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 July 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 July 2, 2016, 25,294,641 shares of common stock were outstanding consisting of 19,265,232 shares of common stock ($.01 par value) and 6,029,409 shares of Class B common stock ($.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
July 2, 2016 with Comparative Figures for December 31, 2015
(In thousands)
 
 
July 2,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
20,411

 
$
18,561

Accounts Receivable, Net of Allowance for Doubtful Accounts
106,316

 
95,277

Inventories
119,329

 
115,467

Prepaid Expenses and Other Current Assets
11,308

 
20,662

Total Current Assets
257,364

 
249,967

Property, Plant and Equipment, Net of Accumulated Depreciation
123,709

 
124,742

Other Assets
11,966

 
10,889

Intangible Assets, Net of Accumulated Amortization
103,598

 
108,276

Goodwill
115,614

 
115,369

Total Assets
$
612,251

 
$
609,243

Current Liabilities:
 
 
 
Current Maturities of Long-term Debt
$
2,691

 
$
2,579

Accounts Payable
27,240

 
27,138

Accrued Expenses and Other Current Liabilities
33,588

 
35,758

Customer Advance Payments and Deferred Revenue
28,729

 
38,757

Total Current Liabilities
92,248

 
104,232

Long-term Debt
163,898

 
167,210

Other Liabilities
37,661

 
37,576

Total Liabilities
293,807

 
309,018

Shareholders’ Equity:
 
 
 
Common Stock
257

 
256

Accumulated Other Comprehensive Loss
(13,498
)
 
(15,064
)
Other Shareholders’ Equity
331,685

 
315,033

Total Shareholders’ Equity
318,444

 
300,225

Total Liabilities and Shareholders’ Equity
$
612,251

 
$
609,243

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Operations
Three and Six Months Ended July 2, 2016 With Comparative Figures for 2015
(Unaudited)
(In thousands, except per share data)
 
 
Six Months Ended
 
Three Months Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Sales
$
323,956

 
$
334,794

 
$
164,426

 
$
173,156

Cost of Products Sold
239,638

 
245,180

 
119,591

 
123,704

Gross Profit
84,318

 
89,614

 
44,835

 
49,452

Selling, General and Administrative Expenses
44,108

 
43,916

 
22,224

 
21,297

Income from Operations
40,210

 
45,698

 
22,611

 
28,155

Interest Expense, Net of Interest Income
2,143

 
2,357

 
1,056

 
1,111

Income Before Income Taxes
38,067

 
43,341

 
21,555

 
27,044

Provision for Income Taxes
11,602

 
14,968

 
6,575

 
9,354

Net Income
$
26,465

 
$
28,373

 
$
14,980

 
$
17,690

Earnings Per Share:
 
 
 
 
 
 
 
Basic
$
1.04

 
$
1.12

 
$
0.59

 
$
0.70

Diluted
$
1.00

 
$
1.08

 
$
0.57

 
$
0.67

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Comprehensive Income
Three and Six Months Ended July 2, 2016 With Comparative Figures for 2015
(Unaudited)
(In thousands)
 
 
Six Months Ended
 
Three Months Ended
 
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Net Income
$
26,465

 
$
28,373

 
$
14,980

 
$
17,690

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
1,305

 
(3,214
)
 
(511
)
 
432

Retirement Liability Adjustment – Net of Tax
261

 
323

 
130

 
162

Other Comprehensive Income (Loss)
1,566

 
(2,891
)
 
(381
)
 
594

Comprehensive Income
$
28,031

 
$
25,482

 
$
14,599

 
$
18,284

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Consolidated Condensed Statements of Cash Flows
Six Months Ended July 2, 2016
With Comparative Figures for 2015
(Unaudited)
(In thousands)
 
 
Six Months Ended
 
July 2,
2016
 
July 4,
2015
Cash Flows From Operating Activities:
 
 
 
Net Income
$
26,465

 
$
28,373

Adjustments to Reconcile Net Income to Cash Provided By Operating Activities:
 
 
 
Depreciation and Amortization
13,146

 
12,545

Provisions for Non-Cash Losses on Inventory and Receivables
928

 
957

Stock Compensation Expense
1,256

 
1,143

Deferred Tax Benefit
(980
)
 
(576
)
Non-cash Earnout Liability Adjustment

 
(1,268
)
Other
320

 
158

Cash Flows from Changes in Operating Assets and Liabilities:
 
 
 
Accounts Receivable
(10,860
)
 
(3,797
)
Inventories
(4,145
)
 
(16,786
)
Accounts Payable
(10
)
 
9,192

Accrued Expenses
(3,643
)
 
(857
)
Other Current Assets and Liabilities
32

 
(352
)
Customer Advanced Payments and Deferred Revenue
(9,992
)
 
(13,287
)
Income Taxes
10,107

 
4,610

Supplemental Retirement and Other Liabilities
695

 
820

Cash Provided By Operating Activities
23,319

 
20,875

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

 
(52,615
)
Capital Expenditures
(6,176
)
 
(12,277
)
Other Investing Activities
(850
)
 
(2,678
)
Cash Used For Investing Activities
(7,026
)
 
(67,570
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from Long-term Debt
15,000

 
55,000

Payments for Long-term Debt
(18,279
)
 
(6,331
)
Purchase of Outstanding Shares for Treasury
(12,154
)
 

Debt Acquisition Costs
(164
)
 

Proceeds from Exercise of Stock Options
557

 
638

Acquisition Earnout Payments

 
(2
)
Income Tax Benefit from Exercise of Stock Options
529

 
708

Cash (Used For) Provided By Financing Activities
(14,511
)
 
50,013

Effect of Exchange Rates on Cash
68

 
(748
)
Increase in Cash and Cash Equivalents
1,850

 
2,570

Cash and Cash Equivalents at Beginning of Period
18,561

 
21,197

Cash and Cash Equivalents at End of Period
$
20,411

 
$
23,767

See notes to consolidated condensed financial statements.

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Table of Contents

ASTRONICS CORPORATION
Notes to Consolidated Condensed Financial Statements
July 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 six months ended July 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 Armstrong Aerospace, Inc. (“Armstrong”); 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”) and Astronics Test Systems, Inc. (“ATS”).
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 $21.9 million and $21.3 million for the three months ended and $45.2 million and $43.6 million for the six months ended July 2, 2016 and July 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 and six months ended July 2, 2016 and July 4, 2015.
Foreign Currency Translation
The aggregate transaction gain or loss included in operations was insignificant for the six months ended July 2, 2016 and July 4, 2015.


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Table of Contents

Accounting Pronouncements Adopted in 2016
There have been no recent accounting pronouncements that have had an impact on the Company’s financial statements.
2) Inventories
Inventories are as follows:
 
(In thousands)
July 2,
2016
 
December 31,
2015
Finished Goods
$
28,383

 
$
27,770

Work in Progress
26,307

 
23,977

Raw Material
64,639

 
63,720

 
$
119,329

 
$
115,467

3) Property, Plant and Equipment
The following table summarizes Property, Plant and Equipment as follows:
(In thousands)
July 2,
2016
 
December 31,
2015
Land
$
11,164

 
$
11,145

Buildings and Improvements
79,434

 
78,989

Machinery and Equipment
94,623

 
89,514

Construction in Progress
3,397

 
3,282

 
188,618

 
182,930

Less Accumulated Depreciation
64,909

 
58,188

 
$
123,709

 
$
124,742

4) Intangible Assets
The following table summarizes acquired intangible assets as follows: 
 
 
July 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

 
$
1,357

 
$
2,146

 
$
1,264

Non-compete Agreement
4 Years
 
2,500

 
729

 
2,500

 
479

Trade Names
7 Years
 
10,232

 
2,685

 
10,217

 
2,216

Completed and Unpatented Technology
6 Years
 
24,083

 
8,006

 
24,056

 
6,795

Backlog
Less than 1 Year
 
11,627

 
11,202

 
11,202

 
10,793

Customer Relationships
12 Years
 
96,946

 
19,957

 
96,472

 
16,770

Total Intangible Assets
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:
 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Amortization Expense
$
5,607

 
$
5,772

 
$
2,799

 
$
2,920


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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
$
11,013

2017
10,591

2018
10,066

2019
9,664

2020
9,130

2021
9,085

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

 
$

 
$
245

 
$
115,614

Test Systems

 

 

 

 
$
115,369

 
$

 
$
245

 
$
115,614

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 July 2, 2016 there was $153.0 million outstanding on the revolving credit facility and there remains $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 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 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 34.5 to 1 at July 2, 2016. The Company’s leverage ratio was 1.30 to 1 at 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.

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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: 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Balance at Beginning of Period
$
5,741

 
$
4,884

 
$
5,122

 
$
5,472

Acquisitions

 
500

 

 

Warranties Issued
1,206

 
1,139

 
545

 
401

Warranties Settled
(1,290
)
 
(1,427
)
 
(405
)
 
(701
)
Reassessed Warranty Exposure
(296
)
 
223

 
99

 
147

Balance at End of Period
$
5,361

 
$
5,319

 
$
5,361

 
$
5,319

8) Income Taxes
The effective tax rates were approximately 30.5% and 34.5% for the six months ended and 30.5% and 34.6% for the three months ended July 2, 2016 and July 4, 2015, respectively. The tax rates in 2016 were 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 six months ended July 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

 
15,000

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

 
239

 
(239
)
Exercise of Stock Options
1

 
37

 
48

End of Period
$
257

 
19,625

 
6,029

ADDITIONAL PAID IN CAPITAL
 
 
 
 
 
Beginning of Period
$
57,865

 
 
 
 
Stock Compensation Expense
1,256

 
 
 
 
Exercise of Stock Options
1,085

 
 
 
 
End of Period
$
60,206

 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
Beginning of Period
$
(15,064
)
 
 
 
 
Foreign Currency Translation Adjustment
1,305

 
 
 
 
Retirement Liability Adjustment – Net of Tax
261

 
 
 
 
End of Period
$
(13,498
)
 
 
 
 
RETAINED EARNINGS
 
 
 
 
 
Beginning of Period
$
257,168

 
 
 
 
Net Income
26,465

 
 
 
 
End of Period
$
283,633

 
 
 
 
TREASURY STOCK
 
 
 
 
 
Beginning of Period
$

 

 
 
Purchase
(12,154
)
 
(360
)
 
 
End of Period
$
(12,154
)
 
(360
)
 
 
TOTAL SHAREHOLDERS’ EQUITY
 
 
 
 
 
Beginning of Period
$
300,225

 
 
 
 
 
 
 
 
 
 
End of Period
$
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.


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Table of Contents

10) Earnings Per Share
Basic and diluted weighted-average shares outstanding are as follows:
 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Weighted Average Shares - Basic
25,500

 
25,363

 
25,444

 
25,415

Net Effect of Dilutive Stock Options
839

 
880

 
840

 
846

Weighted Average Shares - Diluted
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 July 2, 2016 was approximately 230,000 shares.
11) Accumulated Other Comprehensive Loss and Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows: 
(In thousands)
July 2,
2016
 
December 31,
2015
Foreign Currency Translation Adjustments
$
(6,666
)
 
$
(7,971
)
Retirement Liability Adjustment – Before Tax
(10,510
)
 
(10,912
)
Tax Benefit
3,678

 
3,819

Retirement Liability Adjustment – After Tax
(6,832
)
 
(7,093
)
Accumulated Other Comprehensive Loss
$
(13,498
)
 
$
(15,064
)
The components of other comprehensive income (loss) are as follows: 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Foreign Currency Translation Adjustments
$
1,305

 
$
(3,214
)
 
$
(511
)
 
$
432

Retirement Liability Adjustments:
 
 
 
 
 
 
 
Reclassifications to General and Administrative Expense:
 
 
 
 
 
 
 
Amortization of Prior Service Cost
219

 
260

 
109

 
130

Amortization of Net Actuarial Losses
183

 
237

 
92

 
119

Tax Benefit
(141
)
 
(174
)
 
(71
)
 
(87
)
Retirement Liability Adjustment
261

 
323

 
130

 
162

Other Comprehensive Income (Loss)
$
1,566

 
$
(2,891
)
 
$
(381
)
 
$
594


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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.
 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Service Cost
$
86

 
$
97

 
$
43

 
$
48

Interest Cost
450

 
422

 
225

 
211

Amortization of Prior Service Cost
207

 
247

 
103

 
124

Amortization of Net Actuarial Losses
172

 
225

 
86

 
112

Net Periodic Cost
$
915

 
$
991

 
$
457

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

 
$
3

 
$
1

 
$
2

Interest Cost
20

 
19

 
10

 
10

Amortization of Prior Service Cost
12

 
13

 
6

 
6

Amortization of Net Actuarial Losses
11

 
12

 
6

 
7

Net Periodic Cost
$
45

 
$
47

 
$
23

 
$
25

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 six months ended and 21% and 16% for the three months ended July 2, 2016. Sales to these customers were in the Aerospace segment. Accounts receivable from these customers at July 2, 2016 was approximately $25.9 million. Sales to these two customers represented 22% and 14% of consolidated sales for the six months ended July 4, 2015 and 20% and 13% for the three months ended 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.


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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 is scheduled to be heard on October 12, 2016 at the Higher Regional Court. Should that ruling be unfavorable, the Company may choose to 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 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. 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. District Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice. Lufthansa has indicated that it will appeal the Court's dismissal to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it has valid defenses to Lufthansa’s claims and will vigorously contest the 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 July 2, 2016.

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15) Segment Information
Below are the sales and operating profit by segment for the three and six months ended July 2, 2016 and July 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.
 
 
Six Months Ended
 
Three Months Ended
(Dollars 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

 
 
 
 
 
 
 
 
Test Systems
$
43,146

 
$
60,327

 
$
21,925

 
$
40,986

Less Intersegment Sales

 
(55
)
 

 

Total Test Systems Sales
43,146

 
60,272

 
21,925

 
40,986

Total Consolidated Sales
$
323,956

 
$
334,794

 
$
164,426

 
$
173,156

Operating Profit and Margins
 
 
 
 
 
 
 
Aerospace
$
43,542

 
$
43,673

 
$
24,851

 
$
20,271

 
15.5
%
 
15.9
%
 
17.4
%
 
15.3
%
Test Systems
3,284

 
7,638

 
1,074

 
9,863

 
7.6
%
 
12.7
%
 
4.9
%
 
24.1
%
Total Operating Profit
46,826

 
51,311

 
25,925

 
30,134

 
14.5
%
 
15.3
%
 
15.8
%
 
17.4
%
Deductions from Operating Profit
 
 
 
 
 
 
 
Interest Expense, Net of Interest Income
2,143

 
2,357

 
1,056

 
1,111

Corporate Expenses and Other
6,616

 
5,613

 
3,314

 
1,979

Income Before Income Taxes
$
38,067

 
$
43,341

 
$
21,555

 
$
27,044

Total Assets: 
(In thousands)
July 2,
2016
 
December 31,
2015
Aerospace
$
505,612

 
$
510,884

Test Systems
81,361

 
64,934

Corporate
25,278

 
33,425

Total Assets
$
612,251

 
$
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 July 2, 2016 and December 31, 2015, determined 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 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.

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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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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK 
 
Six Months Ended
 
Three Months Ended
(Dollars in thousands)
July 2,
2016
 
July 4,
2015
 
July 2,
2016
 
July 4,
2015
Sales
$
323,956

 
$
334,794

 
$
164,426

 
$
173,156

Gross Profit (sales less cost of products sold)
$
84,318

 
$
89,614

 
$
44,835

 
$
49,452

Gross Margin
26.0
%
 
26.8
%
 
27.3
%
 
28.6
%
Selling, General and Administrative Expenses
$
44,108

 
$
43,916

 
$
22,224

 
$
21,297

SG&A Expenses as a Percentage of Sales
13.6
%
 
13.1
%
 
13.5
%
 
12.3
%
Interest Expense, Net of Interest Income
$
2,143

 
$
2,357

 
$
1,056

 
$
1,111

Effective Tax Rate
30.5
%
 
34.5
%
 
30.5
%
 
34.6
%
Net Income
$
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 SECOND QUARTER RESULTS
Consolidated sales for the second quarter of 2016 were $164.4 million, down from $173.2 million for the same period last year. Record Aerospace segment sales of $142.5 million offset lower Test Systems segment sales.
Consolidated cost of products sold decreased $4.1 million to $119.6 million from $123.7 million for the same period last year, primarily due to lower sales volume. Engineering and development (“E&D”) costs were $21.9 million in the second quarter of 2016. E&D costs in last year’s second quarter were $21.3 million. As a percent of sales, E&D was 13.3% and 12.3% in the second quarters of 2016 and 2015, respectively.
Selling, general and administrative (“SG&A”) expenses were $22.2 million, or 13.5% of sales, compared with $21.3 million, or 12.3% of sales, in the same period last year. The second quarter of 2015 benefited from a $1.3 million reduction to the contingent consideration liability related to prior acquisitions.
The effective tax rate for the second quarter was 30.5%, compared with 34.6% in the second quarter of 2015. 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 $17.7 million in the prior-year period. Diluted earnings per share for the 2016 second quarter were $0.57 compared with $0.67 in the prior-year period.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated sales for the first six months of 2016 decreased by $10.8 million, or 3.2%, to $ 324.0 million from $334.8 million for the same period last year.
Consolidated costs of products sold decreased $5.6 million to $239.6 million from $245.2 million in the first six months of 2015. The decrease was the result of lower sales volume partially offset by $1.6 million higher E&D costs. E&D costs were 14.0% of sales, or $45.2 million, compared with $43.6 million, or 13.0% of sales, in the prior year’s first six months.
SG&A expenses were $44.1 million, or 13.6% of sales, in the first six months of 2016 compared with $43.9 million, or 13.1% of sales, in the same period last year. The second quarter of 2015 benefited from a $1.3 million reduction to 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 six months of 2016 were $1.00 compared with $1.08 for the same period last year.

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CONSOLIDATED OUTLOOK
Consolidated sales in 2016 are forecasted to be in the range of $655 million to $685 million. Approximately $560 million to $580 million of revenue is expected from the Aerospace segment. Expectations for Test Systems segment revenue in 2016 remains relatively unchanged at approximately $95 million to $105 million.
Consolidated backlog at July 2, 2016 was $293.8 million, of which $199.9 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 $17 million to $20 million. E&D costs are expected to be similar to 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.
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 Margin
15.5
%
 
15.9
%
 
17.4
%
 
15.3
%
 
 
 
 
 
 
 
 
Aerospace Sales by Market
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
Commercial Transport
$
229,818

 
$
227,823

 
$
116,423

 
$
107,629

Military
26,254

 
19,827

 
13,973

 
10,569

Business Jet
14,232

 
17,153

 
7,707

 
9,061

Other
10,506

 
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 & Safety
82,544

 
79,985

 
41,979

 
37,907

Avionics
16,818

 
29,030

 
9,344

 
11,663

Systems Certification
9,997

 
10,344

 
5,391

 
5,771

Structures
9,988

 
8,029

 
5,825

 
4,074

Other
10,506

 
9,719

 
4,398

 
4,911

 
$
280,810

 
$
274,522

 
$
142,501

 
$
132,170

(In thousands)
July 2, 2016
 
December 31, 2015
Total Assets
$
505,612

 
$
510,884

Backlog
$
235,800

 
$
212,651



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AEROSPACE SECOND QUARTER RESULTS
Aerospace segment sales increased by $10.3 million, or 7.8%, when compared with the prior year’s second quarter to $142.5 million, which represents a record level for the Aerospace segment.
Electrical Power & Motion sales grew $7.7 million, or 11.4%, largely driven by higher sales of in-seat power products, which 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 lower sales of satellite antenna systems and in-flight entertainment system and cabin management systems for VVIP aircraft.
Aerospace operating profit for the second quarter of 2016 also set an all-time high of $24.9 million, or 17.4% of sales, compared with $20.3 million, or 15.3% of sales, in the same period last year. Operating margins gained on higher volume were partially offset by increased E&D spending and a general increase in operating costs. Aerospace E&D costs were $19.0 million in the quarter compared with $18.5 million in the same period last year.
AEROSPACE YEAR-TO-DATE RESULTS
Aerospace segment sales increased by $6.3 million, or 2.3%, when compared with the prior year’s first six months to $280.8 million.
Electrical Power & Motion sales grew $13.5 million, or 9.9%, largely driven by higher sales of in-seat power products, which were up 10.2%. This increase was offset by a $12.2 million decline in Avionics products, which was largely due to lower sales of satellite antenna systems.
Aerospace operating profit for the first six months of 2016 was $43.5 million, or 15.5% of sales, compared with $43.7 million, or 15.9% of sales, in the same period last year. Operating leverage gained on increased volume for the business was offset by higher E&D costs of approximately $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 $0.7 million in the first six months of 2016 as compared with 2015. The first six months of 2015 included inventory step-up costs of $0.7 million that reduced normal operating margins for that period.
AEROSPACE OUTLOOK
We expect 2016 sales for our Aerospace segment to be in the range of $560 million to $580 million. The Aerospace segment’s backlog at the end of the second quarter of 2016 was $235.8 million with approximately $159.6 million expected to be shipped over the remaining part of 2016 and $205.7 million is expected to ship over the next 12 months.
TEST SYSTEMS SEGMENT 
 
Six Months Ended
 
Three Months Ended
(In thousands)
July 2, 2016
 
July 4, 2015
 
July 2, 2016
 
July 4, 2015
Sales
$
43,146

 
$
60,327

 
$
21,925

 
$
40,986

Less Intersegment Sales

 
(55
)
 

 

Net Sales
$
43,146

 
$
60,272

 
$
21,925

 
$
40,986

Operating profit (loss)
$
3,284

 
$
7,638

 
$
1,074

 
$
9,863

Operating Margin
7.6
%
 
12.7
%
 
4.9
%
 
24.1
%
 
 
 
 
 
 
 
 
Test Systems Sales by Market
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
Semiconductor
$
16,985

 
$
36,258

 
$
9,848

 
$
31,507

Aerospace & Defense
26,161

 
24,014

 
12,077

 
9,479

 
$
43,146

 
$
60,272

 
$
21,925

 
$
40,986

(In thousands)
July 2, 2016
 
December 31, 2015
Total Assets
$
81,361

 
$
64,934

Backlog
$
58,011

 
$
61,713


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TEST SYSTEMS SECOND QUARTER RESULTS
Sales in the second quarter of 2016 decreased approximately $19.0 million to $21.9 million compared with the same period in 2015, 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 market.
Operating profit was $1.1 million, or 4.9% of sales, compared with $9.9 million or 24.1% of sales in last year’s second quarter. E&D costs remained relatively consistent at $2.9 million and $2.8 million in the second quarters of 2016 and 2015, respectively.
TEST SYSTEMS YEAR-TO-DATE RESULTS
Sales in the first six months of 2016 decreased 28.4% to $43.1 million compared with sales of $60.3 million for the same period in 2015, due to lower shipments to the Semiconductor market. Sales to the Semiconductor market decreased $19.3 million compared with the same period in 2015, which was partially offset by increased sales of $2.1 million to the Aerospace & Defense market.
Operating profit was $3.3 million, or 7.6% of sales, compared with $7.6 million, or 12.7% of sales, in the first six months of 2015. E&D costs were $5.9 million in the first six months of 2016 compared with $5.6 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 $95 million to $105 million. The Test Systems segment’s backlog at the end of the second quarter of 2016 was $58.0 million with approximately $40.3 million expected to be shipped over the remaining part of 2016 and approximately $48.8 million scheduled to ship over the next 12 months.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
Cash provided by operating activities totaled $23.3 million for the first six months of 2016, as compared with $20.9 million during the same period in 2015. Cash flow from operating activities increased primarily due to the impact of decreases in net operating assets for the first six months of 2016 when compared with the first six months of 2015.
Investing Activities:
Cash used for investing activities was $7.0 million for the first six months of 2016 compared with $67.6 million used in the same period of 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.
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 July 2, 2016 there was $153.0 million outstanding on the revolving credit facility and there remains $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 July 2, 2016, outstanding letters of credit totaled $1.1 million.

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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 34.5 to 1 at July 2, 2016. The Company’s leverage ratio was 1.30 to 1 at 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.
BACKLOG
The Company’s backlog at July 2, 2016 was $293.8 million compared with $274.4 million at December 31, 2015 and $352.0 million at July 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.
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

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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 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 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, Astronics 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. 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 is scheduled to be heard on October 12, 2016 at the Higher Regional Court. Should that ruling be unfavorable, the Company may choose to 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 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. 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. District Court granted the motion for summary judgment and issued an order dismissing all claims against AES with prejudice. Lufthansa has indicated that it will appeal the Court's dismissal to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it has valid defenses to Lufthansa’s claims and will vigorously contest the 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 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, 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 July 2, 2016.

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
$34.17
231,021
$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.
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:
August 4, 2016
 
By:
/s/ David C. Burney
 
 
 
 
David C. Burney
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

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