting provision of the decision, as discussed above, has no impact on the 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 April 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. 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 intends to seek an order dismissing the case on the grounds that the patent is invalid and unenforceable.   Lufthansa may appeal the Court’s ruling.   The Company believes that it has valid defenses to Lufthansa’s claims and would vigorously contest any 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 April 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, 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.

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Item 2. Unregistered sales of equity securities and use of proceeds
(c) The following table summarizes our purchases of our common stock for the quarter ended April 2, 2016.

Period
(a) Total Number of Shares Purchased (1)
(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 (2)
February 28 -
April 2, 2016
132,861
$33.05
129,093
$45,739,193

(1) Includes 3,768 shares transferred to us by employees in connection with the exercise of stock options. The remainder were shares purchased in the open market pursuant to our repurchase program.

(2) On February 24, 2016, the Company’s Board of Directors authorized the repurchase of up to $50 million of common stock.
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:
May 5, 2016
 
By:
/s/ David C. Burney
 
 
 
 
David C. Burney
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

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