Astronics Corp Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the Fiscal Year Ended December 31, 2013Commission File Number 0-7087 Astronics Corporation(Exact Name of Registrant as Specified in its Charter) New York 16-0959303(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)130 Commerce Way, East Aurora, N.Y. 14052(Address of principal executive office)Registrant’s telephone number, including area code (716) 805-1599Securities registered pursuant to Section 12(b) of the Act: NoneSecurities 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition 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 ¨ Accelerated filer xNon-accelerated filer ¨ Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of January 31, 2014, 17,876,973 shares were outstanding, consisting of 13,589,794 shares of Common Stock $.01 Par Value and 4,287,179shares of Class B Stock $.01 Par Value. The aggregate market value, as of the last business day of the Company’s most recently completed second fiscalquarter, of the shares of Common Stock and Class B Stock of Astronics Corporation held by non-affiliates was approximately $390,085,268 (assumingconversion of all of the outstanding Class B Stock into Common Stock and assuming the affiliates of the Registrant to be its directors, executive officers andpersons known to the Registrant to beneficially own more than 10% of the outstanding capital stock of the Corporation).DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders to be held May 13, 2014 are incorporated by reference into PartIII of this Report. Table of ContentsTable of ContentsASTRONICS CORPORATIONIndex to Annual Reporton Form 10-KYear Ended December 31, 2013 PagePART I Item 1. Business 4-6Item 1A. Risk Factors 6-10Item 1B. Unresolved Staff Comments 10Item 2. Properties 10Item 3. Legal Proceedings 11Item 4. Mine Safety Disclosures 11PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12-13Item 6. Selected Financial Data 14Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14-27Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27Item 8. Financial Statements and Supplementary Data 28-59Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 60Item 9A. Controls and Procedures 60Item 9B. Other Information 60PART III Item 10. Directors and Executive Officers of the Registrant 61Item 11. Executive Compensation 61Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 61Item 13. Certain Relationships and Related Party Transactions and Director Independence 61Item 14. Principal Accountant Fees and Services 61PART IV Item 15. Exhibits and Financial Statement Schedule 62-65 2Table of ContentsFORWARD LOOKING STATEMENTSThis Annual Report contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolves uncertainties and risks. These statements are identified by the use of the “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,”“plans,” “projects,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” and words of similar import.Readers are cautioned not to place undue reliance on these forward looking statements as various uncertainties and risks could cause actual results to differmaterially from those anticipated in these statements. These uncertainties and risks include the success of the Company with effectively executing its plans;the timeliness of product deliveries by vendors and other vendor performance issues; changes in demand for our products from the U.S. government and othercustomers; the acceptance by the market of new products developed; our success in cross-selling products to different customers and markets; changes ingovernment contracts; the state of the commercial and business jet aerospace market; the Company’s success at increasing the content on current and newaircraft platforms; the level of aircraft build rates; as well as other general economic conditions and other factors. Certain of these factors, risks anduncertainties are discussed in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations.” 3Table of ContentsPART I ITEM 1.BUSINESSAstronics is a leading supplier of products to the aerospace and defense industries. Our products include advanced, high-performance lighting andsafety systems, electrical power generation and distribution systems, aircraft structures, avionics products and other products for the global aerospaceindustry as well as test, training and simulation systems primarily for the military.We have twelve primary locations; ten in the United States, one in Canada, and one in France. We design and build our products through our whollyowned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Ballard Technology, Inc.(“Ballard”); DME Corporation (“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. We have two reportable segments, Aerospace and Test Systems.On May 28, 2013 Astronics entered into a Stock Purchase Agreement to acquire all of the outstanding capital stock of Peco. The acquisition wascompleted on July 18, 2013. Peco designs and manufactures highly engineered commercial aerospace interior components and systems for the aerospaceindustry. Peco is a member of our Aerospace segment.On October 1, 2013 Astronics acquired certain assets and liabilities from AeroSat Corporation and related entities, a manufacturer of fuselage and tail-mounted antenna systems for commercial transport, business jet, and military aircraft. AeroSat is a member of our Aerospace segment.On November 4, 2013, the company entered into a sale agreement and a guarantee agreement to acquire all of the outstanding capital stock of PGA. Thepurchase price was paid with a combination of cash and Astronics’ stock. The acquisition was completed on December 5, 2013. PGA designs andmanufactures seat motion and lighting systems primarily for business and first class aircraft seats and is Europe’s leading provider of in-flightentertainment/communication systems as well as cabin management systems for private VVIP aircraft. PGA is a member of our Aerospace segment.On February 28, 2014, Astronics acquired, through a wholly owned subsidiary Astronics Test Systems, Inc. (“ATS”), certain assets and liabilities ofEADS North America’s Test and Services division, located in Irvine, California. ATS is a leading provider of highly engineered automatic test systems,subsystems and instruments for semi-conductor and consumer electronics products to both the commercial and defense industries. ATS will be reported as amember of our Test Systems segment.Products and CustomersOur Aerospace segment designs and manufactures products for the global aerospace industry. Product lines include lighting and safety systems,electrical power generation, distribution and motions systems, aircraft structures, avionics products and other products. Our Aerospace customers are theairframe manufacturers (OEM’s) that build aircraft for the commercial, military and general aviation markets, suppliers to those OEM’s, aircraft operatorssuch as airlines and branches of the U.S. Department of Defense as well as the Federal Aviation Administration and airport operators. During 2013, thissegment’s sales were divided 72% to the commercial transport market, 15% to the military aircraft market, 9% to the business jet market and 4% to othermarkets. Most of this segment’s sales are a result of contracts or purchase orders received from customers, placed on a day-to-day basis or for single yearprocurements rather than long-term multi-year contract commitments. On occasion the Company does receive contractual commitments or blanket purchaseorders from our customers covering multiple year deliveries of hardware to our customers.Including the acquisition of ATS, our Test Systems segment designs, develops, manufactures and maintains automatic test systems that support thesemiconductor, aerospace, communications and weapons test systems as well as training and simulation devices for both commercial and militaryapplications. In the Test Systems Segment, Astronics’ products are sold to a global customer base including OEMs and prime government contractors for bothconsumer electronics and military products.During 2013, and before the acquisition of ATS, this segment’s sales were all to the military markets. This segment’s revenue is recognized at time ofshipment and transfer of title and from long-term, primarily fixed price contracts using the percentage of completion method of accounting, measured bymultiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. We make significantestimates involving usage of percentage-of-completion accounting to recognize contract revenues. We periodically review contracts in process for estimates-to-completion, and revise estimated gross profit accordingly. While we believe our estimated gross profit on contracts in process is reasonable, unforeseen eventsand changes in circumstances can take place in a subsequent accounting period that may cause us to revise our estimated gross profit on one or more of ourcontracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts betweenaccounting periods.Sales by Segment, Geographic Region, Major Customer and Foreign Operations are provided in Note 18 of Item 8, Financial Statements andSupplementary Data in this report. 4Table of ContentsWe have a significant concentration of business with two major customers, Panasonic Avionics Corporation and the Boeing Company. Sales toPanasonic Avionics accounted for 29.6% of sales in 2013, 38.0% of sales in 2012 and 35.7% of sales in 2011. Accounts receivable from this customer atDecember 31, 2013 and 2012 were $14.1 million and $17.4 million, respectively. Sales to the Boeing Company accounted for 14.5% of sales in 2013, 5.5%of sales in 2012 and 4.4% of sales in 2011. Accounts receivable from this customer at December 31, 2013 and 2012 were $6.5 million and $1.9 million,respectively.StrategyOur strategy is to develop and maintain positions of technical leadership in our chosen aerospace and defense markets, leveraging those positions togrow the amount of content and volume of product sold to those markets and to selectively acquire businesses that could benefit from our leadership positionand strategic direction.Practices as to Maintaining Working CapitalLiquidity is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Liquiditysection of this report.Competitive ConditionsWe experience considerable competition in the market sectors we serve, principally with respect to product performance and price, from variouscompetitors, many of which are substantially larger and have greater resources. Success in the markets we serve depends upon product innovation, customersupport, responsiveness, and cost management. We continue to invest in developing the technologies and engineering support critical to competing in ourmarkets.Government ContractsAll U.S. Government contracts, including subcontracts where the U.S. Government is the ultimate customer, may be subject to termination at theelection of the government. Our revenue stream relies on military spending. Approximately 17% of our consolidated sales were made to the military aircraft andmilitary test systems markets combined.Raw MaterialsMaterials, supplies and components are purchased from numerous sources. We believe that the loss of any one source, although potentially disruptive inthe short-term, would not materially affect our operations in the long-term.SeasonalityOur business is typically not seasonal.BacklogAt December 31, 2013, our backlog was $214.2 million. At December 31, 2012, our backlog was $114.5 million. Backlog in the Aerospace segmentwas $207.1 million of which $199.3 million is expected to be realized in 2014. Backlog in the Test Systems segment was $7.1 million at December 31, 2013of which $4.9 million is expected to be realized in 2014.PatentsWe have a number of patents. While the aggregate protection of these patents is of value, our only material business that is dependent upon the protectionafforded by these patents is our cabin power distribution products. Our patents and patent applications relate to electroluminescence, instrument panels,keyboard technology and a broad patent covering the cabin power distribution technology. We regard our expertise and techniques as proprietary and rely upontrade secret laws and contractual arrangements to protect our rights. We have trademark protection in major markets.Research, Development and Engineering ActivitiesWe are engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantialimprovement or new application of our existing technologies. These costs are expensed when incurred and included in cost of sales. Research, development andengineering costs amounted to approximately $52.8 million in 2013, $44.9 million in 2012 and $36.1 million in 2011.EmployeesWe employed 1,715 employees as of December 31, 2013. We consider our relations with our employees to be good. None of our employees are subject tocollective bargaining agreements except for the hourly workforce at Peco. 5Table of ContentsStock DistributionOn September 27, 2013, the Company announced a one-for-five distribution of Class B Stock to holders of both Common and Class B Stock.Stockholders received one share of Class B Stock for every five shares of Common and Class B Stock held on the record date of October 10, 2013. Fractionalshares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of thisdistribution.Available informationWe file our financial information and other materials as electronically required by the SEC with the SEC. These materials can be accessed electronicallyvia the Internet at www.sec.gov. Such materials and other information about the Company are also available through our website at www.astronics.com. ITEM 1A.RISK FACTORSThe loss of Panasonic Avionics Corporation or the Boeing Company as major customers or a significant reduction in sales to either or both ofthose two customers would reduce our sales and earnings. In 2013 we had a concentration of sales to Panasonic representing approximately 29.6% of oursales and to the Boeing Company representing approximately 14.5% of our sales. The loss of one or both of these customers or a significant reduction in salesto them would significantly reduce our sales and earnings.The amount of debt we have outstanding, as well as any debt we may incur in the future, could have an adverse effect on our operationaland financial flexibility. As of December 31, 2013, we had approximately $200.3 million of debt outstanding, of which $188.0 million is long-term debt.Changes to our level of debt subsequent to December 31, 2013 could have significant consequences to our business, including the following: • Depending on interest rates and debt maturities, a substantial portion of our cash flow from operations could be dedicated to payingprincipal and interest on our debt, thereby reducing funds available for our acquisition strategy, capital expenditures or other purposes; • A significant amount of debt could make us more vulnerable to changes in economic conditions or increases in prevailing interest rates; • Our ability to obtain additional financing for acquisitions, capital expenditures or for other purposes could be impaired; • The increase in the amount of debt we have outstanding increases the risk of non-compliance with some of the covenants in our debtagreements which require us to maintain specified financial ratios; and • We may be more leveraged than some of our competitors, which may result in a competitive disadvantage.We are subject to debt covenant restrictions. Our credit facility contains several financial and other restrictive covenants. A significant decline in ouroperating income could cause us to violate our covenants. A covenant violation would require a waiver by the lenders or an alternative financing arrangement beachieved. This could result in our being unable to borrow under our bank credit facility or being obliged to refinance and renegotiate the terms of our bankindebtedness. Historically both choices have been available to us however it is difficult to predict the availability of these options in the future.Our future operating results could be impacted by estimates used to calculate impairment losses on long term assets. The preparation offinancial statements in conformity with U.S. generally accepted accounting principles requires Management to make significant and subjective estimates andassumptions that may affect the reported amounts of long term assets in the financial statements. These estimates are integral in the determination of whether apotential impairment loss exists as well as the calculation of that loss. Actual future results could differ from those estimates.A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth. AtDecember 31, 2013, goodwill and purchased intangible assets were approximately 20.9% and approximately 20.6% of our total assets respectively. Ourgoodwill and other intangible assets may increase in the future since our strategy includes growing through acquisitions. We may have to write off all or part ofour goodwill or purchased intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earningsand net worth significantly.The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operatingresults to fluctuate. In our Aerospace segment, demand by the business jet markets for our products is dependent upon several factors, including capitalinvestment, product innovations, economic growth and wealth creation, and technology upgrades. In addition, the commercial airline industry is highlycyclical and sensitive to fuel price increases, labor disputes, global economic conditions, availability of capital to fund new aircraft purchases and upgradesof existing aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of air travel and the ability of airlines toinvest in new aircraft or to upgrade existing aircraft. These factors would reduce orders for new aircraft and would likely reduce airlines spending for cabinupgrades for which we supply products, thus reducing our sales and profits. A reduction in air travel may also result in our commercial airline customersbeing unable to pay our invoices on a timely basis or not at all. 6Table of ContentsWe are a supplier on various new aircraft programs just entering or expected to begin production in the future such as the Boeing 787, F-35 Joint StrikeFighter and Lear 85. As with any new program there is risk as to whether the aircraft or program will be successful and accepted by the market. As iscustomary for our business we purchase inventory and invest in specific capital equipment to support our production requirements generally based ondelivery schedules provided by our customer. If a program or aircraft is not successful we may have to write off all or a part of the inventory, accountsreceivable and capital equipment related to the program. A write off of these assets could result in a significant reduction of earnings and cause covenantviolations relating to our debt agreements. This could result in our being unable to borrow additional funds under our bank credit facility or being obliged torefinance or renegotiate the terms of our bank indebtedness.In our Test Systems segment, demand for our products is dependent upon several factors, including government funding levels for our products, ourability to compete successfully for those contracts and our ability to develop products to satisfy the demands of our customers. A change in any of thesefactors could result in a reduction of our sales and profits.Our products are sold in highly competitive markets. Some of our competitors are larger; more diversified corporations and have greater financial,marketing, production and research and development resources. As a result, they may be better able to withstand the effects of periodic economic downturns.Our operations and financial performance will be negatively impacted if our competitors: • Develop products that are superior to our products; • Develop products that are more competitively priced than our products; • Develop methods of more efficiently and effectively providing products and services or • Adapt more quickly than we do to new technologies or evolving customer requirements.We believe that the principal points of competition in our markets are product quality, price, design and engineering capabilities, product development,conformity to customer specifications, quality of support after the sale, timeliness of delivery and effectiveness of the distribution organization. Maintainingand improving our competitive position will require continued investment in manufacturing, engineering, quality standards, marketing, customer service andsupport and our distribution networks. If we do not maintain sufficient resources to make these investments, or are not successful in maintaining ourcompetitive position, our operations and financial performance will suffer.Our future success depends to a significant degree upon the continued contributions of our management team and technical personnel. Theloss of members of our management team could have a material and adverse effect on our business. In addition, competition for qualified technical personnelin our industry is intense, and we believe that our future growth and success will depend on our ability to attract, train and retain such personnel.Future terror attacks, war, or other civil disturbances could negatively impact our business. Continued terror attacks, war or otherdisturbances could lead to further economic instability and decreases in demand for our products, which could negatively impact our business, financialcondition and results of operations. Terrorist attacks world-wide have caused instability from time to time in global financial markets and the aviationindustry. The long-term effects of terrorist attacks on us are unknown. These attacks and the U.S. Government’s continued efforts against terroristorganizations may lead to additional armed hostilities or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may furthercontribute to economic instability.Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent orrestrict our ability to compete. We rely on patents, trademarks and proprietary knowledge and technology, both internally developed and acquired, in orderto maintain a competitive advantage. Our inability to defend against the unauthorized use of these rights and assets could have an adverse effect on our resultsof operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. Thislitigation could result in significant costs and divert our management’s focus away from operations.If we are unable to adapt to technological change, demand for our products may be reduced. The technologies related to our products haveundergone, and in the future may undergo, significant changes. To succeed in the future, we will need to continue to design, develop, manufacture, assemble,test, market and support new products and enhancements on a timely and cost effective basis. Our competitors may develop technologies and products thatare more effective than those we develop or that render our technology and products obsolete or uncompetitive. Furthermore, our products could becomeunmarketable if new industry standards emerge. We may have to modify our products significantly in the future to remain competitive, and new products weintroduce may not be accepted by our customers.Our new product development efforts may not be successful, which would result in a reduction in our sales and earnings. We may experiencedifficulties that could delay or prevent the successful development of new products or product enhancements, and new products or product enhancements maynot be accepted by our customers. In addition, the development expenses we incur may exceed our cost estimates, and new products we develop may notgenerate sales sufficient to offset our costs. If any of these events occur, our sales and profits could be adversely affected. 7Table of ContentsWe depend on government contracts and subcontracts with defense prime contractors and sub-contractors that may not be fully funded,may be terminated, or may be awarded to our competitors. The failure to be awarded these contracts or failure to receive funding or thetermination of one or more of these contracts could reduce our sales. Sales to the U.S. Government and its prime contractors and subcontractorsrepresent a significant portion of our business. The funding of these programs is generally subject to annual congressional appropriations, and congressionalpriorities are subject to change. In addition, government expenditures for defense programs may decline or these defense programs may be terminated. A declinein governmental expenditures or the termination of existing contracts may result in a reduction in the volume of contracts awarded to us. We have resourcesapplied to specific government contracts and if any of those contracts were terminated, we may incur substantial costs redeploying those resources.If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtainfuture business could be materially and adversely impacted. Many of our contracts involve subcontracts with other companies upon which we rely toperform a portion of the services we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputesregarding the quality and timeliness of work performed by the subcontractor or customer concerns about the subcontractor. Failure by our subcontractors tosatisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability toperform our obligations with our customer. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A defaulttermination could expose us to liability and substantially impair our ability to compete for future contracts and orders. In addition, a delay in our ability toobtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may have an adverse effect upon ourprofitability.Our results of operations are affected by our fixed-price contracts, which could subject us to losses in the event that we have cost overruns.For the year ended December 31, 2013, fixed-price contracts represented almost all of the Company’s sales. On fixed-price contracts, we agree to perform thescope of work specified in the contract for a predetermined price. Depending on the fixed price negotiated, these contacts may provide us with an opportunity toachieve higher profits based on the relationship between our costs and the contract’s fixed price. However, we bear the risk that increased or unexpected costsmay reduce our profit.Some of our contracts contain late delivery penalties. Failure to deliver in a timely manner due to supplier problems, development schedule slides,manufacturing difficulties, or similar schedule related events could have a material adverse effect on our business.The failure of our products may damage our reputation, necessitate a product recall or result in claims against us that exceed ourinsurance coverage, thereby requiring us to pay significant damages. Defects in the design and manufacture of our products may necessitate a productrecall. We include complex system design and components in our products that could contain errors or defects, particularly when we incorporate newtechnology into our products. If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages orwarranty claims. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. We are also exposed toproduct liability claims. We carry aircraft and non-aircraft product liability insurance consistent with industry norms. However, this insurance coverage maynot be sufficient to fully cover the payment of any potential claim. A product recall or a product liability claim not covered by insurance could have a materialadverse effect on our business, financial condition and results of operations.Changes in discount rates and other estimates could affect our future earnings and equity. Pension obligations and the related costs aredetermined using actual results and actuarial valuations that involve several assumptions. The most critical assumption is the discount rate. Otherassumptions include salary increases and retirement age. The discount rate assumptions are based on current market conditions and are outside of our control.Changes in these assumptions could affect our future earnings and equity.We are subject to financing and interest rate exposure risks that could adversely affect our business, liquidity and operating results.Changes in the availability, terms and cost of capital, increases in interest rates or a reduction in credit rating could cause our cost of doing business toincrease and place us at a competitive disadvantage. At December 31, 2013, approximately 4% of our debt was at fixed interest rates with the remainingpercentage subject to variable interest rates.Contracting in the defense industry is subject to significant regulation, including rules related to bidding, billing and accounting kickbacksand false claims, and any non-compliance could subject us to fines and penalties or possible debarment. Like all government contractors, we aresubject to risks associated with this contracting. These risks include the potential for substantial civil and criminal fines and penalties. These fines andpenalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to followcost accounting standards, receiving or 8Table of Contentspaying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by government agencies. Thefailure to comply with the terms of our government contracts could harm our business reputation. It could also result in suspension or debarment from futuregovernment contracts.If we fail to meet expectations of securities analysts or investors due to fluctuations in our revenue or operating results, our stock price coulddecline significantly. Our revenue and earnings may fluctuate from quarter to quarter due to a number of factors, including delays or cancellations ofprograms. It is likely that in some future quarters our operating results may fall below the expectations of securities analysts or investors. In this event, thetrading price of our stock could decline significantly. Our operations in foreign countries expose us to political and currency risks and adverse changes in locallegal and regulatory environments.Our operations in foreign countries expose us to political and currency risks and adverse changes in local legal and regulatory environments.In addition, our domestic operations have sales to foreign customers. In 2013, approximately 13.2% of our sales were to customers outside of the United States.Our financial results may be adversely affected by fluctuations in foreign currencies and by the translation of the financial statements of our foreignsubsidiaries from local currencies into U.S. dollars. We expect international operations and export sales to continue to contribute to our earnings for theforeseeable future. Both the sales from international operations and export sales are subject in varying degrees to risks inherent in doing business outside of theUnited States. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations, changes in tariff and tradebarriers and import or export licensing requirements, and political or economic reprioritization, insurrection, civil disturbance or war.Government regulations could limit our ability to sell our products outside the United States and could otherwise adversely affect ourbusiness. In 2013, approximately 11.5% of our sales were subject to compliance with the United States export regulations. Our failure to obtain, or fullyadhere to the limitations contained in, the requisite licenses, meet registration standards or comply with other government export regulations would hinder ourability to generate revenues from the sale of our products outside the United States. Compliance with these government regulations may also subject us toadditional fees and operating costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. Inorder to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirementswith respect to a significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to numerousU.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices andanti-boycott provisions. Our failure, or failure by an authorized agent or representative that is attributable to us, to comply with these laws and regulationscould result in administrative, civil or criminal liabilities and could, in the extreme case, result in monetary penalties, suspension or debarment fromgovernment contracts or suspension of our export privileges, which would have a material adverse effect on us.Our stock price is volatile. For the year ended December 31, 2013, our stock price ranged from a low of $18.99 to a high of $52.99. The price of ourcommon stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as: • quarterly variations in operating results; • variances of our quarterly results of operations from securities analyst estimates; • changes in financial estimates; • announcements of technological innovations, new products; and • news reports relating to trends in our markets.In addition, the stock market in general, and the market prices for companies in the aerospace industry in particular, have experienced significant priceand volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad marketfluctuations may adversely affect the market price of our common stock, regardless of our operating performance.We may incur losses and liabilities as a result of our acquisition strategy. Growth by acquisition involves risks that could adversely affect ourfinancial condition and operating results, including: • diversion of management time and attention from our core business, • the potential exposure to unanticipated liabilities, • the potential that expected benefits or synergies are not realized and that operating costs increase, • the risks associated with incurring additional acquisition indebtedness, including that additional indebtedness could limit our cash flowavailability for operations and our flexibility, • difficulties in integrating the operations and personnel of acquired companies, and • the potential loss of key employees, suppliers or customers of acquired businesses. 9Table of ContentsIn addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not perform as planned, does notincrease earnings, or does not prove otherwise to be beneficial to us.We currently are involved or may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, couldmaterially impact our financial condition. As an aerospace company, we may become a party to litigation in the ordinary course of our business,including, among others, matters alleging product liability, warranty claims, breach of commercial or government contract or other legal actions. In general,litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impactresults of operations and financial condition.We are a defendant in an action filed in the Regional State Court of Mannheim, Germany (Lufthansa Technik AG v. Astronics AdvancedElectronics Systems Corp.) relating to an allegation of patent infringement. The damages sought include injunctive relief, as well as monetary damages.We dispute the allegation and are vigorously defending ourselves in this action. We have filed a nullity action with the Federal Patent Court in Munich,Germany, requesting the court to revoke the German part of the European patent that is subject to the claim. In November 2011, the Regional State Court ofManheim, Germany, issued an interim decision to the effect that the infringement litigation proceedings be stayed until the Federal Patent Court decides on theconcurrent nullity action. In February 2014, The Federal Patent Court issued a written judgment upholding the validity of a portion of the patent. Thisjudgment is subject to appeal. However, as a result the judgment proclaimed by The Federal Patent Court the stay of the infringement litigation proceedings isno longer effective. At this time we are unable to provide a reasonable estimate of our potential liability or the potential amount of loss related to this action, ifany. If the outcome of this litigation is adverse to us, our results and financial condition could be materially affected. ITEM 1B.UNRESOLVED STAFF COMMENTSNone ITEM 2.PROPERTIESOn December 31, 2013, we occupied 759,000 square feet of space in the United States, Canada, and France, distributed as follows: Owned Leased Total Aerospace: East Aurora, NY 125,000 — 125,000 Ft. Lauderdale, FL 96,000 — 96,000 Kirkland, WA 92,000 7,600 99,600 Lebanon, NH 80,000 — 80,000 Portland, OR — 155,000 155,000 Montierchaume, France — 92,000 92,000 Montreal, Quebec, Canada — 25,300 25,300 Everett, WA — 16,000 16,000 Amherst, NH — 14,500 14,500 Portland, OR — 3,500 3,500 Hillsboro, OR — 1,100 1,100 Aerospace Square Feet 393,000 315,000 708,000 Test Systems Orlando, FL — 51,000 51,000 Test Systems Square Feet — 51,000 51,000 Total Square Feet 393,000 366,000 759,000 Our corporate headquarters is located in East Aurora, New York. The lease for the AES Kirkland warehouse facility expires in March, 2016. The leasefor the PGA Montierchaume facility is a capital lease that will expire in December, 2018. At the end of the lease, title to this building will transfer to PGA. Thelease for the LSI Canada facility in Montreal expires in July, 2018. The lease for the Ballard Everett facility expires in September, 2014. The lease for theAeroSat Amherst facility expires in July, 2015. The lease for the Max-Viz Portland facility expires in January, 2016. The lease for the Max-Viz Hillsborofacility expires in February, 2014 and is renewed annually. The lease for the DME Orlando facility expires in February, 2015 with one renewal option forseven years. Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases for alternative locationsat market terms. We believe that our properties have been adequately maintained and are generally in good condition.In January 2014, Peco purchased two facilities totaling 233,000 square feet in Clackamas, Oregon for approximately $14.5 million and expects to investan additional $7.0 million into the buildings before moving its operations into the buildings by the end of the fourth quarter of 2014. The leases on our twoexisting buildings expire in June, 2015 and June, 2017. Peco has given notice of termination on these two building leases. 10Table of ContentsITEM 3.LEGAL PROCEEDINGSThe Company is subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of thesematters is currently not determinable, we do not expect these matters will have a material adverse effect on our business, financial position, results ofoperations, or cash flows. However, the results of these matters cannot be predicted with certainty. Should the Company fail to prevail in any legal matter orshould several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could bematerially adversely affected.We are a defendant in an action filed in the Regional State Court of Mannheim, Germany (Lufthansa Technik AG v. Astronics Advanced ElectronicsSystems Corp.) relating to an allegation of patent infringement. The damages sought include injunctive relief, as well as monetary damages. We dispute theallegation and are vigorously defending ourselves in this action. We have filed a nullity action with the Federal Patent Court in Munich, Germany, requestingthe court to revoke the German part of the European patent that is subject to the claim. In November 2011, the Regional State Court of Manheim, Germany,issued an interim decision to the effect that the infringement litigation proceedings be stayed until the Federal Patent Court decides on the concurrent nullityaction. In February 2014, The Federal Patent Court issued a written judgment upholding the validity of a portion of the patent. This judgment is subject toappeal. However, as a result the judgment proclaimed by The Federal Patent Court the stay of the infringement litigation proceedings is no longer effective. Atthis time we are unable to provide a reasonable estimate of our potential liability or the potential amount of loss related to this action, if any. If the outcome ofthis litigation is adverse to us, our results and financial condition could be materially affected.Other than this proceeding, we are not party to any significant pending legal proceedings that management believes will result in material adverse effecton our financial condition or results of operations. ITEM 4.MINE SAFETY DISCLOSURESNot Applicable 11Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESThe table below sets forth the range of prices for the Company’s Common Stock, traded on the NASDAQ National Market System, for each quarterlyperiod during the last two years. The approximate number of shareholders of record as of January 31, 2014, was 905 for Common Stock and 1,298 forClass B Stock. 2013 High Low First $24.85 $18.99 Second 34.21 21.16 Third 42.37 32.23 Fourth 52.99 38.86 2012 High Low First $26.52 $26.74 Second 25.50 17.86 Third 22.63 19.66 Fourth 22.31 16.54 The Company has not paid any cash dividends in the three-year period ended December 31, 2013. The Company has no plans to pay cash dividendsas it plans to retain all cash from operations as a source of capital to finance growth in the business.On September 27, 2013, the Company announced a twenty percent distribution of Class B Stock to holders of both Common and Class B Stock.Stockholders received one share of Class B Stock for every five shares of Common and Class B Stock held on the record date of October 10, 2013. Fractionalshares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of thisdistribution.With respect to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the sectionentitled “Equity Compensation Plan Information” of our definitive Proxy Statement for the 2014 Annual Meeting of Shareholders is incorporated herein byreference.The Company repurchased and subsequently retired approximately 4,073 shares of common stock in conjunction with the exercise of stock options in2013. In October of 2012, all shares held in the treasury were permanently retired. 12Table of ContentsThe following graph charts the annual percentage change in return on the Company’s common stock compared to the S&P 500 Index — Total Returnand the NASDAQ US and Foreign Securities: 2008 2009 2010 2011 2012 2013 Astronics Corp. Return % — -3.93 145.61 85.02 -27.61 122.90 Cum $ 100.00 96.07 235.96 436.57 316.05 704.48 S&P 500 Index - Total Returns Return % — 26.46 15.06 2.11 16.00 32.39 Cum $ 100.00 126.46 145.51 148.59 172.37 228.19 NASDAQ Stock Market (US and Foreign Companies) Return % — 45.32 18.02 -0.85 17.41 40.11 Cum $ 100.00 145.32 171.51 170.05 199.67 279.75 13Table of ContentsITEM 6.SELECTED FINANCIAL DATAFive-Year Performance Highlights 2013(6) 2012(5) 2011 (4) 2010 2009(3) (Amounts in thousands, except for employee and per share data) PERFORMANCE: Sales $339,937 $266,446 $228,163 $195,754 $191,201 Impairment Loss (2) $— $— $(2,500) $— $(19,381) Net Income (Loss) $27,266 $21,874 $21,591 $14,948 $(3,802) Net Margin 8.0% 8.2% 9.5% 7.6% (2.0)% Diluted Earnings (Loss) per Share (1) $1.49 $1.20 $1.21 $0.88 $(0.23) Weighted Average Shares Outstanding – Diluted (1) 18,359 18,157 17,817 17,129 16,292 Return on Average Equity 18.4% 19.2% 24.0% 21.8% (6.4)% YEAR-END FINANCIAL POSITION: Working Capital $125,961 $60,042 $58,833 $65,855 $52,857 Total Assets $491,271 $211,989 $174,905 $150,888 $138,714 Indebtedness $200 320 $29,983 $33,263 $38,578 $44,776 Shareholders’ Equity $171,509 $125,134 $102,863 $77,215 $60,113 Book Value Per Share (1) $9.61 $7.21 $6.04 $4.65 $3.68 OTHER YEAR-END DATA: Depreciation and Amortization $11,059 $6,905 $4,943 $4,881 $7,342 Capital Expenditures $6,868 $16,720 $14,281 $3,568 $2,466 Shares Outstanding (1) 17,858 17,353 17,124 16,618 16,357 Number of Employees 1,715 1,156 1,081 1,010 1,035 (1)- Diluted Earnings (Loss) Per-Share, Weighted Average Shares Outstanding-Diluted, Book Value Per-Share and Shares Outstanding have been adjustedfor the impact of the September 27, 2013 twenty percent Class B Stock distribution, the October 15, 2012 three-for-twenty Class B stock distributionand the August 16, 2011 one-for-ten Class B stock distribution.(2)- The Company recorded a $2.4 million goodwill impairment charge and a $0.1 million impairment charge to purchased intangible assets during thefourth quarter of 2011. The Company recorded a $14.2 million goodwill impairment charge and a $5.2 million impairment charge to purchasedintangible assets during the fourth quarter of 2009. Refer to “Item 7. Management’s Discussion and Analysis of Results of Operations and FinancialCondition” and Notes 4 and 5 of our consolidated financial statements for additional information on Intangible Assets and Goodwill.(3)- Information includes the results of DME, acquired on January 30, 2009, from the acquisition date forward.(4)- Information includes the results of Ballard, acquired on November 30, 2011, from the acquisition date forward.(5)- Information includes the results of Max-Viz, acquired on July 30, 2012, from the acquisition date forward.(6)- Information includes the results of Peco, acquired on July 18, 2013, AeroSat acquired on October 1, 2013 and PGA acquired December 5, 2013, eachfrom the acquisition date forward. ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWAstronics Corporation, through its subsidiaries, designs and manufactures advanced, high-performance lighting and safety systems, electrical powergeneration and distribution systems, aircraft structures, avionics products and other products for the global aerospace industry as well as test, training andsimulation systems primarily for military markets. On February 28, 2014 we completed the acquisition of substantially all of the assets and liabilities ofEADS North America’s Test and Services division which will be included in our Test Systems segment in the future.Our strategy is to invest significantly in engineering, research and development to develop and maintain positions of technical leadership. We expect toleverage those positions to increase our ship set content, growing the amount of content and volume of products we sell and to selectively acquire businesseswith similar technical capabilities.We have two reportable segments, Aerospace and Test Systems. Our Aerospace segment has ten principal operating facilities located in New York State,Florida, two in New Hampshire, two in Oregon, two in Washington State, Quebec, Canada and Montierchaume, France. Our Test Systems segment hasfacilities located in Florida and California. 14Table of ContentsOur Aerospace segment’s product lines in the tabular presentation found later in this MD&A have been reorganized compared to our historicalpresentation in prior years. The following table maps prior reported product lines to our current reported product lines. New Product LineElectrical Power & Motion - Includes Cabin Electronics, Airframe Power and PGA Seat Motion ProductsLighting & Safety - Includes Aircraft Lighting and Peco Safety Products (PSUs) and PGA Cabin Lighting ProductsAvionics - Includes Avionics, AeroSat Satellite Antenna Products and PGA In-Flight Entertainment and Cabin ControlProductsStructures - Includes Peco Structures Products (fuel access doors and diffusers)Other - Includes Airfield Lighting and Other Peco ProductsOur Aerospace segment serves four primary markets. They are the military, commercial transport, business jet and other. The Test systems segmentserves the military and defense markets. With the addition of ATS in 2014, the Test Systems segment will also serve the commercial electronics and semi-conductor markets.Commercial Transport MarketSales to the commercial transport market include sales of electrical power & motion products, lighting & safety products, structures products andavionics products. Sales to this market totaled approximately $237.7 million or 70% of our consolidated sales in 2013, up $58.7 million or 32.7% from 2012.Sales of electrical power & motion products, which provide in-seat power for airline passengers, airframe power management products, power for in-flight entertainment systems (IFE) and passenger seat motion products found on commercial airlines around the world. Sales to this market were $174.0million or 51.2% of our consolidated sales, up $23.3 million from 2012, due primarily to increased product sales volume.Lighting & safety products supplied to the commercial transport market were approximately $52.8 million or 15.5% in 2013, up $29.3 million from2012 due primarily to the sales of Peco and PGA both acquired in 2013 which added $26.4 million.Structures sales of $6.3 million were all due to the sales of Peco fuel access doors and diffusers.Sales of avionics products to this market were $4.6 million.Maintaining and growing our sales to the commercial transport market will depend on airlines capital spending budgets for cabin up-grades as well asthe purchase of new aircraft such as the Boeing 787, Airbus A380 and Airbus A350. This spending by the airlines is impacted by their profits, cash flow andavailable financing as well as competitive pressures between the airlines to improve the travel experience for their passengers. We expect that these new aircraft,once in production will be equipped with more IFE and in-seat power than previous generation aircraft. Our ability to maintain and grow sales to this marketdepends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major IFE suppliers and globalairlines.Military Aerospace MarketSales to the military aerospace market include sales of lighting & safety products, avionics products, electrical power & motion products and otherproducts. Sales to this market totaled approximately 14% of our consolidated revenue in 2013 and amounted to $48.7 million in 2013, up $12.1 million or33.3% from 2012.Sales of lighting & safety products to the military aircraft market were approximately $31.2 million in 2013, up $6.2 million from 2012, due primarilyto higher volume of sales of our organic lighting and safety products.Sales of avionics products to the military amounted to approximately $9.2 million in 2013, up $1.9 million from 2012 due primarily to higher volumeof sales of our organic avionics products.Sales of our electrical power & motion products to the military, which are primarily airframe power products, accounted for approximately $7.6 millionof our sales to this market, up $3.4 million from 2012, due primarily to a higher volume of sales of our organic electrical power products.Sales of other products to the military were all due to the addition of Peco.The military market is dependent on governmental funding which can change from year to year. Risks are that overall spending may be reduced in thefuture, specific programs may be eliminated or that we fail to win new business through the competitive bid process. Astronics does not have significantreliance on any one program such that cancellation of a particular program will cause material financial loss. We believe that we will continue to haveopportunities similar to past years regarding this market. 15Table of ContentsBusiness Jet MarketSales to the business jet aerospace market include sales of lighting & safety products, avionics products, and electrical power & motion products. Salesto this market totaled approximately 9% of our consolidated revenue in 2013 and amounted to $29.8 million. Sales to the business jet market are driven byour ship set content on new aircraft and build rates of new aircraft. Business jet OEM build rates continue to be significantly impacted by slow global wealthcreation and corporate profitability which have been negatively affected during the past several years by the slow recovery from the global recession. Our salesto the business jet market will continue to be challenged in the upcoming year as business jet aircraft production rates are not expected to increase significantlyduring 2014 as the global economy continues to struggle. Additionally, there continues to be a large supply of high quality used aircraft in the marketcompeting with new aircraft for customers. Despite the current market conditions, we continue to see opportunities on new aircraft currently in the designphase to employ our lighting & safety, electrical power and avionics technologies in the business jet market. There is risk involved in the development of anynew aircraft including the risk that the aircraft will not ultimately be produced or that it will be produced in lower quantities than originally expected and thusimpacting our return on our engineering and development efforts.Our lighting & safety products used on business jet aircraft, sales of which amounted to approximately $18.2 million in 2013, are down $2.9 millionor 13.7% from 2012, due primarily to lower sales volumes of our organic lighting and safety products.Sales of avionics products used on business jet aircraft amounted to approximately $4.9 million in 2013, up $1.9 million from 2012 due primarily tohaving a full year of sales of Max-Viz enhanced vision systems products, compared to a half a year of sales of those products in 2012.Sales of our electrical power & motion products used on business jet aircraft, which are primarily airframe power management products, accounted forapproximately $6.7 million of our sales to this market, up $1.4 million from 2012, due primarily to higher volume of sales of our organic electrical power &motion products.Other AerospaceSales of our other aerospace products include sales of airfield lighting products and other Peco products. Sales to this market totaled approximately 4%of our total revenue in 2013 and amounted to $14.4 million in 2013 which is up approximately $4.4 million when compared to 2012. The increase in salesfrom 2012 was due primarily to the addition of Peco other product sales, which amounted to approximately $3.6 million.Tests Systems ProductsOur Test Systems segment accounted for approximately 3% of our consolidated sales in 2013 and amounted to $9.4 million which is downapproximately $2.1 million when compared to 2012. All sales of these products are to the military test market.On February 28, 2014, Astronics completed the acquisition of substantially all of the assets and liabilities of EADS North America’s Test and Servicesdivision, a leading provider of highly engineered automatic test systems, subsystems and instruments for semi-conductor and consumer electronics productsto both the commercial and defense industries. ATS will be included in our Test Systems segment. Sales of the ATS products are expected to be a total ofapproximately $100 million in 2014 to the defense and commercial industries.Important factors affecting our growth and profitability are the rate at which new aircraft are produced, government funding of military programs, ourability to have our products designed into the plans for new aircraft and the rates at which aircraft owners, including commercial airlines, refurbish or installupgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments is cyclical and dependent on the strength ofthe global economy. Once designed into a new aircraft, the spare parts business is frequently retained by the Company. With the acquisition of ATS in 2014future growth and profitability of the test business will be dependent on developing and procuring new and follow-on business in commercial electronics andsemi-conductor markets as well as with the military.Each of the markets that we serve presents opportunities that we expect will provide growth for the Company over the long-term. We continue to look foropportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.Challenges which continue to face us include improving shareholder value through increasing profitability. Increasing profitability is dependent on manythings, primarily revenue growth and the Company’s ability to control operating expenses and to identify means of creating improved productivity. Revenue isdriven by increased build rates for existing aircraft, market acceptance and economic 16Table of Contentssuccess of new aircraft, continued government funding of defense programs, the Company’s ability to obtain production contracts for parts we currentlysupply or have been selected to design and develop for new aircraft platforms and continually identifying and winning new business for our Test Systemssegment. Reduced aircraft build rates driven by a weak economy, tight credit markets, reduced air passenger travel and an increasing supply of used aircrafton the market would likely result in reduced demand for our products, which will result in lower profits. Reduction of defense spending may result in feweropportunities for us to compete, which could result in lower profits in the future. Many of our newer development programs are based on new and unproventechnology and at the same time we are challenged to develop the technology on a schedule that is consistent with specific programs. We will continue toaddress these challenges by working to improve operating efficiencies and focusing on executing on the growth opportunities currently in front of us.ACQUISITIONSOn February 28, 2014, Astronics completed the acquisition of substantially all of the assets and liabilities of EADS North America’s Test and Servicesdivision. The entity, Astronics Test Systems (“ATS”) is located in Irvine, California and is a leading provider of highly engineered automatic test systems,subsystems and instruments for the semi-conductor, consumer electronics to both the commercial and defense industries. The purchase price wasapproximately $53.0 million in cash plus a net working capital adjustment yet to be determined. The addition of ATS compliments products and technologiesthat the Astronics Test Segment offers. ATS will be reported as a member of our Test Systems segment.On December 5, 2013 we completed the acquisition of 100% of the stock of PGA. PGA designs and manufactures seat motion and lighting systemsprimarily for premium class aircraft seats and is Europe’s leading provider of in-flight entertainment/communication systems as well as cabin managementsystems for private VVIP aircraft. The addition of PGA further diversifies the products and technologies that Astronics offers. The purchase price wasapproximately $32.9 million for which approximately $10.7 million, net of cash acquired, was paid in cash and the balance paid with 264,168 shares ofAstronics stock valued at $51.00/share. PGA is included in our Aerospace reporting segment.On October 1, 2013, we acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraft antenna systems for$12 million in cash, plus contingent purchase consideration (“Earn Out”) of up to a maximum of $53.0 million based upon the achievement of certainrevenue levels in 2014 and 2015 calculated as follows: AeroSat Revenue Earn Out Formula2014 <$30 million No Earn Out >$30 million < $50 million (AeroSat Revenue X 15%) x ((AeroSat Revenue-$30 million)/$20 million >$50 million AeroSat Revenue X 15%2015 <$40 million No Earn Out >$40 million < $60 million (AeroSat Revenue X 15%) x ((AeroSat Revenue-$40 million)/$20 million >$60 million AeroSat Revenue X 15%The addition of AeroSat further diversifies the products and technologies that Astronics offers. The additional contingent purchase consideration isrecorded at its estimated fair value of approximately $5.0 million at the date of acquisition based upon the Company’s assessment of revenue levels for theearn out periods and the probability of AeroSat achieving those revenue levels. Substantially all of the goodwill and purchased intangible assets are expected tobe deductible for tax purposes over 15 years.On July 18, 2013, we completed the acquisition of 100% of the stock of Peco, Inc. which designs and manufacturers highly engineered commercialaerospace interior components and systems for the aerospace industry. The company specializes in overhead Passenger Service Units, (“PSUs”) whichincorporate air handling, emergency oxygen, electrical power management and cabin lighting systems. It also manufactures a wide range of fuel access doorsthat meet stringent strength, fuel sealing and anti-corrosion requirements. The addition of Peco diversifies the products and technologies that Astronics offers.We purchased the outstanding stock of Peco for $136.0 million in cash. Peco is included in our Aerospace reporting segment.On July 30, 2012 we acquired by merger, 100% of the stock of Max-Viz, Inc., a manufacturer of industry-leading Enhanced Vision Systems for defenseand commercial aerospace applications for the purpose of improving situational awareness. The addition of Max-Viz diversifies the products and technologiesthat Astronics offers. We purchased the outstanding stock of Max-Viz for $10.7 million in cash plus contingent purchase consideration up to a maximum of$8.0 million subject to meeting certain revenue thresholds through 2014. Max-Viz is included in our Aerospace reporting segment. The additional contingentpurchase consideration is recorded at its estimated fair value at the date of acquisition based upon the Company’s assessment of the probability of Max-Vizachieving the revenue growth targets. At December 31, 2013, the amount recorded as additional purchase consideration is insignificant. 17Table of ContentsOn November 30, 2011 we acquired 100% of the stock of Ballard Technology, Inc., a manufacturer of avionics databus products. Ballard is includedin our aerospace reporting segment. The addition of Ballard diversifies the products and technologies that Astronics offers. We purchased the outstandingstock of Ballard for approximately $23.9 million in cash plus contingent purchase consideration up to a maximum of $5.5 million subject to meeting certainrevenue growth targets over the next five years. At December 31, 2013, the amount recorded as additional purchase consideration is approximately $0.7million.CRITICAL ACCOUNTING POLICIESOur financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of theCompany’s financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates,assumptions and judgments are affected by management’s application of accounting policies, which are discussed in the Notes to Consolidated FinancialStatements, Note 1 of Item 8, Financial Statements and Supplementary Data of this report. The critical accounting policies have been reviewed with the AuditCommittee of our Board of Directors.Revenue RecognitionMost of our revenue is recognized at the time of shipment of goods and transfer of title. Revenue of approximately $4.4 million, $4.2 million and $10.0million for the years ending December 31, 2013, 2012 and 2011 respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting, measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to theestimated total contract costs. Substantially all long-term contracts are with U.S. government agencies and contractors thereto. The Company makessignificant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts inprocess for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts inprocess is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company torevise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts canvary significantly from estimated amounts between accounting periods.Accounts Receivable and Allowance for Doubtful AccountsWe record a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on Management’sknowledge of the business, specific customers, review of receivable aging and a specific identification of accounts where collection is at risk. At December 31,2013, the allowance for doubtful accounts for accounts receivable was $0.1 million, or 0.2% of gross accounts receivable. At December 31, 2012, theallowance for doubtful accounts for accounts receivable was $0.7 million, or 1.4% of gross accounts receivable.Inventory ValuationWe record valuation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower of cost or market value. Indetermining the appropriate reserve, Management considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as wellas reserving for specifically identified inventory that we believe is no longer salable. At December 31, 2013, our reserve for inventory valuation was $11.0million, or 11.5% of gross inventory. At December 31, 2012, our reserve for inventory valuation was $12.0 million, or 19.8% of gross inventory.Deferred Tax Asset Valuation AllowancesDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. We record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit thatwe believe is more likely than not to be realized. Significant assumptions regarding future profitability is required to estimate the value of these deferred taxassets. We consider recent earnings projections, allowable tax carryforward periods, tax planning strategies and historical earnings performance to determinethe amount of the valuation allowance. Changes in these factors could cause us to adjust our valuation allowance, which would impact our income tax expenseand the carrying value of these assets when we determine that these factors have changed.As of December 31, 2013 we had net deferred tax liabilities of $19.9 million. Included in the deferred tax liabilities are approximately $17.5 million indeferred tax assets net of a $2.5 million valuation allowance. These deferred tax assets principally relate to goodwill and intangible assets, employee benefitliabilities, asset reserves, depreciation and state and foreign general business tax credit carry-forwards. 18Table of ContentsAs of December 31, 2012, we had net deferred tax assets of $14.0 million, net of a $2.2 million valuation allowance. These assets principally relate togoodwill and intangible assets, employee benefit liabilities, asset reserves, depreciation and state and foreign general business tax credit carry-forwards.Because of the uncertainty as to the Company’s ability to generate sufficient future taxable income in certain states, the Company has recorded thevaluation allowances accordingly in 2013 and 2012.Impairment of long-lived assetsGoodwill Impairment TestingOur goodwill is the result of the excess of purchase price over net assets acquired from acquisitions. As of December 31, 2013, we had approximately$101.0 million of goodwill. As of December 31, 2012, we had approximately $21.9 million of goodwill. The change in goodwill is due to the acquisitions ofPeco, AeroSat and PGA, increasing goodwill by $79.1 million.We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financialinformation is available and segment management regularly reviews the operating results of those components. The Test Systems operating segment is its ownreporting unit while the other reporting units are one level below our Aerospace operating segment.Companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units.Companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired. Economic uncertainties and the length of timefrom the calculation of a baseline fair value are factors that we would consider in determining whether to perform a quantitative test.When we evaluate the potential for goodwill impairment using a qualitative assessment, we consider factors including, but not limited to,macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and politicaldevelopments, entity specific factors such as strategy and changes in key personnel and overall financial performance. If, after completing this assessment, itis determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative two-stepimpairment test.Quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value. We use the discounted cash flow method toestimate the fair value of each of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projectedrevenue growth rates, operating profit margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growth rates,operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies. If the carrying value ofthe reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.In measuring the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets andliabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carryingamount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to thatexcess.In 2013, we performed quantitative assessments for the seven reporting units which have goodwill and concluded that it is more likely than not that theirfair values exceed their carrying values. Based on our quantitative assessments of our reporting units, we concluded that goodwill was not impaired.Amortized Intangible Asset Impairment TestingAmortizable intangible assets with a carrying value of $102.7 million at December 31, 2013 are amortized over their assigned useful lives. We test theselong-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Therecoverability test consists of comparing the projected undiscounted cash flows, with its carrying amount. An impairment loss would then be recognized forthe carrying amount in excess of its fair value.Depreciable Asset Impairment TestingProperty, plant and equipment with a carrying value of $70.9 million at December 31, 2013 are depreciated over their assigned useful lives. We test theselong-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Therecoverability test consists of comparing the projected undiscounted cash flows, with its carrying amount. An impairment loss would then be recognized forthe carrying amount in excess of its fair value.Supplemental Executive Retirement Plan (SERP)We maintain two non-qualified defined benefit supplemental retirement plans (“SERP” and “SERP II”) for certain executive officers and retired formerexecutive officers. Expense for these plans in 2013 was $1.5 million. Plan obligations and the related costs 19Table of Contentsare determined using actuarial valuations that involve several assumptions that may be highly uncertain and may have a material impact on the financialstatements if different reasonable assumptions had been used. The most critical assumptions include the discount rate, future wage increases, retirement ageand life expectancy. The discount rate is used to state expected future cash flows at present value. Using a lower discount rate increases the present value ofpension obligations and increases pension expense. For determining the discount rate the Company considers long-term interest rates for high-grade corporatebonds. The discount rate for determining the expense recognized in 2013 was 4.2% compared with 4.5% in 2012. We will use a discount rate of 5.1% indetermining our 2014 expense. The assumption for compensation increases takes a long-term view of inflation and performance based salary adjustmentsbased on the Company’s approach to executive compensation. The rate used for future wage increases was 5%. It was assumed that each participant retiresafter fully vesting in the plan at age 62 or 65. A 100 point increase in the discount rate we used would decrease our annual pension expense for 2014 by 0.2million. If we had assumed annual wage increases of 6% our 2014 pension expense would increase approximately $0.1 million.Stock-Based CompensationWe have stock-based compensation plans, which include non-qualified stock options as well as incentive stock options. Expense recognized for stock-based compensation was $1.4 million for the year ended 2013, $1.4 million for the year ended 2012 and $1.1 million for the year ended 2011. We determinethe fair value of the option awards at the date of grant using a Black-Scholes model. Option pricing models require management to make assumptions and toapply judgment to determine the fair value of the award. These assumptions and judgments include estimating the future volatility of our stock price, expecteddividend yield, future employee stock option exercise behaviors and future employee turnover rates. Changes in these assumptions can materially affect thefair value estimate.AcquisitionsThe Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature andfinancial effects of business combinations. Acquisition costs are expensed as incurred. Acquisition expenses in 2013 were approximately $1.9 million andwere insignificant in 2012 and 2011.When the Company acquires a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at theirrespective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involvesjudgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications,as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment, as explainedpreviously. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant,and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and engage independentvaluation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined usingvaluation techniques that use discounted cash flow methods, independent market appraisals, and other acceptable valuation techniques.With respect to determining the fair value of the purchase price, the most subjective estimates involve valuations of contingent consideration. Significantjudgment is necessary to determine the fair value of the purchase price when the transaction includes an earn out provision, such as the earn out provisionincluded in our 2013 acquisition of Aerosat. We engage valuation specialists to assist in the determination of the fair value of contingent consideration. Keyassumptions used to value the contingent consideration include future projections and discount rates.During 2013, acquisitions added approximately, $16.3 million in property plant and equipment, $90.2 million in purchased intangible assets and$79.2 million in goodwill. See Note 19 in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data,regarding the acquisitions in 2013 and 2012. 20Table of ContentsCONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK 2013 (3) 2012 (2) 2011 (1) (Dollars in thousands) Sales $339,937 $266,446 $228,163 Gross Margin 25.8% 26.1% 26.5% Impairment Loss $— $— $2,500 SG&A Expenses as a Percentage of Sales 13.4% 13.8% 11.9% Interest Expense $4,094 $1,042 $1,806 Effective Tax Rate 28.6% 30.7% 25.6% Net Earnings $27,266 $21,874 $21,591 (1)Our results of operations for 2011 include the operations of Ballard beginning November 30, 2011, the effective date of the acquisition.(2)Our results of operations for 2012 include the operations of Max-Viz, beginning July 30, 2012, the effective date of the acquisition.(3)Our results of operations for 2013 include the operations of Peco beginning July 18, 2013, the effective date of the acquisition, AeroSat beginningOctober 1, 2013, the effective date of the acquisition and PGA beginning December 5, 2013, the effective date of the acquisition.A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.CONSOLIDATED OVERVIEW OF OPERATIONSThe increase of consolidated sales in 2013 compared to 2012 was due to a combination of acquisitions and organic sales volume growth. Consolidatedyear-to-date sales increased by 27.6% to $339.9 million, compared with $266.4 million for the same period last year. Acquisitions contributed $39.5 million,all in the aerospace segment while organic sales increased by $34.0 million or 12.8% from the prior year. Aerospace sales of $330.5 million increased by$75.6 million, while Test Systems sales of $9.4 million decreased by $2.1 million, compared with the prior year.The increase of consolidated sales in 2012 compared to 2011 was due to sales volume growth in our Aerospace segment offset partially by reduced salesvolume in our Test Systems segment.Consolidated cost of products sold increased $55.1 million to $252.1 million in 2013 from $197.0 million in the prior year. The increase was due tothe impact of increased organic sales volumes and the additional costs of products sold associated with 2013 acquisitions. Cost of products sold as apercentage of sales was 74.2% in 2013 as compared with 73.9% in the prior year. Cost of products sold in 2013 increased by approximately $7.9 million andincluded $5.5 million for the expensing of fair value cost step-up of acquired inventory and increased Engineering & development (“E&D”) costs. Thesecosts were slightly offset by lower warranty and inventory obsolescence expenses of approximately $2.9 million. E&D costs were $52.8 million for the fullyear of 2013 compared with $44.9 million in the prior-year period.Consolidated cost of products sold increased $29.3 million to $197.0 million in 2012 from $167.7 million in the prior year. Cost of products sold as apercentage of sales was 73.9% in 2012 compared with 73.5% in 2011. The increase was due to the increased sales volumes, increased E&D costs ofapproximately $8.8 million and higher warranty and inventory obsolescence expenses of approximately $2.3 million. E&D costs were $44.9 million for thefull year of 2012 compared with $36.1 million in the prior-year period.Selling, General and Administrative (“SG&A”) expenses in 2013 were $45.6 million, or 13.4% of sales compared with $36.8 million, or 13.8% ofsales, in the same period last year. The increase was due primarily to $7.8 million of additional SG&A costs for the acquired businesses, including $3.2million of purchased intangible asset amortization expense associated with these acquisitions and $1.8 million relating to the acquisition transactions includingfinancing, legal and diligence efforts.The SG&A expenses in 2012 were $36.8 million or 13.8% of sales, compared with $27.2 million or 11.9% of sales in 2011. The increase in 2012compared with 2011 was due primarily to higher legal expenses which increased $1.4 million and the additional SG&A from Ballard Technologies and Max-Viz, acquired in November of 2011 and July 2012 respectively, which added $6.1 million. Additionally, compensation costs increased in 2012 compared to2011 primarily as a result of increased pension expense.In 2011, as a result of declining sales and low new orders, our forecast future cash flow for our Test Systems segment indicated that its carrying valueexceeded its fair value. As a result we recorded an impairment charge of $2.5 million to write down the carrying value of our Test Systems goodwill to zero andcertain intangible assets to fair value. There were no impairment charges in 2013 and 2012. 21Table of ContentsInterest expense increased in 2013 compared to 2012 due to increased debt levels used primarily to finance acquisitions and increased interest ratesrelated to higher leverage ratios. Interest expense decreased in 2012 compared to 2011, due to a combination of lower rates and reduced debt levels whencompared with the same period in the prior year.Our effective tax rates for 2013, 2012, and 2011 were 28.6%, 30.7%, and 25.6%, respectively. Our tax rate is affected by recurring items, such as taxrates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to be fairly consistent in the near term. It is alsoaffected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the following items hadthe most significant impact on the difference between our statutory U.S. federal income tax rate of 35% and our effective tax rate:2013: 1.Recognition of $0.8 million of 2013 U.S. R&D tax credits as well as $1.1 million of U.S. R&D tax creditsrecognized relating to 2012. The 2012 R&D tax credits were not recognized in 2012, as the American Tax Payer ReliefAct of 2012 which extended the R&D tax credit for 2012, was not enacted until 2013. 2.Permanent differences, primarily the impact of the Domestic Production Activities Deduction.2012: 1.Permanent differences, primarily the impact of the Domestic Production Activities Deduction. 2.Reduction in the reserves for uncertain tax positions related to U.S. R&D tax credits.2011: 1.Permanent differences, primarily the impact of the Domestic Production Activities Deduction. 2.Reduction in the reserves for uncertain tax positions related to U.S. R&D tax credits that occurred in tax years 2006through 2010.2014 OutlookWe expect consolidated sales in 2014 to be between $585 million and $640 million, including the February 2014 addition of ATS. Our consolidatedbacklog at December 31, 2013 was $207.1 million of which approximately $204.1 million is expected to ship in 2014.We expect our capital equipment spending in 2014 to be in the range of $33 million to $37 million, including approximately $21 million for theacquisition and renovation of a recently acquired facility in Portland, OR. Engineering and development costs are estimated to be in the range of $65 million to$69 million excluding the impact of the acquisition of ATS.SEGMENT RESULTS OF OPERATIONS AND OUTLOOKOperating profit, as presented below, is sales less cost of sales and other operating expenses excluding interest expense, corporate expenses and other non-operating revenue and expenses. Cost of sales and operating expenses are directly attributable to the respective segment. Operating profit is reconciled toearnings before income taxes in Note 18 of Item 8, Financial Statements and Supplementary Data, of this report. 22Table of ContentsAEROSPACE (in thousands, except percentages) 2013 2012 2011 Sales $330,530 $254,955 $213,874 Operating Profit $55,200 $44,137 $40,400 Operating Margin 16.7% 17.3% 18.9% (in thousands) 2013 2012 Total Assets $428,619 $177,168 Backlog $207,101 $110,915 Sales by Market (in thousands) 2013 2012 2011 Commercial Transport $237,725 $179,104 $143,337 Military 48,669 36,511 35,394 Business Jet 29,784 29,379 25,983 Other 14,352 9,961 9,160 $330,530 $254,955 $213,874 Sales by Product Line (in thousands) 2013 2012 2011 Electrical Power & Motion $188,221 $160,136 $134,649 Lighting & Safety 102,233 69,597 69,653 Avionics 18,733 15,261 412 Structures 6,331 — — Other 15,012 9,961 9,160 $330,530 $254,955 $213,874 Sales for the Aerospace segment increased $75.6 million compared with the prior year. Sales for this segment from the acquired businesses accountedfor $39.4 million of the increase. Organic sales for this segment were up $36.2 million primarily from electrical power & motion product sales. Sales to thecommercial transport market increased in 2013 due to increased volume of electrical power & motion, lighting & safety products and structures products.Sales of the electrical power & motion products grew as global demand for passenger power systems continues to be strong. Lighting & safety product salesincreased due primarily to the acquisition of Peco, which added $25.9 million in sales to this product line. Peco also contributed $6.3 million of structuressales to the commercial transport market. Sales of avionics products to this market were flat when compared to the prior year period. Military sales were upcompared with last year as a result of higher sales volume of lighting & safety products, electrical power & motion products and avionics products. Sales tothe business jet market were down slightly when compared with the prior year as higher sales volumes of electrical power & motion products and avionicsproduct sales were more than offset by a lower volume of lighting & safety product sales. Sales to other markets increased $4.4 million due primarily to theacquisition of Peco other product sales.Aerospace operating profit for 2013 was $55.2 million, or 16.7% of sales, compared with $44.1 million, or 17.3% of sales, in the prior year. Theincrease in the operating profit was due to leverage from a higher volume of sales, lower warranty and inventory obsolescence expense of $2.9 million andlower legal expenses of $1.1 million which more than offset the $5.5 million fair value expense for the step-up of acquired inventory from the 2013acquisitions and higher E&D expenses of $8.0 million, of which approximately $1.9 million was from the acquired businesses. SG&A costs for thebusinesses acquired in 2013 totaled $6.6 million for 2013, including $3.2 million of purchased intangible asset amortization expense associated with theseacquisitions.Aerospace sales for 2012 increased by $41.1 million, or 19.2%, to $255.0 million from $213.9 million in 2011. Sales growth was primarily driven byincreased sales of electrical power & motion products to the commercial transport market as well as the impact of acquisitions of approximately $15.3 million.Military sales were up slightly due primarily to the acquisition of Ballard adding $7.4 million in new product sales being mostly offset by lower volume oflighting & safety products and electrical power & motion products. Sales to the business jet market were higher due primarily to the acquisition of Max-Vizadding $2.7 million in new product sales and increased volume of lighting & safety products which were partially offset by decreased volume from ourelectrical power & motion products.Operating margins for the Aerospace segment decreased in 2012 to 17.3% from 18.9% in 2011. Operating margins decreased as the leverage contributedfrom the increased sales volume was more than offset by higher E&D (“engineering and development”) expense and increased SG&A costs. E&D costs in2012 increased compared with 2011 by $9.1 million to $41.9 million in 2012. SG&A costs increases were related to compensation, legal and warranty costs,compared with 2011. 23Table of ContentsIt is our intention to continue investing in capabilities and technologies as needed that allows us to execute our strategy to increase the ship set content andvalue we provide on aircraft in all markets that we serve. The rate of spending on these activities, however, will continue to be driven by market opportunities.The backlog for our Aerospace segment at December 31, 2013 was $207.1 million compared with $110.9 million at December 31, 2012.2014 Outlook for Aerospace – We expect 2014 Aerospace segment sales to be in the range of $475 million to $505 million.TEST SYSTEMS (in thousands, except percentages) 2013 2012 2011 Sales $10,103 $11,491 $14,289 Less Inter-segment Sales (696) — — Net Sales $9,407 $11,491 $14,289 Operating Loss $(3,756) $(4,985) $(4,760) Operating Margin (37.2)% (43.4)% (33.3)% (in thousands) 2013 2012 Total Assets $11,035 $18,121 Backlog $7,062 $3,565 Sales in 2013, 2012 and 2011 were all to the military market. The Test Systems segment continues to face headwinds as military spending has slowedand opportunities for large programs are fewer. With the lack of large programs we have continued to utilize our engineering capacity to continue to develop ournext generation family of synthetic radio testers which we believe will provide a firm base line of repeating business for the future.In 2011, an impairment charge relating to the write-down of goodwill and intangible assets of $2.5 million is included in our Test Systems operatingloss of $4.8 million for the year. There were no impairment charges in 2013 or 2012.The backlog for Test Systems was $7.1 million at December 31, 2013 compared with $3.6 million at December 31, 2012.2014 Outlook for Test Systems – With the acquisition of ATS in February of 2014, we expect 2014 Test Systems sales to be approximately $110million to $135 million.OFF BALANCE SHEET ARRANGEMENTSWe do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations orfinancial condition.CONTRACTUAL OBLIGATIONSThe following table represents contractual obligations as of December 31, 2013: Payments Due by Period (In thousands) Total 2014 2015-2016 2017-2018 After 2018 Long-term Debt $200,320 $12,279 $33,167 $151,472 $3,402 Purchase Obligations 91,230 89,120 2,016 94 — Interest on Long-term Debt 32,235 8,087 14,431 8,851 866 Supplemental Retirement Plan and Post Retirement Obligations 14,944 391 782 782 12,989 Operating Leases 3,762 2,183 1,205 374 — Other Long-term Liabilities 13,287 542 12,427 255 63 Total Contractual Obligations $355,778 $112,602 $64,028 $161,828 $17,320 Notes to Contractual Obligations TablePurchase Obligations — Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.Long-Term Debt — See item 8, Financial Statements and Supplementary Data, Note 6, Long-Term Debt and Note Payable in this report.Operating Leases — Operating lease obligations are primarily related to facility leases for our AES, AeroSat, Ballard, DME, Max-Viz, Peco, andforeign operations. 24Table of ContentsLIQUIDITY AND CAPITAL RESOURCES (in thousands) 2013 2012 2011 Net cash provided (used) by: Operating Activities $49,549 $24,178 $27,908 Investing Activities (166,629) (27,379) (38,132) Financing Activities 164,253 (341) (1,565) Our cash flow from operations and available borrowing capacity provide us with the financial resources needed to run our operations and reinvest in ourbusiness.Operating ActivitiesCash provided by operating activities was $49.5 million in 2013 compared with $24.2 million in 2012. The increase of $25.3 million in 2013 wasprimarily a result of higher net income, increases in non-cash expenses and decreased cash used for net working capital components due primarily to timing ofpayments on accounts payable and receivable collections.Cash provided by operating activities was $24.2 million in 2012 compared with $27.9 million in 2011. The decrease of $3.7 million in 2012 wasmainly a result of increased cash used for net working capital components due primarily to timing of inventory purchases and the collection of accountsreceivable and customer advanced payments.Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables,level of inventory and payments to suppliers. Sales are influenced significantly by the build rates of new aircraft, which are subject to general economicconditions, airline passenger travel and spending for government and military programs. Over time, sales will also be impacted by our success in executingour strategy to increase ship set content and obtain production orders for programs currently in the development stage. A significant change in new aircraftbuild rates could be expected to impact our profits and cash flow. A significant change in government procurement and funding and the overall health of theworldwide airline industry could be expected to impact our profits and cash flow as well.Investing ActivitiesCash used for investing activities in 2013 was approximately $166.6 million. The acquisitions of Peco, AeroSat and PGA used approximately $159.8million of cash in 2013 and purchases of property, plant and equipment (“PP&E”) used $6.9 million. In January 2014, we purchased a facility nearPortland, Oregon for approximately $14 million and expect to invest an additional $7 million into the buildings before moving our PECO operations into thenew facility in the second half 2014.Cash used for investing activities in 2012 was approximately $27.4 million including the acquisition of Max-Viz for $10.7 million and $16.7 millionfor fixed assets including the completion of the building in Kirkland, WA that we acquired in 2011. AES relocated to this facility in 2012. In 2012 we spent$12.0 million to complete the Kirkland building and $4.7 million on other capital equipment.Our expectation for 2014 is that we will invest between $33 million and $37 million for PP&E, including approximately $21 million for the acquisitionand build out of the new facility in Oregon. Future requirements for PP&E depend on numerous factors, including expansion of existing product lines andintroduction of new products. Management believes that our cash flow from operations and current borrowing arrangements will provide for these capitalexpenditures. We expect to continue to evaluate acquisition opportunities in the future.Financing ActivitiesOur ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating resultscould have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future. Our obligations under our CreditAgreement are jointly and severally guaranteed by each of our domestic subsidiaries. The obligations are secured by a first priority lien on substantially all ofthe Company’s and the guarantors’ assets and 100% of the issued and outstanding equity interest of each subsidiary.In July, 2013, in connection with funding the 2013 acquisitions, the Company amended its existing credit facility by entering into a Third Amended andRestated Credit Agreement ( the “Credit Agreement”), dated as of July18, 2013. The Credit Agreement provides for a $75 million five-year revolving creditfacility and a $190 million five-year term loan, both maturing on June 30, 2018. The amended facilities carry an interest rate ranging from 225 basis points to350 basis points above LIBOR, depending on the Company’s leverage ratio as defined in the Credit Agreement. Principal installments are payable on the termloan in varying quarterly amounts through March 31, 2018 and the entire unpaid principal balance together with interest due and payable on June 30, 2018and with mandatory prepayments being required in certain circumstances. The credit facility is secured by substantially all of the Company’s assets. Inaddition, the Company is required to pay a commitment fee of between 25 basis points and 50 basis points quarterly on the unused portion of the revolvingcredit facility, based on the Company’s leverage ratio under the Credit Agreement. 25Table of ContentsThe proceeds of the term loan were used to finance acquisitions, pay off $7.0 million outstanding under the existing term loan, $7.0 million outstandingunder the existing revolving credit facility and $0.5 million of other term debt and to pay transaction expenses.On December 31, 2013, the Company modified its existing credit facility by entering into Amendment No, 1 dated as of December 31, 2013 to the ThirdAmended and Restated Credit Agreement (“Amendment”). The Amendment modifies the definition of EBITDA by adding back certain non-recurring expensesand adjustments and modifies the definition of the Fixed Charge Coverage Ratio by excluding certain Peco capital expenditures from the computation.The Credit Agreement contains various financial covenants. The covenant for minimum fixed charge coverage, defined as the ratio of the sum of netincome, interest expense, provision for taxes based on income, total depreciation expense, total amortization expense, other non-cash items reducing net incomeminus other non-cash items increasing net income minus capital expenditures, minus cash taxes paid and dividends paid to interest expense plus scheduledprincipal payments on long-term debt calculated on a rolling four-quarter basis to be not less than 1.25 to 1 for each fiscal quarter ending on or afterSeptember 30, 2011. The Company’s minimum fixed charge coverage was 3.70 to 1 at December 31, 2013. The covenant for maximum leverage, defined asthe ratio of the sum of net income, interest expense, provision for taxes based on income, total depreciation expense, total amortization expense, other non-cashitems reducing net income minus other non-cash items increasing net income to funded debt calculated on a rolling four-quarter basis is not to exceed 3.75 to 1as of the end of each fiscal quarter through March 31, 2015 and 3.50 to 1 for each fiscal quarter ending thereafter. The Company’s leverage as defined in thecredit agreement was 2.68 to 1 at December 31, 2013.There was no balance outstanding on our revolving credit facility at December 31, 2013. For working capital requirements, the Company had availableon its credit facility $65.2 million. The credit facility allocates up to $20 million of the revolving credit line for the issuance of letters of credit, includingcertain existing letters of credit totaling approximately $9.8 million at December 31, 2013. In addition, the Company is required to pay a commitment fee ofbetween 25 basis points and 50 basis points quarterly, on the unused portion of the total revolving credit commitment, also based on the Company’s LeverageRatio.On February 28, 2014, in connection with the funding of the acquisition of ATS, the Company amended its existing credit facility by entering intoAmendment No 2. to Third Amended and Restated Credit Agreement. The Company elected to exercise its option to increase the revolving credit commitment.The Credit Agreement now provides for a $125 million five-year revolving credit facility maturing on June 30, 2018, of which $58.0 million was drawn tofinance the acquisition. There remains approximately $56.1 million available under the revolving credit facility on February 28, 2014.The amended facility temporarily increases the maximum leverage ratio permitted under the agreement to 4.0 to 1.0 for fiscal quarters ending March 31,2014 and June 30, 2014, 3.75 to 1.0 as of the end of fiscal quarters from September 30, 2014 through March 31, 2015 and 3.5 to 1.0 as of the end of eachfiscal quarter subsequent to March 31, 2015 to maturity. There were no changes to the other covenants, interest rates being charged or commitment fees.In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the CreditAgreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial andother covenants, give the Agent the option to declare all such amounts immediately due and payable. At December 31, 2013, we were in compliance with all ofthe covenants pursuant to the credit facility.The Company’s cash needs for working capital, debt service and capital equipment during 2014 is expected to be met by cash flows from operationsand cash balances and if necessary, utilization of the revolving credit facility.DIVIDENDSManagement believes that it should retain the capital generated from operating activities for investment in advancing technologies, acquisitions and debtretirement. Accordingly, there are no plans to institute a cash dividend program.BACKLOGAt December 31, 2013, the Company’s backlog was approximately $214.2 million compared with approximately $114.5 million at December 31, 2012. 26Table of ContentsRELATED-PARTY TRANSACTIONSInformation regarding certain relationships and related transactions is incorporated herein by reference to the information included in the Company’s2014 Proxy Statement which will be filed with the Commission within 120 days after the end of the Company’s 2013 fiscal year.RECENT ACCOUNTING PRONOUNCEMENTSSee Note 1 of the Consolidated Financial Statements at Item 8 of this report. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe Company has limited exposure to fluctuation in Canadian and Euro currency exchange rates to the U.S. dollar. Nearly all of the Company’sconsolidated sales are transacted in U.S. dollars.Net assets held in or measured in Canadian dollars amounted to $7.2 million at December 31, 2013. Annual disbursements transacted in Canadiandollars were approximately $10.6 million in 2013. A 10% change in the value of the U.S. dollar versus the Canadian dollar would impact net income byapproximately $0.8 million.Net assets held in or measured in Euros amounted to $32.8 million at December 31, 2013. Disbursements transacted in Euros in 2013 wereapproximately $2.8 million. A 10% change in the value of the U.S. dollar versus the Euros would have had an insignificant impact to 2013 net income;however it could be significant in the future.Risk due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations, which total approximately $192.0 million atDecember 31, 2013. To offset this exposure, the Company has one interest rate swap to fix the interest rate on a portion of the underlying debt for a set periodof time. The interest rate swap has a notional amount of approximately $1.5 million at December 31, 2013, and was entered into in February 2006, related tothe Company’s Series 1999 New York Industrial Revenue Bond. The interest rate swap effectively fixes the rate at 3.99% plus a spread based on theCompany’s leverage ratio on this obligation through 2016.Before the Company entered into the Third Amended and Restated Credit Agreement, a change of 1% in interest rates would impact annual net incomeby less than $0.2 million. Subsequent to July 18, 2013, the additional $190.0 million senior secured term debt incurred in conjunction with the acquisition ofPeco causes a 1% change in interest rates on all variable rate debt to impact annual net income by $1.2 million. 27Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders of Astronics Corporation.We have audited the accompanying consolidated balance sheets of Astronics Corporation as of December 31, 2013 and 2012, and the related consolidatedstatements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Ouraudits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Astronics Corporation atDecember 31, 2013 and 2012 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Astronics Corporation’s internalcontrol over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 7, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLPBuffalo, New YorkMarch 7, 2014 28Table of ContentsMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the Chief Executive Officer andChief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 based uponthe framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),1992 Framework. Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31, 2013.We completed an acquisition in 2013, which was excluded from our management’s report on internal control over financial reporting as of December 31,2013. We acquired Peco Inc. on July 18, 2013, AeroSat Corporation on October 1, 2013 and PGA Electronic s.a. on December 5, 2013. These acquisitionswere included in our 2013 consolidated financial statements and constituted $246.0 million and $206.1 million of total and net assets, respectively, as ofDecember 31, 2013 and $39.5 million and $5.0 million of sales and net loss, respectively, for the year then ended.Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Reporton Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting. By: /s/ Peter J. Gundermann March 7, 2014 Peter J. Gundermann President & Chief Executive Officer (Principal Executive Officer) /s/ David C. Burney March 7, 2014 David C. Burney Vice President-Finance, Chief Financial Officer & Treasurer (Principal Financial and Accounting Officer) 29Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders of Astronics CorporationWe have audited Astronics Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria).Astronics Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.As indicated in the accompanying Management’s Report on Internal Controls over Financial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did not include the internal controls of Peco, Inc. acquired on July 18, 2013, Aerosat Corporationacquired on October 1, 2013, and PGA Electronic S.A. acquired on December 5, 2013, which are included in the December 31, 2013 consolidated financialstatements of Astronics Corporation and collectively constituted $246.0 million and $206.1 million of total and net assets, respectively, as of December 31,2013 and $39.5 million and $5.0 million of sales and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting ofAstronics Corporation also did not include an evaluation of the internal control over financial reporting of Peco, Inc., Aerosat Corporation and PGA ElectronicS.A.In our opinion, Astronics Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based onthe COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Astronics Corporation as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, shareholders’equity, and cash flows for each of the three years in the period ended December 31, 2013 of Astronics Corporation and our report dated March 7, 2014expressed an unqualified opinion thereon. /s/ Ernst & Young LLPBuffalo, New YorkMarch 7, 2014 30Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In thousands, except per share data) 2013 2012 2011 Sales $339,937 $266,446 $228,163 Cost of Products Sold 252,079 197,004 167,667 Gross Profit 87,858 69,442 60,496 Impairment Loss — — 2,500 Selling, General and Administrative Expenses 45,553 36,817 27,175 Income from Operations 42,305 32,625 30,821 Interest Expense, Net of Interest Income 4,094 1,042 1,806 Income Before Income Taxes 38,211 31,583 29,015 Provision for Income Taxes 10,945 9,709 7,424 Net Income $27,266 $21,874 $21,591 Basic Earnings Per Share $1.56 $1.28 $1.29 Diluted Earnings Per Share $1.49 $1.20 $1.21 See notes to consolidated financial statements. 31Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (In thousands) 2013 2012 2011 Net Income $27,266 $21,874 $21,591 Other Comprehensive Income: Foreign Currency Translation Adjustments (131) 183 (90) Mark to Market Adjustments for Derivatives – Net of Tax 73 114 82 Retirement Liability Adjustment – Net of Tax 1,230 (4,194) (876) Other Comprehensive Income (Loss) 1,172 (3,897) (884) Comprehensive Income $28,438 $17,977 $20,707 See notes to consolidated financial statements. 32Table of ContentsASTRONICS CORPORATIONCONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share and per share data) 2013 2012 ASSETS Current Assets: Cash and Cash Equivalents $54,635 $7,380 Accounts Receivable, Net of Allowance for Doubtful Accounts 60,942 45,473 Inventories 85,269 48,624 Prepaid Expenses and Other Current Assets 5,061 1,566 Deferred Income Taxes 5,291 4.967 Total Current Assets 211,198 108,010 Property, Plant and Equipment, at Cost: Land 6,742 5,424 Buildings and Improvements 45,551 37,045 Machinery and Equipment 54,369 43,342 Construction in Progress 1,527 1,456 108,189 87,267 Less Accumulated Depreciation 37,289 33,730 Net Property, Plant and Equipment 70,900 53,537 Deferred Income Taxes — 9,019 Other Assets 5,474 2,977 Intangible Assets, Net of Accumulated Amortization 102,701 16,523 Goodwill 100,998 21,923 Total Assets $491,271 $211,989 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Current Maturities of Long-term Debt $12,279 $9,268 Accounts Payable 25,255 10,592 Accrued Payroll and Employee Benefits 16,214 10,228 Accrued Income Taxes 1,318 — Other Accrued Expenses 8,454 5,406 Customer Advanced Payments and Deferred Revenue 20,747 12,286 Billings in Excess of Recoverable Costs and Accrued Profits on Uncompleted Contracts — 188 Deferred Income Taxes 970 — Total Current Liabilities 85,237 47,968 Long-term Debt 188,041 20,715 Supplemental Retirement Plan and Other Liabilities for Pension Benefits 14,550 15,243 Other Liabilities 7,704 2,929 Deferred Income Taxes 24,230 — Total Liabilities 319,762 86,855 Shareholders’ Equity Common Stock, $.01 par value, Authorized 40,000,000 Shares 13,268,299 Shares Issued and Outstanding at December 31,2013 10,865,212 Shares Issued and Outstanding at December 31, 2012 133 109 Convertible Class B Stock, $.01 par value, Authorized 10,000,000 Shares 4,590,149 Shares Issued and Outstanding atDecember 31, 2013 6,487,921 Shares Issued and Outstanding at December 31, 2012 46 65 Additional Paid-in Capital 40,826 22,854 Accumulated Other Comprehensive Loss (3,611) (4,783) Retained Earnings 134,115 106,889 Total Shareholders’ Equity 171,509 125,134 Total Liabilities and Shareholders’ Equity $491,271 $211,989 See notes to consolidated financial statements. 33Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2013 2012 2011 Cash Flows from Operating Activities Net Income $27,266 $21,874 $21,591 Adjustments to Reconcile Net Income to Cash Provided By Operating Activities, Excluding the Effectsof Acquisitions: Impairment Loss — — 2,500 Depreciation and Amortization 11,059 6,905 4,943 Provision for Non-Cash Losses on Inventory and Receivables 216 1,632 802 Stock Compensation Expense 1,384 1,351 1,061 Deferred Tax Expense (Benefit) (722) (1,544) 423 Other (578) 154 (220) Cash Flows from Changes in Operating Assets and Liabilities: Accounts Receivable 3,493 (8,097) (3,042) Inventories (5,222) (9,330) (883) Prepaid Expenses 380 335 291 Accounts Payable 5,831 (537) (349) Accrued Expenses 3,520 3,374 638 Income Taxes Payable 2,271 669 (404) Customer Advanced Payments and Deferred Revenue (359) 6,490 1,943 Billings in Excess of Recoverable Costs and Accrued Profits on Uncompleted Contracts (188) (76) (1,255) Supplemental Retirement Plan and Other Liabilities 1,198 978 (131) Cash Provided By Operating Activities 49,549 24,178 27,908 Cash Flows from Investing Activities Acquisition of Business (159,761) (10,659) (23,926) Capital Expenditures (6,868) (16,720) (14,281) Other — — 75 Cash Used For Investing Activities (166,629) (27,379) (38,132) Cash Flows from Financing Activities Proceeds From Term Note 190,000 — — Principal Payments on Long-term Debt (19,498) (10,307) (5,302) Proceeds from Note Payable — 10,000 — Payments on Note Payable (7,000) (3,000) — Payment of Contingent Consideration (81) — — Debt Acquisition Costs (2,288) — (143) Proceeds from Exercise of Stock Options 1,922 1,714 2,266 Income Tax Benefit from Exercise of Stock Options 1,198 1,252 1,614 Cash Provided By (Used For) Financing Activities 164,253 (341) (1,565) Effect of Exchange Rates on Cash 82 3 (1) Increase (Decrease) in Cash and Cash Equivalents 47,255 (3,539) (11,790) Cash and Cash Equivalents at Beginning of Year 7,380 10,919 22,709 Cash and Cash Equivalents at End of Year $54,635 $7,380 $10,919 Supplemental Cash Flow Information: Interest Paid $3,543 $1,068 $1,900 Income Taxes Paid, net of refunds $8,025 $9,330 $5,785 Value of Shares Issued as Consideration for Acquisition $13,473 — — See notes to consolidated financial statements. 34Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Year Ended December 31, ($ In thousands) 2013 2012 2011 Common Stock Beginning of Year $109 $97 $89 Issuance of Common Shares as Consideration for Acquisition 3 Exercise of Stock Options and Stock Compensation Expense – Net of Taxes 1 2 3 Retirement of Treasury Stock — (2) — Class B Stock Converted to Common Stock 20 12 5 End of Year $133 $109 $97 Convertible Class B Stock Beginning of Year $65 $80 $84 Exercise of Stock Options and Stock Compensation Expense – Net of Taxes 1 — 1 Retirement of Treasury Stock — (3) — Class B Stock Converted to Common Stock (20) (12) (5) End of Year $46 $65 $80 Treasury Stock Beginning of Year $— $(2,281) $(2,281) Retirement of Treasury Shares — 2,281 — End of Year $— $— $(2,281) Additional Paid in Capital Beginning of Year $22,854 $19,231 $14,278 Issuance of Common Shares as Consideration for Acquisition 13,470 — — Retirement of Treasury Stock — (693) — Exercise of Stock Options and Stock Compensation Expense - Net of Taxes 4,502 4,316 4,953 End of Year $40,826 $22,854 $19,231 Accumulated Comprehensive Loss Beginning of Year $(4,783) $(886) $(2) Foreign Currency Translation Adjustments (131) 183 (90) Mark to Market Adjustments for Derivatives – Net of Taxes 73 114 82 Retirement Liability Adjustment – Net of Taxes 1,230 (4,194) (876) End of Year $(3,611) $(4,783) $(886) Retained Earnings Beginning of Year $106,889 $86,622 $65,047 Net income 27,266 21,874 21,591 Retirement of Treasury Stock — (1,583) — Cash Paid in Lieu of Fractional Shares from Stock Distribution (40) (24) (16) End of Year $134,115 $106,889 $86,622 Total Shareholders’ Equity $171,509 $125,134 $102,863 Shares(in thousands) Common Stock Beginning of Year 10,865 9,681 8,973 Issuance of Common Shares as Consideration for Acquisition 264 — — Exercise of Stock Options 145 194 232 Retirement of Treasury Shares — (179) — Class B Stock Converted to Common Stock 1,994 1,169 476 End of Year 13,268 10,865 9,681 Convertible Class B Stock Beginning of Year 6,488 7,971 8,374 Exercise of Stock Options 96 35 73 Retirement of Treasury Shares — (349) — Class B Stock Converted to Common Stock (1,994) (1,169) (476) End of Year 4,590 6,488 7,971 Treasury Stock Beginning of Year — 528 528 Retirement of Treasury Shares — (528) — End of Year — — 528 See notes to consolidated financial statements 35Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICESDescription of the BusinessAstronics is a leading supplier of products to the aerospace and defense industries. Our products include advanced, high-performance lighting andsafety systems, electrical power generation, distribution and motion systems, avionics and structure and other products for the global aerospace industry aswell as test, training and simulation systems primarily for the military.We have twelve primary locations, ten in the United States, one in Canada, and one in France. We design and build our products through our whollyowned subsidiaries Astronics Advanced Electronic Systems Corp. (“AES”); Astronics AeroSat Corporation (“AeroSat”); Ballard Technology, Inc.(“Ballard”); DME Corporation (“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”).On May 28, 2013 Astronics entered into a Stock Purchase Agreement to acquire all of the outstanding capital stock of Peco. Peco designs andmanufacturers highly engineered commercial aerospace interior components and systems for the aerospace industry. The acquisition was completed onJuly 18, 2013. On October 1, 2013 Astronics acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraftantenna systems. On December 5, 2013, Astronics completed the acquisition of PGA. PGA designs and manufactures seat motion and lighting systemsprimarily for business and first class aircraft seats and is Europe’s leading provider of in-flight entertainment/communication systems as well as cabinmanagement systems for private VVIP aircraft. Peco, AeroSat and PGA are all part of our Aerospace segment.At December 31, 2013, the Company has two reportable segments, Aerospace and Test Systems. The Aerospace segment designs and manufacturesproducts for the global aerospace industry. The Test Systems segment designs, manufactures and maintains communications and weapons test systems andtraining and simulation devices for military applications.On February 28, 2014, Astronics acquired, through a wholly owned subsidiary Astronics Test Systems, Inc. (“ATS”), certain assets and liabilities ofEADS North America’s Test and Services division, located in Irvine, California. ATS is a leading provider of highly engineered automatic test systems,subsystems and instruments for semi-conductor and consumer electronics products to both the commercial and defense industries. ATS will be reported as amember of our Test Systems segment.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions andbalances have been eliminated.Acquisitions are accounted for under the acquisition method and, accordingly, the operating results for the acquired companies are included in theconsolidated statements of operations from the respective dates of acquisition.Revenue and Expense RecognitionIn the Aerospace segment, revenue is recognized on the accrual basis at the time of shipment of goods and transfer of title. There are no significantcontracts allowing for right of return.In the Test Systems segment, revenue of approximately $4.4 million, $4.2 million and $10.0 million for the years ended December 31, 2013, 2012 and2011, respectively, was recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting, measured by multiplyingthe estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs. Substantially all long-term contractsare with U.S. government agencies and contractors thereto. The Company makes significant estimates involving its usage of percentage-of-completionaccounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated grossprofit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes incircumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contractsin process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary from estimated amounts between accounting periods.Revenue not recognized using the percentage-of-completion method is recognized at the time of shipment of goods and transfer of title. - 36 -Table of ContentsCost of Products Sold, Engineering and Development and Selling, General and Administrative ExpensesCost of products sold includes the costs to manufacture products such as direct materials and labor and manufacturing overhead as well as allengineering and developmental costs. The Company is engaged in a variety of engineering and design activities as well as basic research and developmentactivities directed to the substantial improvement or new application of the Company’s existing technologies. These costs are expensed when incurred andincluded in cost of products sold. Research and development, design and related engineering amounted to $52.8 million in 2013, $44.9 million in 2012 and$36.1 million in 2011. Selling, general and administrative expenses include costs primarily related to our sales, marketing and administrative departments.Shipping and HandlingShipping and handling costs are expensed as incurred and are included in costs of products sold.Stock DistributionOn September 27, 2013, the Company announced a one-for-five distribution of Class B Stock to holders of both Common and Class B Stock.Stockholders received one share of Class B Stock for every five shares of Common and Class B Stock held on the record date of October 10, 2013. Fractionalshares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of thisdistribution.Equity-Based CompensationThe Company accounts for its stock options following Accounting Standards Codification (“ASC”) Topic 718 Compensation – Stock Compensation(“ASC Topic 718”). This Topic requires all equity-based payments to employees, including grants of employee stock options, to be recognized in thestatement of earnings based on the grant date fair value of the award. For awards with graded vesting, the Company uses a straight-line method of attributingthe value of stock-based compensation expense, subject to minimum levels of expense, based on vesting.Under ASC Topic 718, stock compensation expense recognized during the period is based on the value of the portion of share-based payment awardsthat is ultimately expected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outsidedirectors vest six months from the date of grant and options granted to officers and key employees vest with graded vesting over a five-year period, 20% eachyear, from the date of grant.The tax benefits from share based payment arrangements were approximately $1.2 million in 2013, $1.2 million in 2012, and $1.6 million in 2011.These were classified as cash flows from financing activities.Cash and Cash EquivalentsAll highly liquid instruments with a maturity of three months or less at the time of purchase are considered cash equivalents.Accounts Receivable and Allowance for Doubtful AccountsThe Company will record a valuation allowance to account for potentially uncollectible accounts receivable. The allowance is determined based on ourknowledge of the business, specific customers, review of the receivables’ aging and a specific identification of accounts where collection is at risk. Accountbalances are charged against the allowance after all means of collections have been exhausted and recovery is considered remote. The Company typically doesnot require collateral.InventoriesInventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. The Company recordsvaluation reserves to provide for excess, slow moving or obsolete inventory or to reduce inventory to the lower of cost or market value. In determining theappropriate reserve, the Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands as well as reserving forspecifically identified inventory that the Company believes is no longer salable.Property, Plant and EquipmentDepreciation of property, plant and equipment is computed using the straight-line method for financial reporting purposes and using accelerated methodsfor income tax purposes. Estimated useful lives of the assets are as follows: buildings, 25-40 years; machinery and equipment, 4-10 years. Leaseholdimprovements are amortized over the shorter of the terms of the lease or the estimated useful lives of the assets. - 37 -Table of ContentsThe cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts, and the resulting gain orloss, as well as maintenance and repair expenses, are reflected in income. Replacements and improvements are capitalized.Depreciation expense was approximately $5.7 million, $4.4 million and $4.0 million in 2013, 2012 and 2011, respectively.Long-Lived AssetsLong-lived assets to be held and used are initially recorded at cost. The carrying value of these assets is evaluated for recoverability whenever adverseeffects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if future undiscounted cash flowsfrom operations are not expected to be sufficient to recover long-lived assets. The carrying amounts are then reduced to fair value, which is typicallydetermined by using a discounted cash flow model.GoodwillThe Company tests goodwill at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that wouldmore likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has nine reporting units, however as of November 1,2013 (the annual testing date), only six reporting units have goodwill and were subject to the goodwill impairment test.We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or selected reporting units. If,after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceedto a quantitative test. We may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units.Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We use the discounted cash flow method toestimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenuegrowth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unitexceeds its fair value, goodwill is considered impaired and any loss must be measured. To determine the amount of the impairment loss, the implied fair valueof goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if thereporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair value ofthat goodwill, an impairment loss would be recognized in an amount equal to that excess.See Note 5 for further information regarding the goodwill impairment charges in 2011 relating to our Test Systems reporting unit. There were noimpairment charges in 2013 or 2012.Intangible AssetsAcquired intangibles are generally valued based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangible assetsare recorded at fair value and are amortized over their estimated useful lives. Acquired intangible assets with an indefinite life are not amortized, but arereviewed for impairment at least annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of those assets arebelow its estimated fair value.Impairment is tested under ASC 350, Intangibles - Goodwill and Other, as amended by Accounting Standards Update (“ASU”) 2012-02, by firstperforming a qualitative analysis in a manner similar to the testing methodology of goodwill discussed previously. The qualitative factors applied under thisnew provision indicated no impairment to the Company’s indefinite lived intangible assets in 2013 and 2012. See Note 4 for further information regarding theimpairment charges in 2011 relating to intangible assets in our Test Systems reporting unit.Financial InstrumentsThe Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable, long-termdebt and interest rate swaps. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.The Company does not hold or issue financial instruments for trading purposes. Due to their short-term nature, the carrying values 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 debtinstruments also approximates fair value due to the variable rate feature of these instruments. The Company’s interest rate swaps are recorded at fair value asdescribed under Note 14 - Fair Value. - 38 -Table of ContentsDerivativesThe accounting for changes in the fair value of derivatives depends on the intended use and resulting designation. The Company’s use of derivativeinstruments was limited to a cash flow hedge for interest rate risk associated with long-term debt. Interest rate swaps are used to adjust the proportion of totaldebt that is subject to variable and fixed interest rates. The interest rate swaps are designated as hedges of the amount of future cash flows related to interestpayments on variable-rate debt that, in combination with the interest payments on the debt, convert a portion of the variable-rate debt to fixed-rate debt. TheCompany records all derivatives on the balance sheet at fair value. The related gains or losses, to the extent the derivatives are effective as a hedge, are deferredin shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (AOCI) and reclassified into earnings at the time interest expenseis recognized on the associated long-term debt. Any ineffectiveness is recorded in the Consolidated Statements of Operations.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expensesduring the reporting periods in the financial statements and accompanying notes. Actual results could differ from those estimates.Foreign Currency TranslationThe Company accounts for its foreign currency translation in accordance with ASC Topic 830, Foreign Currency Translation. The aggregatetransaction gain or loss included in operations was insignificant for 2013, 2012 and 2011.DividendsThe Company has not paid any cash dividends in the three-year period ended December 31, 2013. It has no plans to pay cash dividends as it plans toretain all cash from operations as a source of capital to finance growth in the business.Loss ContingenciesLoss contingencies may from time to time arise from situations such as claims and other legal actions. Loss contingencies are recorded as liabilitieswhen it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonablepossibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. In recording liabilities forprobable losses, management is required to make estimates and judgments regarding the amount or range of the probable loss. Management continuallyassesses the adequacy of estimated loss contingencies and, if necessary, adjusts the amounts recorded as better information becomes known.AcquisitionsThe Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature andfinancial effects of business combinations. Acquisition costs are expensed as incurred. Acquisition expenses in 2013 were approximately $1.9 million andwere insignificant in 2012 and 2011. See Note 19 regarding the acquisitions in 2013 and 2012. - 39 -Table of ContentsNewly Adopted and Recent Accounting PronouncementsOn January 1, 2013, the Company adopted the new provisions of Accounting Standards Update (“ASU”) No. 2013-02 Comprehensive Income (Topic220). The amendments in this ASU require the Company to provide information about the amounts reclassified out of accumulated other comprehensiveincome, by component. Other than requiring additional disclosures, the adoption of this amendment does not have a material impact on the Company’sfinancial statements.The Company’s management has reviewed recent accounting pronouncements issued through the date of the issuance of financial statements. Inmanagement’s opinion, none of these new pronouncements apply or will have a material effect on the Company’s financial statementsNOTE 2 — ACCOUNTS RECEIVABLEAccounts receivable at December 31 consists of: (In thousands) 2013 2012 Trade Accounts Receivable $58,224 $44,196 Long-term Contract Receivables: Amounts Billed — 907 Unbilled Recoverable Costs and Accrued Profits 2,858 1,020 Total Long-term Contract Receivables 2,858 1,927 Total Receivables 61,082 46,123 Less Allowance for Doubtful Accounts (140) (650) $60,942 $45,473 NOTE 3 — INVENTORIESInventories at December 31 are as follows: (In thousands) 2013 2012 Finished Goods 21,627 $10,864 Work in Progress 15,017 8,960 Raw Material 48,625 28,800 $85,269 $48,624 At December 31, 2013, the Company’s reserve for inventory valuation was $11.0 million, or 11.5% of gross inventory. At December 31, 2012, theCompany’s reserve for inventory valuation was $12.0 million, or 19.8% of gross inventory.NOTE 4 — INTANGIBLE ASSETSThe following table summarizes acquired intangible assets as follows: December 31, 2013 December 31, 2012 (In thousands) WeightedAverage Life Gross CarryingAmount AccumulatedAmortization Gross CarryingAmount AccumulatedAmortization Patents 11 Years $2,146 $891 $1,271 $784 Trade Names 10 Years 7,453 552 2,453 162 Completed and Unpatented Technology 10 Years 15,377 2,620 6,377 1,749 Backlog and Customer Relationships 14 Years 88,998 7,210 13,085 3,968 Total Intangible Assets 13 Years $113,974 $11,273 $23,186 $6,663 Amortization is computed on the straight-line method for financial reporting purposes. Amortization expense for intangibles was $4.9 million, $2.3million and $0.5 million for 2013, 2012 and 2011, respectively. The Company has a $0.5 million identifiable asset with an indefinite life included above inTrade Names at December 31, 2013. - 40 -Table of ContentsBased upon acquired intangible assets at December 31, 2013, amortization expense for each of the next five years is estimated to be: (In thousands) 2014 $10,129 2015 8,249 2016 8,073 2017 8,064 2018 7,974 For the Company’s indefinite-lived intangible asset, the impairment test consists of comparing the fair value, determined using the relief from royaltymethod, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. For the years endedDecember 31, 2013 and 2012, the Company recorded no impairment charge to any of its indefinite-lived intangible assets. For the year ended December 31,2011, the Company recorded a $0.1 million impairment charge related to Trade Names assigned to the Company’s Test Systems reporting unit, as of theannual impairment test date of November 1, 2011. Impairment losses are reported on the Impairment Loss line of the Consolidated Statements of Operations.NOTE 5 — GOODWILLThe following table summarizes the changes in the carrying amount of goodwill for 2013 and 2012: (In thousands) 2013 2012 Balance at Beginning of the Year $21,923 $17,185 Acquisition 79,155 4,665 Foreign Currency Translations (80) 73 Balance at End of the Year $100,998 $21,923 Goodwill $117,540 $38,465 Accumulated Impairment Losses (16,542) (16,542) Goodwill - Net $100,998 $21,923 As discussed in Note 1, goodwill is not amortized but is periodically tested for impairment. For the six reporting units with goodwill at November 1,2013, the Company performed a quantitative assessment of the goodwill’s carrying value. The assessment indicated no impairment to the carrying value ofgoodwill in any of the Company’s reporting units and no impairment charge recognized.During fiscal 2011, the weak economic conditions resulted in a decline in business and a reduction in forecasted cash flows in the Test Systemsreporting unit. Based on this evaluation, we determined that the fair value of the Test Systems reporting unit was less than its carrying value. None of thereporting units in the Aerospace Segment indicated impairment. Following this assessment, ASC Topic 350 required us to perform a second step in order todetermine the implied fair value of goodwill in the Test Systems reporting unit and to compare it to its carrying value. The activities in the second step includedhypothetically valuing all of the tangible and intangible assets of the impaired reporting unit using market participant assumptions, as if the reporting unit hadbeen acquired in a business combination as of the date of the valuation.As a result of this assessment in 2011, the Company recorded an impairment charge of approximately $2.4 million in the December 31, 2011Consolidated Statement of Operations. The impairment loss is reported on the Impairment Loss line of the Consolidated Statements of Operations. None of thisloss related to goodwill is immediately deductible for tax purposes. At December 31, 2013 and 2012, the Test Systems segment has no recorded goodwill, as aresult of previous impairment charges. There was no impairment to the carrying value of goodwill in 2013 or 2012. - 41 -Table of ContentsNOTE 6 — LONG-TERM DEBT AND NOTE PAYABLELong-term debt consists of the following: (In thousands) 2013 2012 Senior Term Note issued under the Third Amended and Restated Credit Agreement datedJuly 18, 2013. Scheduled amounts payable quarterly for $2.375 million to June 30,2015, $3.562 million to June 30, 2016, $4.750 million to March 31, 2018 with theremainder due June 30, 2018. Mandatory unscheduled prepayments for 25% ofExcess Cash Flow and Net Proceeds received in connection with Asset Sales andInsurance Recoveries. Interest is at LIBOR plus between 2.25 and 3.50% (3.2% atDecember 31, 2013) $185,250 $— Series 2007 Industrial Revenue Bonds issued through the Erie County, New YorkIndustrial Development Agency payable $340,000 annually through 2017 and$330,000 annually thereafter through maturity with interest reset weekly (3.2% atDecember 31, 2013). 4,720 5,060 Series 1999 Industrial Revenue Bonds issued through the Erie County, New YorkIndustrial Development Agency payable $350,000 annually through 2017 and$145,000 in 2018, with interest reset weekly (3.2% at December 31, 2013). 1,545 1,895 Series 1998 Industrial Revenue Bonds issued through the Business Finance Authorityof the State of New Hampshire payable $400,000 annually through 2018 with interestreset weekly (3.2% at December 31, 2013). 2,050 2,450 Revolving Credit Line, payable August 31, 2016. Interest was at LIBOR plus between1.50% and 2.50%. The entire amount was paid off upon the issuance of the SeniorTerm Notes under the Third Amended and Restated Credit Agreement dated July 18,2013. — 7,000 Senior Term Note, payable $2.0 million quarterly in 2013 with a balloon payment of$5.0 million in January 2014. Interest was at LIBOR plus between 2.25% and 3.50%.The entire amount was refinanced in conjunction with the issuance of the Senior TermNotes under the Third Amended and Restated Credit Agreement dated July 18, 2013. — 13,000 Note Payable at Canadian Prime — 566 Other Bank Debt 2,936 — Capital Lease Obligations and Other Debt 3,819 12 200,320 29,983 Less Current Maturities 12,279 9,268 $188,041 $20,715 Principal maturities of long-term debt are approximately: (In thousands) 2014 $12,279 2015 14,237 2016 18,930 2017 21,259 2018 130,213 Thereafter 3,402 $200,320 The Company’s obligations under the Credit Agreement as amended are jointly and severally guaranteed by each domestic subsidiary of the Companyother 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 extended and modified its existing credit facility by entering into Amendment No. 1 dated as of March 27, 2013 (the “Amendment”), tothe Second Amended and Restated Credit Agreement. The Amendment provided for an increase in the Company’s revolving credit facility from $35 million to$75 million and for an extension of the maturity date. Interest remained at a rate of LIBOR plus between 1.50% and 2.50% based on the Company’s LeverageRatio under the Credit Agreement. The credit facility allocates up to $20 million of the $75 million revolving credit line for the issuance of letters of credit,including certain existing letters of credit. - 42 -Table of ContentsOn July 18, 2013, in connection with the funding of the Peco Acquisition (See Note 19), the Company amended its existing credit facility by enteringinto a Third Amended and Restated Credit Agreement ( the “Credit Agreement”). The Credit Agreement continued to provide for a $75 million five-yearrevolving credit facility and a new $190 million five-year term loan, both expiring on June 30, 2018. At December 31, 2013, there were no amounts owingunder the revolver, there were $9.8 million in outstanding letters of credit leaving $65.2 million available. The amended facilities carry an interest rate rangingfrom 225 basis points to 350 basis points above LIBOR, depending on the Company’s leverage ratio as defined in the Credit Agreement. Variable principalpayments on the term loan are quarterly through March 31, 2018 with a balloon payment at maturity and with mandatory prepayments being required incertain circumstances. The credit facility is secured by substantially all of the Company’s assets. In addition, the Company is required to pay a commitmentfee of between 0.25% and 0.50% on the unused portion of the total credit commitment for the preceding quarter, based on the Company’s leverage ratio underthe Credit Agreement.The Credit Agreement contains various financial covenants. The covenant for minimum fixed charge coverage, defined as the ratio of the sum of netincome, interest expense, provision for taxes based on income, total depreciation expense, total amortization expense, other non-cash items reducing net incomeminus other non-cash items increasing net income minus capital expenditures, minus cash taxes paid and dividends paid to interest expense plus scheduledprincipal payments on long-term debt calculated on a rolling four-quarter basis is not to be less than 1.25 to 1 for each fiscal quarter ending on or afterSeptember 30, 2011. The Company’s fixed charge coverage was 3.70 to 1 at December 31, 2013. The covenant for maximum leverage, defined as the ratio ofthe sum of net income, interest expense, provision for taxes based on income, total depreciation expense, total amortization expense, other non-cash itemsreducing net income minus other non-cash items increasing net income to funded debt calculated on a rolling four-quarter basis is not to exceed 3.75 to 1through March 31, 2015 or to exceed 3.5 to 1 each fiscal quarter thereafter. The Company’s leverage ratio was 2.68 to 1 at December 31, 2013.The Company modified its existing credit facility by entering into Amendment No. 1 dated as of December 31, 2013 (the “Amendment”), to the ThirdAmended and Restated Credit Agreement, with HSBC Bank USA, National Association (“HSBC”), as Agent and with HSBC, Bank of America, N.A. andManufacturers and Traders Trust Company, as Lenders ( the “Credit Agreement”). The Amendment modifies the definition of EBITDA by adding backcertain non-recurring expenses and adjustments and modifies the definition of the Fixed Charge Coverage Ratio by excluding certain capital expenditures fromthe computation.In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under the CreditAgreement automatically become due and payable. Other events of default, such as failure to make payments as they become due and breach of financial andother covenants, change of control, judgments over a certain amount, and cross default under other agreements give the Agent the option to declare all suchamounts immediately due and payable.The Industrial Revenue Bonds are held by institutional investors and are guaranteed by a bank letter of credit, which is collateralized by certainproperty, plant and equipment assets, the carrying value of which approximates the principal balance on the bonds.NOTE 7 — WARRANTYIn the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship typically over periodsranging from twelve to sixty months. The Company determines warranty reserves needed by product line based on experience and current facts andcircumstances. Activity in the warranty accrual, which is included in other accrued expenses on the Consolidated Balance Sheets, is summarized as follows: (In thousands) 2013 2012 2011 Balance at Beginning of the Year $2,551 $1,092 $1,699 Warranty Liabilities Acquired 671 — — Warranties Issued 722 2,430 1,446 Reassessed Warranty Exposure (222) — (95) Warranties Settled (926) (971) (1,958) Balance at End of the Year $2,796 $2,551 $1,092 - 43 -Table of ContentsNOTE 8 — INCOME TAXESThe Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financialreporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefitswhich are not expected to be realized. Investment tax credits are recognized on the flow through method.The FASB issued ASC Topic 740-10 Overall - Uncertainty in Income Taxes (“ASC Topic 740-10”) which clarifies the accounting and disclosure foruncertainty in tax positions, as defined. ASC Topic 740-10 seeks to reduce the diversity in practice associated with certain aspects of the recognition andmeasurement related to accounting for income taxes. The Company is subject to the provisions of ASC Topic 740-10 and has analyzed filing positions in all ofthe federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.Should the Company need to accrue a liability for uncertain tax benefits, any interest associated with that liability will be recorded as interest expense.Penalties, if any, would be recognized as operating expenses. There are no penalties or interest liabilities accrued as of December 31, 2013 or 2012, nor are anypenalties or interest costs included in expense for each of the years ended December 31, 2013, 2012 and 2011. The years under which we conducted ourevaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2011 through 2013 forfederal purposes and 2010 through 2013 for state purposes.Pretax income from the Company’s foreign subsidiaries amounted to $0.2 million, $1.0 million and $0.9 million for 2013, 2012 and 2011,respectively. The balances of pretax earnings for each of those years were domestic.The provision (benefit) for income taxes consists of the following: (In thousands) 2013 2012 2011 Current US Federal $10,904 $11,173 $6,840 State 682 78 114 Foreign 81 2 47 Deferred (722) (1,544) 423 $10,945 $9,709 $7,424 The effective tax rates differ from the statutory federal income tax rate as follows: 2013 2012 2011 Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% Permanent Items Non-deductible Stock Compensation Expense 1.0% 1.1% 1.0% Domestic Production Activity Deduction (3.0)% (3.0)% (2.9)% Non-deductible Acquisition Costs 1.0% — % — % Other — % 0.1% (0.2)% Foreign Tax Benefits (0.3)% (1.2)% (1.0)% State Income Tax (Benefits), Net of Federal Income Tax Effect (0.1)% (0.1)% 1.4% Research and Development Tax Credits (5.0)% (1.1)% (6.1)% Other — % (0.1)% (1.6)% Effective Tax Rate 28.6% 30.7% 25.6% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes.No provision has been made for U.S. federal or foreign taxes on that portion of certain foreign subsidiaries’ undistributed earnings ($3.8 million atDecember 31, 2013) considered to be permanently reinvested. It is not practicable to determine the amount of tax that would be payable if these amounts wererepatriated to the U.S. - 44 -Table of ContentsSignificant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows: 2013 2012 (In thousands) Deferred Tax Assets: Goodwill and Intangible Assets $3,367 $6,918 Asset Reserves 5,780 4,901 Deferred Compensation 6,564 6,656 State Investment Tax Credit Carryforwards, Net of Federal Tax 665 665 Customer Advanced Payments and Deferred Revenue 956 1,113 State Net Operating Loss Carryforwards and Other 2,639 729 Total Gross Deferred Tax Assets 19,971 20,982 Valuation Allowance for State and Foreign Deferred Tax Assets and Tax CreditCarryforwards, Net of Federal Tax (2,509) (2,190) Deferred Tax Assets 17,462 18,792 Deferred Tax Liabilities: Depreciation 7,164 4,806 Intangible Assets 27,742 — Other 2,465 — Deferred Tax Liabilities 37,371 4,806 Net Deferred Tax Asset (Liabilities) $(19,909) $13,986 The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31: (In thousands) 2013 2012 Deferred Tax Asset — Current $5,291 $4,967 Deferred Tax Asset — Long-term — 9,019 Deferred Tax Liabilities — Current (970) — Deferred Tax Liabilities — Long-term (24,230) — Net Deferred Tax Liability $(19,909) $13,986 At December 31, 2013, state and foreign tax credit carryforwards amounted to approximately $1.5 million. These state and foreign tax creditcarryforwards will expire from 2015 through 2028.Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in certain states in the future and utilize certain of the Company’sstate operating loss carryforwards before they expire, the Company has recorded a valuation allowance accordingly. These state net operating losscarryforwards amount to approximately $17.8 million and expire at various dates from 2027 through 2033. As a result, the excess tax benefits included incertain state net operating loss carryforwards but not reflected in deferred tax assets was approximately $4.8 million. The excess tax benefits associated withstock option exercises are recorded directly to shareholders’ equity only when realized and amounted to approximately $1.3 million and $1.2 million for theyears ended December 31, 2013 and 2012 respectively.We have unrecognized tax benefits which, if ultimately recognized, will reduce our annual effective tax rate. Reserves for uncertain income taxpositions have been recorded pursuant to ASC Topic 740-10. An estimate of the range of possible change during 2014 to the reserves cannot be made as ofDecember 31, 2013. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties which are insignificant, is as follows: (in thousands) 2013 2012 2011 Balance at Beginning of the Year $840 $880 $1,470 Increases (Decreases) as a Result of Tax Positions Taken in Prior Years 145 (220) (1,090) Increases as a Result of Tax Positions Taken in the Current Year 955 180 500 Balance at End of the Year $1,940 $840 $880 In January 2013, the American Taxpayer Relief Act of 2012 extended the research and development tax credits for the year ended December 31, 2012. Asthe new law was not enacted until 2013, the 2012 tax provision contains no estimated benefit for research and development tax credits. Had the law beenenacted in 2012, the company would have recognized approximately $0.7 million in tax benefits (net of a $0.7 million reserve) for the year ended December 31,2012. The Company recognized a total benefit of $1.1 million in 2013 related to the 2012 credit. - 45 -Table of ContentsNOTE 9 — PROFIT SHARING/401(k) PLANThe Company offers eligible domestic full-time employees participation in the ATRO Profit Sharing/401(k) Plan. The plan provides for annualcontributions based on percentages of pretax income. In addition, employees may contribute a portion of their salary to the 401(k) plan which is partiallymatched by the Company. The plan may be amended or terminated at any time.Total charges to income before income taxes for these plans were approximately $3.7 million, $3.0 million and $2.6 million in 2013, 2012 and 2011,respectively.NOTE 10—RETIREMENT PLANS AND RELATED POST RETIREMENT BENEFITSThe Company has two non-qualified supplemental retirement defined benefit plans (“SERP” and “SERP II”) for certain current and retired executiveofficers. On March 6, 2012 the Company adopted SERP II for eligible current executive officers. The Company recorded a liability at the date of adoption ofthe new plan in the amount of approximately $5.8 million for the projected benefit obligation.The accumulated benefit obligation of the plans as of December 31, 2013 and 2012 amounts to $10.1 million and $9.5 million, respectively.The Plans provide for benefits based upon average annual compensation and years of service and in the case of SERP, there are offsets for SocialSecurity and Profit Sharing benefits. It is the Company’s intent to fund the plans as plan benefits become payable, since no assets exist at December 31, 2013or 2012 for either of the plans.The Company accounts for the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pensionplans in accordance with the recognition and disclosure provisions of ASC Topic 715, Compensation, Retirement Benefits (“ASC Topic 715”), whichrequires the Company to recognize the funded status in its balance sheet, with a corresponding adjustment to AOCI, net of tax. These amounts will besubsequently recognized as net periodic pension cost pursuant to the Company’s historical policy for amortizing such amounts. Further, actuarial gains andlosses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of AOCI.Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in AOCI.Unrecognized prior service costs of $3.5 million ($5.3 million net of $1.8 million in taxes) and unrecognized actuarial losses of $1.2 million ($1.9million net of $0.7 million in taxes) are included in AOCI at December 31, 2013 and have not yet been recognized in net periodic pension cost. The priorservice cost included in AOCI and amounts expected to be recognized in net periodic pension cost during the fiscal year-ended December 31, 2014 is $0.3million ($0.5 million net of $0.2 million in taxes). The actuarial loss included in AOCI expected to be recognized in net periodic pension cost during the fiscalyear-ended December 31, 2014 is $0.1 million, net of taxes.The reconciliation of the beginning and ending balances of the projected benefit obligation of the plans for the years ended December 31 is as follows: (In thousands) 2013 2012 Funded Status Projected Benefit Obligation Beginning of the Year — January 1 $15,042 $7,588 Adoption of SERP II — 5,790 Service Cost 295 303 Interest Cost 624 548 Actuarial (Gain) Loss (1,299) 1,161 Benefits Paid (348) (348) End of the Year — December 31 $14,314 $15,042 The decrease in the 2013 projected benefit obligation is due primarily to an increase in the discount rate. The increase in the 2012 projected benefitobligation is due primarily to the adoption of SERP II, the decrease in the discount rate and differences between estimated and actual salaries.The assumptions used to calculate the projected benefit obligation as of December 31 are as follows: 2013 2012 Discount Rate 5.10% 4.20% Future Average Compensation Increases 5.00% 5.00% - 46 -Table of ContentsThe plans are unfunded at December 31, 2013 and are recognized in the accompanying Consolidated Balance Sheets as a current accrued pensionliability of $0.3 million and a long-term accrued pension liability of $14.0 million. This also is the expected future contribution to the plan, since the plan isunfunded.The following table summarizes the components of the net periodic cost for the years ended December 31: (In thousands) 2013 2012 2011 Net Periodic Cost Service Cost — Benefits Earned During Period $295 $303 $46 Interest Cost 624 548 328 Amortization of Prior Service Cost 495 426 109 Amortization of Losses 128 91 11 Net Periodic Cost $1,542 $1,368 $494 The assumptions used to determine the net periodic cost are as follows: 2013 2012 2011 Discount Rate 4.20% 4.50% 5.50% Future Average Compensation Increases 5.00% 5.00% 5.00% The Company expects the benefits to be paid in each of the next five years to be $0.3 million and $1.7 million in the aggregate for the next five years afterthat. This also is the expected Company contribution to the plans.Participants in SERP are entitled to paid medical, dental and long-term care insurance benefits upon retirement under the plan. The measurement date fordetermining the plan obligation and cost is December 31.The reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation for the years ended December 31, is asfollows: (In thousands) 2013 2012 Funded Status Accumulated Postretirement Benefit Obligation Beginning of the Year — January 1 $593 $568 Service Cost 3 2 Interest Cost 24 24 Actuarial Loss 55 42 Benefits Paid (45) (43) End of the Year — December 31 $630 $593 The assumptions used to calculate the accumulated postretirement benefit obligation as of December 31 are as follows: 2013 2012 Discount Rate 5.10% 4.20% The following table summarizes the components of the net periodic cost for the years ended December 31: (In thousands) 2013 2012 2011 Net Periodic Cost Service Cost — Benefits Earned During Period $3 $2 $2 Interest Cost 24 24 27 Amortization of Prior Service Cost 25 26 25 Amortization of (Gains) Losses — — (4) Net Periodic Cost $52 $52 $50 The assumptions used to determine the net periodic cost are as follows: 2013 2012 2011 Discount Rate 4.20% 4.50% 5.50% Future Average Healthcare Benefit Increases 5.76% 6.00% 9.00% - 47 -Table of ContentsThe Company estimates that the prior service costs and net losses in AOCI for medical, dental and long-term care insurance benefits as of December 31,2013, that will be recognized as components of net periodic benefit cost during the year ended December 31, 2014 for the Plan will be insignificant. Formeasurement purposes, a 7.8% and 6.4% increase in the cost of health care benefits was assumed for 2014 and 2015 respectively and a range between 6.2%and 5.1% from 2016 through 2050. A one percentage point increase or decrease in this rate would change the post retirement benefit obligation insignificantly.The Company expects the benefits to be paid in each of the next five years to be insignificant per year and approximately $0.3 million in the aggregate for thenext five years after that. This also is the expected Company contribution to the plan, as it is unfunded.As of July 18, 2013 upon completion of the acquisition of Peco, the Company is now a participating employer in a trustee-managed multiemployerdefined benefit pension plan for employees who participate in collective bargaining agreements. The plan generally provides retirement benefits to employeesbased on years of service to the Company. The multiemployer pension plan is managed by a board of trustees. Contributions are based on the hours workedand are expensed on a current basis.The risks of participating in a multiemployer defined benefit pension plan are different from a single-employer plan because: (a) assets contributed to themultiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stopscontributing to the plan, the unfunded obligations of the plan may be required to be borne by the remaining participating employers, and (c) if the Companychooses to stop participating in a multiemployer plan, it may be required to pay a withdrawal liability to the plan. In connection with ongoing renegotiation ofcollective bargaining agreements, the Company may discuss and negotiate for the complete or partial withdrawal from its multiemployer pension plan.Depending on the number of employees withdrawn in any future period and the financial condition of the multiemployer plan at the time of withdrawal, theassociated withdrawal liabilities could be material to the Company in the period of the withdrawal. The Company has no plans to withdraw from itsmultiemployer pension plan.Western Conference of Teamsters Pension Plan (“WCTPP”) provides fixed retirement payments as a function of the total employer contributions payablefor all service after 1986. However in the event WCTPP is underfunded, the monthly benefit amount can be reduced by the trustees of the plan. Planinformation for the WCTPP, Employer Identification Number 91-6145047, is not publicly available for 2013. According to the most recently available Form5500 for the plan year ended December 31, 2012, plan net assets are $32.3 billion, the total actuarial present value of accumulated plan benefits is $37.9billion, and contributions receivable from all employers totaled $99.2 million. WCTPP is over 90.1% funded as of December 31, 2012.The collective bargaining agreement of WCTPP requires contributions on the basis of hours worked. The agreement also has a minimum contributionrequirement of $2.50 per compensable hour to a maximum of 184 hours per calendar year month and cumulatively to a maximum of 2,080 hours per calendaryear, for subsequent periods. Pension Fund EIN/PensionPlanNumber ZoneStatus RehabilitationPlan Status 2013 CompanyContributions(In thousands) SurchargeImposed Expiration Date ofCollectiveBargainingAgreement PlanYearEndWCTPP 91-6145047 Green None $830* None 10/31/16 12/31* - Total contributions for fiscal year 2013, post-acquisition contributions totaled 0.3 million.NOTE 11 — SHAREHOLDERS’ EQUITYReserved Common StockAt December 31, 2013, approximately 7.9 million shares of common stock were reserved for issuance upon conversion of the Class B stock, exercise ofstock options and purchases under the Employee Stock Purchase Plan. Class B Stock is identical to Common Stock, except Class B Stock has ten votes pershare, is automatically converted to Common Stock on a one for one basis when sold or transferred, and cannot receive dividends unless an equal or greateramount of dividends is declared on Common Stock.Comprehensive Income and Accumulated Other Comprehensive Income (Loss)Comprehensive income consists of net income and the after-tax impact of currency translation adjustments, mark to market adjustments for derivativesand retirement liability adjustments. Income taxes related to derivatives and retirement liability adjustments within other comprehensive income are generallyrecorded based on an effective tax rate of approximately 35%. No income tax effect is recorded for currency translation adjustments. - 48 -Table of ContentsThe components of accumulated other comprehensive income (loss) are as follows: (In thousands) 2013 2012 Foreign Currency Translation Adjustments $1,284 $1,415 Mark to Market Adjustments for Derivatives – Before Tax (107) (218) Tax Benefit 38 76 Mark to Market Adjustments for Derivatives – After Tax (69) (142) Retirement Liability Adjustment – Before Tax (7,423) (9,316) Tax Benefit 2,597 3,260 Retirement Liability Adjustment – After Tax (4,826) (6,056) Accumulated Other Comprehensive Loss $(3,611) $(4,783) - 49 -Table of ContentsThe components of other comprehensive income (loss) are as follows: (In thousands) 2013 2012 2011 Foreign Currency Translation Adjustments $(131) $183 $(90) Reclassification to Interest Expense 109 209 298 Mark to Market Adjustments for Derivatives 2 (34) (171) Tax Benefit (Expense) (38) (61) (45) Mark to Market Adjustments for Derivatives 73 114 82 Retirement Liability Adjustment 1,893 (6,451) (1,348) Tax Benefit (Expense) (663) 2,257 472 Retirement Liability Adjustment 1,230 (4,194) (876) Other Comprehensive (Loss) Income $1,172 $(3,897) $(884) NOTE 12 — EARNINGS PER SHAREEarnings per share computations are based upon the following table: 2013 2012 2011 (In thousands, except per share data) Net Income $27,266 $21,874 $21,591 Basic Earnings Weighted Average Shares 17,484 17,143 16,750 Net Effect of Dilutive Stock Options 875 1,014 1,067 Diluted Earnings Weighted Average Shares 18,359 18,157 17,817 Basic Earnings Per Share $1.56 $1.28 $1.29 Diluted Earnings Per Share $1.49 $1.20 $1.21 Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation of dilutedearnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares covered by out-of-the-money stock options were insignificant at December 31, 2013 and 0.2 million and 0.1 million for the years ended December 31, 2012 and 2011,respectively.NOTE 13 — STOCK OPTION AND PURCHASE PLANSThe Company has stock option plans that authorize the issuance of options for shares of Common Stock to directors, officers and key employees.Stock option grants are designed to reward long-term contributions to the Company and provide incentives for recipients to remain with the Company. Theexercise price, determined by a committee of the Board of Directors, may not be less than the fair market value of the Common Stock on the grant date.Options become exercisable over periods not exceeding ten years. The Company’s practice has been to issue new shares upon the exercise of the options.Stock compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expectedto vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outside directors vest six monthsfrom the date of grant and options granted to officers and key employees straight line vest over a five-year period from the date of grant. 2013 2012 2011 Weighted Average Fair Value of the Options Granted $23.22 $9.93 $12.65 The weighted average fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the followingweighted-average assumptions: 2013 2012 2011Risk-free Interest Rate 0.88% - 2.22% 0.89% - 1.00% 1.55% - 2.82%Dividend Yield 0.0% 0.0% 0.0%Volatility Factor 0.51-0.56 0.52-0.64 0.52-0.53Expected Life in Years 5.0 – 8.0 5.0 – 8.0 7.0 – 8.0 - 50 -Table of ContentsTo determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock and considers currentlyavailable information to determine if future volatility is expected to differ over the expected terms of the options granted. The risk-free rate is based on theUnited States Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s historyand expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.The following table provides compensation expense information based on the fair value of stock options for the years ended December 31, 2013, 2012and 2011: (In thousands) 2013 2012 2011 Stock Compensation Expense $1,384 $1,351 $1,061 Tax Benefit (112) (136) (93) Stock Compensation Expense, Net of Tax $1,272 $1,215 $968 A summary of the Company’s stock option activity and related information for the years ended December 31 is as follows: (Aggregate intrinsic value inthousands) 2013 2012 2011 Options WeightedAverageExercisePrice AggregateIntrinsicValue Options WeightedAverageExercisePrice AggregateIntrinsicValue Options WeightedAverageExercisePrice AggregateIntrinsicValue Outstanding at January 1 1,521,275 $8.23 $65,072 1,661,445 $6.71 $20,532 1,904,232 $5.58 $38,778 Options Granted 69,720 $42.67 $581 130,500 $18.08 $129 84,938 $22.44 $299 Options Exercised (181,218) $4.25 $(8,472) (270,670) $3.67 $(4,168) (327,725) $4.25 $(7,112) Options Forfeited — $— $— — $— $— — $— $— Outstanding at December 31 1,409,777 $10.44 $57,181 1,521,275 $8.23 $16,493 1,661,445 $6.71 $31,965 Exercisable at December 31 1,149,532 $7.81 $49,648 1,168,459 $6.72 $14,431 1,280,744 $5.47 $26,237 The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stock priceof Common Stock which would have been received by the option holders had all option holders exercised their options as of that date. The Company’s closingstock price of Common Stock was $51.00, $19.07 and $25.95 as of December 31, 2013, 2012 and 2011, respectively.The weighted average fair value of options vested during 2013, 2012 and 2011 was $6.20, $6.18 and $3.54, respectively. The total fair value ofoptions that vested during the year amounted to $1.0 million, $1.0 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011,respectively. At December 31, 2013, total compensation costs related to non-vested awards not yet recognized amounts to $3.5 million and will be recognizedover a weighted average period of 2.5 years.The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of December 31, 2013: Outstanding Exercisable Exercise Price Range Shares Weighted AverageRemaining Lifein Years Weighted AverageExercise Price Shares Weighted AverageRemaining Lifein Years WeightedAverageExercise Price $ 2.68 - $ 3.45 265,404 0.9 $3.07 265,404 0.9 $3.07 $ 4.84 - $ 7.07 578,364 4.7 5.34 533,109 4.6 5.35 $ 9.15 - $10.07 141,975 3.2 9.35 141,975 3.2 9.35 $14.01 - $24.88 372,314 7.5 18.62 209,044 6.9 19.08 $41.40 - $51.93 51,720 9.9 49.49 — — — 1,409,777 4.8 10.44 1,149,532 4.0 7.81 The Company established Incentive Stock Option Plans for the purpose of attracting and retaining executive officers and key employees, and to alignmanagement’s interest with those of the shareholders. Generally, the options must be exercised within ten years from the grant date and vest ratably over a five-year period. The exercise price for the options is equal to the share price at the date of grant. At December 31, 2013, the Company had options outstanding for1,136,733 shares under the plans. At December 31, 2013, there were 531,516 options available for future grant under the plan established in 2011. - 51 -Table of ContentsThe Company established the Directors Stock Option Plans for the purpose of attracting and retaining the services of experienced and knowledgeableoutside directors, and to align their interest with those of the shareholders. The options must be exercised within ten years from the grant date. The exerciseprice for the option is equal to the share price at the date of grant and vests six months from the grant date. At December 31, 2013, the Company had optionsoutstanding for 273,044 shares under the plans. At December 31, 2013, there were 145,555 options available for future grant under the plan established in2005.In addition to the options discussed above, the Company has established the Employee Stock Purchase Plan to encourage employees to invest inAstronics Corporation. The plan provides employees the opportunity to invest up to 20% of their cash compensation (up to an annual maximum ofapproximately $21,250) in Astronics common stock at a price equal to 85% of the fair market value of the Astronics common stock, determined eachOctober 1. Employees are allowed to enroll annually. Employees indicate the number of shares they wish to obtain through the program and their intention topay for the shares through payroll deductions over the annual cycle of October 1 through September 30. Employees can withdraw anytime during the annualcycle, and all money withheld from the employees pay is returned with interest. If an employee remains enrolled in the program, enough money will have beenwithheld from the employees’ pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2013, employeeshad subscribed to purchase 51,253 shares at $35.16 per share. The weighted average fair value of the options was approximately $9.31, $4.99 and $3.96for options granted during the year ended December 31, 2013, 2012 and 2011, respectively.The fair value for the options granted under the Employee Stock Purchase Plan was estimated at the date of grant using a Black-Scholes option pricingmodel with the following weighted-average assumptions: 2013 2012 2011 Risk-free Interest Rate 0.10% 0.17% 0.10% Dividend Yield 0.0% 0.0% 0.0% Volatility Factor .37 .37 .52 Expected Life in Years 1.0 1.0 1.0 NOTE 14 — FAIR VALUEASC Topic 820, Fair value Measurements and Disclosures, (“ASC Topic 820”) defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair valuemeasurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liabilityoccurs 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. ASCTopic 820 defines fair value based upon an exit price model. The Company’s assessment of the significance of a particular input to the fair value measurementin its entirety requires judgment, and involves consideration of factors specific to the asset or liability.ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs intothree broad levels as follows:Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset orliability, 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. - 52 -Table of ContentsOn 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 valuemeasurement. The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2013 andDecember 31, 2012: (In thousands) Classification Total Level 1 Level 2 Level 3 Interest Rate Swaps Other Liabilities December 31, 2013 $(108) $— $(108) $— December 31, 2012 (218) — (218) — Acquisition Contingent Consideration December 31, 2013 Current Liabilities $(137) $— $— $(137) December 31, 2012 (86) — — (86) December 31, 2013 Other Liabilities $(5,709) $— $— $(5,709) December 31, 2012 (728) — — (728) Interest rate swaps are securities with no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are directlyobservable in active markets and are classified within Level 2 of the valuation hierarchy, using the income approach (See Note 15).Our Level 3 fair value liabilities represent contingent consideration recorded related to the 2011 Ballard acquisition, to be paid up to a maximum of $5.5million if certain revenue growth targets are met over the next five years, the 2012 Max-Viz acquisition, to be paid up to a maximum of $8.0 million if certainrevenue growth targets are met over the next three years and the 2013 AeroSat acquisition, to be paid up to a maximum of $53.0 million if certain revenuegrowth targets are met over the next two years. The calculation of additional purchase consideration (“Earn Out”) related to the acquisition of AeroSat is asfollows: AeroSat Revenue Earn Out Formula2014 <$30 million No Earn Out >$30 million < $50 million (AeroSat Revenue X 15%) x ((AeroSat Revenue-$30 million)/$20 million >$50 million AeroSat Revenue X 15%2015 <$40 million No Earn Out >$40 million < $60 million (AeroSat Revenue X 15%) x ((AeroSat Revenue-$40 million)/$20 million >$60 million AeroSat Revenue X 15%The amounts recorded for the contingent considerations were calculated using an estimate of the probability of the future cash outflows. The varyingcontingent payments were then discounted to the present value utilizing a discounted cash flow methodology. The contingent consideration liabilities have noobservable Level 1 or Level 2 inputs.On a Non-recurring Basis:In accordance with the provisions of ASC Topic 350, Intangibles – Goodwill and Other the Company estimates the fair value of reporting units,utilizing unobservable Level 3 inputs. Level 3 inputs require significant management judgment due to the absence of quoted market prices or observable inputsfor assets of a similar nature. The Company utilizes a discounted cash flow method 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 3inputs.Intangible assets that are amortized are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying valuemay not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should the carryingamount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value. For theCompany’s indefinite-lived intangible asset, the impairment test consists of comparing the fair value, determined using the relief from royalty method, with itscarrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. - 53 -Table of ContentsAt December 31, 2013, the fair value of goodwill and intangible assets classified using Level 3 inputs are as follows: • Beginning January 1, 2012, previously unamortized trade names in the Test Systems segment with a fair value of $0.4 million are now beingamortized over 10 years. The fair value measurement of total amortized intangible assets in the Test Systems reporting unit is $3.9 million. Inputsused to calculate the fair value were internal forecasts used to estimate undiscounted future cash flows. There was no change in fair value fromDecember 31, 2012. • The Max-Viz goodwill and intangible assets acquired on July 30, 2012, were valued at fair value using a discounted cash flow methodology andare classified as Level 3 inputs. • The Peco, AeroSat, and PGA goodwill and intangible assets acquired on July 18, 2013, October 2, 2013, and December 5, 2013 respectively,were valued at fair value using a discounted cash flow methodology and are classified as Level 3 inputs.Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes payable approximatefair 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 theseinstruments.During 2011, in accordance with the provisions of ASC Topic 350, Intangibles – Goodwill and Other, the Company recorded a $2.4 million goodwillimpairment charge related to the Test System reporting unit to write down goodwill to its implied fair value of zero. The Company utilizes a discounted cashflow analysis to estimate the fair value of reporting units utilizing unobservable inputs. The fair value measurement of the reporting unit under the step-one andstep-two analysis of the goodwill impairment test are classified as Level 3 inputs. There were no impairment charges to goodwill in any of the Company’sreporting units in 2013 and 2012.During 2011, the Company recorded an impairment charge to write down to fair value indefinite-lived trade name intangible assets of its Test Systemreporting unit. The impairment charge for the trade names was $0.1 million based on the determined fair value of $0.4 million. This impairment charge is theresult of the revised downward estimates of future revenues and cash flows of the Test Systems reporting unit. The fair value measurements are calculatedusing unobservable inputs classified as Level 3 inputs, requiring significant management judgment due to the absence of quoted market prices or observableinputs for assets of a similar nature. There were no impairment charges to any of the Company’s intangible assets in either of the Company’s segments in2013 and 2012.NOTE 15 — DERIVATIVE FINANCIAL INSTRUMENTSAt December 31, 2013, we had one interest rate swap with a notional amount of approximately $1.5 million, entered into on February 6, 2006, related tothe Company’s Series 1999 New York Industrial Revenue Bond, which effectively fixes the rate at 3.99% plus a spread based on the Company’s leverageratio on this obligation through February 1, 2016.An interest rate swap entered into on March 19, 2009 related to the Company’s term note issued January 30, 2009, was terminated in the third quarterof 2013 with no significant impact to the results of our operations.At December 31, 2013 and 2012, the fair value of the interest rate swap was a liability of $0.1 million and $0.2 million, respectively, which is includedin other liabilities (See Note 14 - Fair Value). Amounts expected to be reclassified to earnings in the next twelve months are not expected to be significant.Activity in AOCI related to these derivatives is summarized below: (In thousands) 2013 2012 2011 Derivative Balance at the Beginning of the Year in AOCI $(142) $(256) $(338) Net Deferral in AOCI of Derivatives: Net (Increase) Decrease in Fair Value of Derivatives 2 (34) (171) Tax Effect — 14 61 2 (20) (110) Net Reclassification from AOCI into Earnings: Reclassification from AOCI into Earnings – Interest Expense 109 209 298 Tax Effect (38) (75) (106) 71 134 192 Net Change in Derivatives for the Year 73 114 82 Derivative Balance at the End of the Year in AOCI $(69) $(142) $(256) - 54 -Table of ContentsTo the extent the interest rate swaps are not perfectly effective in offsetting the change in the value of the payments being hedged; the ineffective portion ofthese contracts is recognized in earnings immediately as interest expense. Ineffectiveness, if any, was not significant for the years ended December 31, 2013,2012 and 2011. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items.Amounts from ineffectiveness, if any, to be reclassified during 2014 are not expected to be significant.NOTE 16 — SELECTED QUARTERLY FINANCIAL INFORMATIONThe following table summarizes selected quarterly financial information for 2013 and 2012: Quarter Ended (Unaudited) Dec. 31, Sept. 28, June 29, March 30, Dec. 31, Sept. 29, June 30, March 31, (In thousands, except for per share data) 2013 2013 2013 2013 2012 2012 2012 2012 Sales $105,456 $89,681 $70,833 $73,967 $67,420 $68,899 $64,989 $65,138 Gross Profit (sales less cost of products sold) 25,173 23,785 18,681 20,219 17,551 16,717 17,054 18,120 Income Before Tax 8,902 10,747 7,718 10,844 7,690 7,381 7,510 9,002 Net Income 6,389 7,155 5,158 8,564 5,655 4,930 5,194 6,095 Basic Earnings Per Share 0.36 0.41 0.30 0.49 0.33 0.29 0.30 0.36 Diluted Earnings Per Share 0.34 0.39 0.28 0.47 0.31 0.27 0.29 0.34 NOTE 17 — COMMITMENTS AND CONTINGENCIESThe Company leases certain facilities and equipment under various lease contracts with terms that meet the accounting definition of operating leases.These arrangements may include fair value renewal or purchase options. Rental expense for the years ended December 31, 2013, 2012 and 2011 was $2.4million, $3.2 million and $3.0 million, respectively. The following table represents future minimum lease payment commitments as of December 31, 2013: (In thousands) 2014 $2,183 2015 925 2016 279 2017 237 2018 136 $3,760 From time to time the Company may enter into purchase agreements with suppliers under which there is a commitment to buy a minimum amount ofproduct. Purchase commitments outstanding at December 31, 2013 were $91.2 million. These commitments are not reflected as liabilities in the Company’sConsolidated Balance Sheets.Legal ProceedingsThe Company is subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of thesematters is currently not determinable, we do not expect these matters will have a material adverse effect on our business, financial position, results ofoperations, or cash flows. However, the results of these matters cannot be predicted with certainty. Should the Company fail to prevail in any legal matter orshould several legal matters be resolved against the Company in the same reporting period, then the financial results of that particular reporting period could bematerially adversely affected.We are a defendant in an action filed in the Regional State Court of Mannheim, Germany (Lufthansa Technik AG v. Astronics Advanced ElectronicsSystems Corp.) relating to an allegation of patent infringement. The damages sought include injunctive relief, as well as monetary damages. We dispute theallegation and are vigorously defending ourselves in this action. We have filed a nullity action with the Federal Patent Court in Munich, Germany, requestingthe court to revoke the German part of the European patent that is subject to the claim. In November 2011, the Regional State Court of Manheim Germany,issued an interim decision to the effect that the infringement litigation proceedings be stayed until the Federal Patent Court decides on the concurrent nullityaction. In February 2014, The Federal Patent Court issued a written judgment upholding the validity of a portion of the patent. This judgment is subject toappeal. However, as a result the judgment proclaimed by The Federal Patent Court the stay of the infringement litigation proceedings is no longer effective. Atthis time we are unable to provide a reasonable estimate of our potential liability or the potential amount of loss related to this action, if any. If the outcome ofthis litigation is adverse to us, our results and financial condition could be materially affected. - 55 -Table of ContentsNOTE 18 — SEGMENTSSegment information and reconciliations to consolidated amounts for the years ended December 31 are as follows: (In thousands) 2013 2012 2011 Sales: Aerospace $330,530 $254,955 $213,874 Test Systems 10,103 11,491 14,289 Less Inter-segment Sales (696) — — 9,407 11,491 14,289 Total Consolidated Sales $339,937 $266,446 $228,163 Operating Profit (Loss) and Margins: Aerospace $55,200 $44,137 $40,400 16.7% 17.3% 18.9% Test Systems (3,756) (4,985) (4,760) (37.2)% (43.4)% (33.3)% Total Operating Profit 51,444 39,152 35,640 15.1% 14.7% 15.6% Deductions from Operating Profit: Interest Expense (4,094) (1,042) (1,806) Corporate and Other Expenses, Net (9,139) (6,527) (4,819) Earnings before Income Taxes $38,211 $31,583 $29,015 Depreciation and Amortization: Aerospace $10,058 $6,043 $3,929 Test Systems 590 634 584 Corporate 411 228 430 Total Depreciation and Amortization $11,059 $6,905 $4,943 Identifiable Assets: Aerospace $428,619 $177,168 $136,930 Test Systems 11,035 18,121 20,020 Corporate 51,617 16,700 17,955 Total Assets $491,271 $211,989 $174,905 Capital Expenditures: Aerospace $6,711 $16,324 $14,195 Test Systems 61 396 86 Corporate 96 — — Total Capital Expenditures $6,868 $16,720 $14,281 Operating profit is sales less cost of products sold and other operating expenses, excluding interest expense and other corporate expenses. Cost ofproducts sold and other operating expenses are directly identifiable to the respective segment.For the years ended December 31, 2013 and 2012, there was no goodwill or purchased intangible asset impairment losses in either the Aerospace or TestSystem segment. For the year ended December 31, 2011, the operating loss in the Test Systems segment includes a goodwill impairment loss of approximately$2.4 million and a purchased intangible asset impairment loss of approximately $0.1 million. In the Aerospace segment, goodwill amounted to $101.0 millionand $21.9 million at December 31, 2013 and 2012, respectively. In the Test Systems segment there was no goodwill as of December 31, 2013 and 2012. - 56 -Table of ContentsThe following table summarizes the Company’s sales by geographic region for the years ended December 31: 2013 2012 2011 (In thousands) North America $300,368 $233,245 $196,447 Europe 21,190 16,188 16,238 Asia 15,570 14,030 12,544 South America 1,851 1,937 2,678 Other 958 1,046 256 $339,937 $266,446 $228,163 The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31: 2013 2012 2011 (In thousands) United States $59,803 $53,235 $40,871 France 10,771 — — Canada 326 302 251 $70,900 $53,537 $41,122 Sales recorded by the Company’s foreign operations were $16.5 million in 2013, $14.2 million in 2012, and $13.1 million in 2011. Net income fromthese locations was $0.2 million in 2013, $1.0 million in 2012, and $0.9 million in 2011. Net assets held outside of the United States total $40.1 million atDecember 31, 2013 and $6.7 million at December 31, 2012. The exchange loss included in determining net income was $0.1 million in each of the yearsending 2013, 2012 and 2011. Cumulative translation adjustments amounted to $1.3 million and $1.4 million at December 31, 2013 and 2012, respectively.The Company has a significant concentration of business with two major customers, Panasonic Aviation Corporation and The Boeing Company. Thefollowing is information relating to the activity with those customers: 2013 2012 2011 Percent of Consolidated Revenue Panasonic 29.6% 38.0% 35.7% Boeing 14.5% 5.5% 4.4% (In thousands) 2013 2012 Accounts Receivable at December 31, Panasonic $14,090 $17,412 Boeing 6,458 1,939 Sales to Panasonic are all in the Aerospace segment. Sales to the Boeing occur in both segments.NOTE 19 — ACQUISITIONSPGA Electronic S.A.On December 5, 2013 we acquired 100% of the stock of PGA, a designer and manufacturer of seat motion and lighting systems primarily for businessand first class aircraft seats and is Europe’s leading provider of in-flight entertainment/communication systems as well as cabin management systems forprivate VVIP aircraft. The addition of PGA further diversifies the products and technologies that Astronics offers. The purchase price was approximately$32.9 million for which approximately $10.7 million, net of cash acquired, was paid in cash and the balance paid with 264,168 shares of Astronics stockvalued at $51.00 per share. PGA is included in our Aerospace reporting segment. The purchase price allocation for this acquisition is not finalized as the fairvalue valuation of assets and liabilities is not complete.Astronics AeroSat CorporationOn October 1, 2013, we acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraft antenna systems for$12 million in cash, plus the a potential additional purchase consideration of up to $53 million based upon the achievement of certain revenue targets in 2014and 2015. The addition of AeroSat further diversifies the products and technologies that Astronics offers. The additional contingent purchase consideration isrecorded at its estimated fair value of approximately $5.0 million at the date of acquisition based upon the Company’s assessment of the probability ofAeroSat achieving the revenue growth targets. Substantially all of the goodwill and purchased intangible assets are expected to be deductible for tax purposesover 15 years. The purchase price allocation for this acquisition is not complete. The purchase price allocation for this acquisition is not finalized as the fairvalue valuation of the earn out liability is still being evaluated. - 57 -Table of ContentsPeco, Inc.On July 18, 2013, we acquired 100% of the stock of Peco, Inc. which designs and manufacturers highly engineered commercial aerospace interiorcomponents and systems for the aerospace industry. The company specializes in PSUs which incorporate air handling, emergency oxygen, electrical powermanagement and cabin lighting systems. It also manufactures a wide range of fuel access doors that meet stringent strength, fuel sealing and anti-corrosionrequirements. The addition of Peco diversifies the products and technologies that Astronics offers. We purchased the outstanding stock of Peco for $136.0million in cash. Peco’s unaudited 2013 revenue prior to the acquisition date was approximately $46.2 million. Peco is included in our Aerospace reportingsegment.The allocation of the purchase price paid for Peco is based on fair values of the acquired assets and liabilities assumed of Peco as of July 18, 2013.The allocation of purchase price based on appraised fair values was as follows (In thousands): Accounts Receivable $8,002 Inventory 15,473 Other Current Assets 1,881 Fixed Assets 5,153 Purchased Intangible Assets 69,000 Goodwill 69,494 Accounts Payable, Accrued Expenses, and Other Current Liabilities (4,114) Deferred Income Taxes (28,889) Total Purchase Price $136,000 The amounts allocated to the purchased intangible assets consist of the following: (In thousands) WeightedAverage Life AcquisitionFair Value Trademark 10 Years $4,200 Technology 10 Years 3,300 Customer Relationships/Backlog 1.5-16 Years 61,500 $69,000 Goodwill and other intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilitiesassumed. The goodwill is primarily attributable to expected synergies and the assembled workforce. Purchased intangible assets and goodwill are notdeductible for tax purposes.The following is a summary of the sales and amounts included in income from operations for Peco included in the consolidated financialstatements of the Company from the date of acquisition to December 31, 2013 (in thousands): Sales $36,452 Operating Income $122 The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of Peco as if theacquisition took place on January 1, 2012. The pro forma consolidated results include the impact of certain adjustments, including increased interest expenseon acquisition debt, amortization of purchased intangible assets and income taxes. (in thousands, except earnings per share) 2013 2012 Sales $386,170 $344,233 Net income $29,456 $24,348 Basic earnings per share $1.68 $1.42 Diluted earnings per share $1.60 $1.34 - 58 -Table of ContentsThe pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the year endedDecember 31, 2013 and 2012. In addition, they are not intended to be a projection of future results.Max-Viz, Inc.On July 30, 2012 we acquired by merger, 100% of the stock of Max-Viz, Inc., a manufacturer of industry-leading Enhanced Vision Systems for defenseand commercial aerospace applications for the purpose of improving situational awareness. The addition of Max-Viz diversifies the products and technologiesthat Astronics offers. We purchased the outstanding stock of Max-Viz for $10.7 million in cash plus contingent purchase consideration up to a maximum of$8.0 million subject to meeting certain revenue growth targets over the next three years. Max-Viz is included in our Aerospace reporting segment. The additionalcontingent purchase consideration was recorded at its estimated fair value at the date of acquisition based upon the Company’s assessment of the probabilityof Max-Viz achieving the revenue growth targets.There was no significant change in the fair value estimate of the contingent consideration, from the date of the acquisition to December 31, 2013. Thegoodwill recognized is comprised primarily of intangible assets that do not require separate recognition. Substantially all of the goodwill and purchasedintangible assets are expected to be deductible for tax purposes over 15 years. The purchase price allocation for the 2012 acquisition is complete.NOTE 20 — SUBSEQUENT EVENTSIn January 2014, Peco purchased two facilities totaling 233,000 square feet in Clackamas, Oregon for approximately $14.5 million and expects to moveits operations into the buildings by the end of the fourth quarter of 2014.On January 20, 2014, the Company entered into an agreement to purchase substantially all of the assets and liabilities of the Test and Services Divisionof EADS North America, Inc. for approximately $53.0 million in cash plus a net working capital adjustment. On February 28, 2014, Astronics completed theacquisition. This division will be reported as part of Test Systems segment.In connection with the funding of the acquisition discussed above, the Company amended its existing credit facility by entering into Amendment No 2.to Third Amended and Restated Credit Agreement, dated as of February 28, 2014. The Company elected to exercise its option to increase the revolving creditcommitment. The Credit Agreement now provides for a $125 million five-year revolving credit facility maturing on June 30, 2018, of which $58.0 millionwas drawn to finance the acquisition. There remains approximately $56.1 million available under the revolving credit facility on February 28, 2014.The amended facility temporarily increases the maximum leverage ratio permitted under the agreement to 4.0 to 1.0 for fiscal quarters ending March 31,2014 and June 30, 2014, 3.75 to 1.0 as of the end of fiscal quarters from September 30, 2014 through March 31, 2015 and 3.5 to 1.0 as of the end of eachfiscal quarter subsequent to March 31, 2015 to maturity. There were no changes to the other covenants, interest rates being charged or commitment fees. - 59 -Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable. ITEM 9A.CONTROLS AND PROCEDURESDisclosure Controls and ProceduresThe Company carried out an evaluation, under the supervision and with the participation of Company Management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined inExchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures are effective as of the end of the period covered by this report, to ensure that information required to be disclosed in reportsfiled or submitted under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are effective to ensuresuch information is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.Management’s report on Internal Control over Financial ReportingSee the report appearing under item 8, Financial Statements and Supplemental Data, Managements report on Internal Control Over Financial Reporting.Changes in Internal Control over Financial ReportingThere have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B.OTHER INFORMATIONNone - 60 -Table of ContentsPART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe information regarding directors is contained under the captions “Election of Directors” and “Security Ownership of Certain Beneficial Owners andManagement” is incorporated herein by reference to the 2014 Proxy to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.The executive officers of the Company, their ages, their positions and offices with the Company, and the date each assumed their office with theCompany, are as follows: Name and Age ofExecutive Officer Positions and Offices with Astronics Year FirstElected OfficerPeter J. Gundermann President, Chief Executive Officer and Director of the Company 2001Age 51 David C. Burney Vice President-Finance, Treasurer, Secretary and Chief Financial Officer of the Company 2003Age 51 Mark A. Peabody Astronics Advanced Electronic Systems Executive Vice President 2010Age 54 James S. Kramer Luminescent Systems Inc. Executive Vice President 2010Age 50 The principal occupation and employment for all executives listed above for the past five years has been with the Company.The Company has adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, Chief Financial Officer as well as otherdirectors, officers and employees of the Company. This Code of Business Conduct and Ethics is available upon request without charge by contactingAstronics Corporation, Investor Relations at (716) 805-1599. The Code of Business Conduct and Ethics is also available on the Investor Relations section ofthe Company’s website at www.astronics.com. ITEM 11.EXECUTIVE COMPENSATIONThe information contained under the caption “Executive Compensation” and “Summary Compensation Table” in the Company’s definitive ProxyStatement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information contained under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”and “Executive Compensation” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein byreference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information contained under the captions “Certain Relationships and Related Party Transactions and Director Independence” and “Proposal One:Election of Directors — Board Independence” in the Company’s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year isincorporated herein by reference. ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information contained under the caption “Audit and Non-Audit Fees” in the Company’s definitive Proxy Statement to be filed within 120 days ofthe end of our fiscal year is incorporated herein by reference. - 61 -Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULE(a) The documents filed as a part of this report are as follows: 1.The following financial statements are included: (i)Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 (ii)Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011 (iii)Consolidated Balance Sheets as of December 31, 2013 and 2012 (iv)Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 (v)Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011 (vi)Notes to Consolidated Financial Statements (vii)Reports of Independent Registered Public Accounting Firm (viii)Management’s Report on Internal Control Over Financial Reporting 2.Financial Statement ScheduleSchedule II. Valuation and Qualifying AccountsAll other consolidated financial statement schedules are omitted because they are inapplicable, not required, or the information is included elsewhere inthe consolidated financial statements or the notes thereto. 3.Exhibits ExhibitNo. Description 3 (a) Restated Certificate of Incorporation, filed herewith. (b) By-Laws, as amended, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 3(b), filed March 11, 2009. (c) Certificate of Amendment of the Certificate of Incorporation of Astronics Corporation; incorporated by reference to the registrant’s Form 8-K,Exhibit 3.1, filed May 28, 2013. 4.1 (a) $60,000,000 Credit Agreement with HSBC Bank USA, dated May 13, 2008, incorporated by reference to the registrant’s Form 8-K, Exhibit10.1, filed May 16, 2008. (b) Amended and Restated Credit Agreement with HSBC Bank USA, dated January 27, 2009, incorporated by reference to the registrant’s Form8-K, Exhibit 10.1, filed January 30, 2009. (c) Amendment No. 2 to the Amended and Restated Credit Agreement dated as of December 23, 2009 among Astronics Corporation, the Lendersparty thereto, HSBC Bank USA, National Association., incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed December28, 2009. (d) Second Amended and Restated Credit Agreement, dated as of August 31, 2011, among Astronics Corporation, HSBC Bank USA, NationalAssociation, Bank of America, N.A. and Manufacturers and Traders Trust Company, incorporated by reference to the registrant’s Form 8-K,Exhibit 10.1, filed September 1, 2011. (e) Third Amended and Restated Credit Agreement dated as of July 18, 2013 between Astronics Corporation, the Lenders Party Hereto, HSBCBank USA National Association, Merrill Lynch, Pierce Fenner & Smith Inc. as Lead Arrangers and Manufacturers and Traders TrustCompany, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.2, filed July 18, 2013. (f) Amendment No. 1 to Third Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC Bank USA,National Association, Bank of America, N.A. and Manufacturers and Traders Trust Company incorporated by reference to the registrant’sForm 8-K, Exhibit 10.1, filed December 31, 2013. (g) Amendment No. 2 to Third Amended and Restated Credit Agreement entered into by and among Astronics Corporation, HSBC Bank USA,National Association, Bank of America, N.A. and Manufacturers and Traders Trust Company incorporated by reference to the registrant’sForm 8-K, Exhibit 10.1, filed February 28, 2014. 10.1* Restated Thrift and Profit Sharing Retirement Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit10.1, filed March 3, 2011. - 62 -Table of Contents 10.3* 1997 Director Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.3, filed March 3,2011. 10.4* 2001 Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.4, filed March 3, 2011. 10.5* Non-Qualified Supplemental Retirement Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.5,filed March 3, 2011. 10.6* Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation and Peter J. Gundermann, President andChief Executive Officer of Astronics Corporation, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.6,filed March 3, 2011. 10.7* Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation and David C. Burney, Vice Presidentand Chief Financial Officer of Astronics Corporation, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit10.7, filed March 3, 2011. 10.8* 2005 Director Stock Option Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.8, filed March 3,2011. 10.9 Stock Purchase Agreement By and Among Astronics Corporation, DME Corporation and the Shareholders of DME Corporation dated January28, 2009, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed January 30, 2009. 10.10* Supplemental Retirement Plan, Amended and Restated, March 6, 2012, incorporated by reference to the registrant’s 2012 Annual Report onForm 10-K, Exhibit 10.10, filed February 22, 2013. 10.11* First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between Astronics Corporation and Peter J.Gundermann, President and Chief Executive Officer of Astronics, incorporated by reference to the registrant’s 2008 Annual Report on Form 10-K, Exhibit 10.11, filed March 11, 2009. 10.12* First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between Astronics Corporation and David C.Burney, Vice President and Chief Financial Officer of Astronics Corporation , incorporated by reference to the registrant’s 2008 Annual Reporton Form 10-K, Exhibit 10.12, filed March 11, 2009. 10.13* Employment Termination Benefits Agreement Dated February 18, 2005 between Astronics Corporation and Mark A. Peabody, Executive VicePresident of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K,Exhibit 10.13, filed March 3, 2011. 10.14* First Amendment of the Employment Termination Benefits Agreement dated December 31, 2008 between Astronics Corporation and Mark A.Peabody, Executive Vice President of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010 AnnualReport on Form 10-K, Exhibit 10.14, filed March 3, 2011. 10.15* Form of Indemnification Agreement as executed by each of Astronics Corporation’s Directors and Executive Officers, incorporated by referenceto the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.15, filed March 3, 2011. 10.16 Stock Purchase Agreement by and among Ballard Technology, Inc. and its Shareholders (the Sellers) and Astronics Corporation (Purchaser)Dated as of November 30, 2011, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed November 30, 2011. 10.17* 2011 Employee Stock Option Plan, incorporated by reference to the registrant’s Form S-8, Exhibit 4.1 filed on August 4, 2011. 10.18* Supplemental Retirement Plan II, incorporated by reference to the registrant’s 2012 Annual Report on Form 10-K, Exhibit 10.18, filed February22, 2013. 10.19 Agreement and Plan of Merger dated as of July 30, 2012 by and among Astronics Corporation, MV Acquisition Corp., Max-Viz Inc. andGerard H. Langeler as the Shareholders’ Representative incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed July 30, 2012. - 63 -Table of Contents 10.20 Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Company incorporated by reference tothe registrant’s Form 8-K, Exhibit 10.1, filed May 28, 2013. 10.21 Amendment to the Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Companyincorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed July 18, 2013. 10.22 Asset Purchase Agreement by and among Astronics AS Corporation. Aerosat Corporation. Aerosat Airborne Internet LLC, AerosatAvionics, LLC and Aerosat Tech Licensing, LLC incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed October 1,2013. 10.23 Sale Agreement and Guarantee Agreement relating to PGA Electronic, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1and Exhibit 10.2, filed November 4, 2013. 10.24 Purchase Agreement between EADS North America Inc. and Astronics Corporation dated as of January 20, 2014, incorporated by referenceto the registrant’s Form 8-K, Exhibit 10.1 filed January 20, 2014. 21** Subsidiaries of the Registrant; filed herewith. 23** Consent of Independent Registered Public Accounting Firm; filed herewith. 31.1** Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002; filed herewith 31.2** Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002; filed herewith 32** Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002; filed herewith101.INS** XBRL Instance Document101.SCH** XBRL Taxonomy Extension Schema Document101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document101.DEF** XBRL Taxonomy Extension Definition Linkbase Document101.LAB** XBRL Taxonomy Extension Label Linkbase Document101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document *Identifies a management contract or compensatory plan or arrangement as required by Item 15(a) (3) of Form 10-K.**Submitted electronically herewith - 64 -Table of ContentsSCHEDULE IIValuation and Qualifying Accounts Year Description Balance at theBeginning ofPeriod Acquisitions Charged toCost andExpense (Write-Offs)Recoveries /Other Balance atEnd ofPeriod (In thousands) 2013 Allowance for Doubtful Accounts $650 $— $112 $(622) $140 Reserve for Inventory Valuation 12,026 — 537 (1,522) 11,041 Deferred Tax Valuation Allowance 2,190 — 319 — 2,509 2012 Allowance for Doubtful Accounts $645 $130 $88 $(213) $650 Reserve for Inventory Valuation 10,599 137 1,544 (254) 12,026 Deferred Tax Valuation Allowance 1,898 — 292 — 2,190 2011 Allowance for Doubtful Accounts $274 $— $466 $(95) $645 Reserve for Inventory Valuation 11,183 — 336 (920) 10,599 Deferred Tax Valuation Allowance 890 — 531 477 1,898 - 65 -Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned; thereunto duly authorized, on March 7, 2014. Astronics Corporation By /s/ Peter J. Gundermann By /s/ David C. BurneyPeter J. Gundermann President and Chief Executive Officer David C. Burney, Vice President-Finance, Chief Financial Officer andTreasurerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date/s/ Peter J. GundermannPeter J. Gundermann President and Chief Executive Officer (Principal Executive Officer) March 7, 2014/s/ David C. BurneyDavid C. Burney Vice President-Finance, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer) March 7, 2014/s/ Raymond W. BoushieRaymond W. Boushie Director March 7, 2014/s/ Robert T. BradyRobert T. Brady Director March 7, 2014/s/ John B. DrenningJohn B. Drenning Director March 7, 2014/s/ Peter J. GundermannPeter J. Gundermann Director March 7, 2014/s/ Kevin T. KeaneKevin T. Keane Director March 7, 2014/s/ Robert J. McKennaRobert J. McKenna Director March 7, 2014 - 66 -Exhibit 3 (a)RESTATED CERTIFICATE OF INCORPORATIONOFASTRONICS CORPORATIONUnder §807 of the Business Corporation LawThe undersigned, being the Secretary of ASTRONICS CORPORATION, hereby certifies: 1.The name of the Corporation is ASTRONICS CORPORATION. The name under which the Corporation was formed is ASTRONICSLUMINESCENT, INC. 2.The Certificate of Incorporation was filed by the Department of State on the 5th day of December, 1968. 3.The Certificate of Incorporation is hereby amended pursuant to Section 801 of the Business Corporation Law to effect certain changes authorized by theBoard of Directors of the Corporation: (a)Paragraph THIRD, setting forth the location of the office of the Corporation, is hereby changed to read in its entirety as follows:“THIRD: The office of the Corporation is to be located in the County of Erie and State of New York.”(b) Paragraph FIFTH, setting forth the address to which the Secretary of State shall mail a copy of process in any action or proceeding against theCorporation, is hereby changed to read in its entirety as follows:“FIFTH: The Secretary of State of the State of New York is designated as the agent of the Corporation upon whom process against it may beserved, and the post office address to which the Secretary of State shall mail a copy of any such process served upon him is AstronicsCorporation, 130 Commerce Way, East Aurora, New York 14052.” 4.The text of the Certificate of Incorporation, as amended heretofore and as further changed hereby, is restated to read as herein set forth in full:RESTATED CERTIFICATE OF INCORPORATIONOFASTRONICS CORPORATIONThe name of the Corporation is ASTRONICS CORPORATION.The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be formed under the BusinessCorporation Law, but it is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or otherbody without such consent or approval first being obtained; including, but not limited, to the following:(a) To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease or otherwise acquire, own, hold, improve, employ, use andotherwise deal in and with real or personal property or any interest therein, wherever situated.To sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, or create a security interest in, all or any of its property,or any interest therein, wherever situated.To purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, employ, sell, lend, lease, exchange, transfer, or otherwise disposeof, mortgage, pledge, use and otherwise deal in and with, bonds and other obligations, shares, or other securities or interests issued by others, whetherengaged in similar or different business, governmental or other activities.To make contracts, give guarantees to the extent permitted by law and incur liabilities, borrow money at such rates of interest as the Corporationmay determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property or anyinterest therein, wherever situated.To purchase, receive, take or otherwise acquire, own, hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise dealin and with its own shares.To be a promoter, partner, member, associate or manager of other business enterprises or ventures or to the extent permitted in any otherjurisdiction to be an incorporator of other corporations of any type or kind, to the extent permitted by law.To purchase, receive, secure, apply for or otherwise acquire, own, hold, employ, use and otherwise deal in and with by grant, license orotherwise, any right, interest, invention, improvement or process used in connection with or secured under letters patent or copyright of the UnitedStates or of any jurisdiction without the United States.To purchase, receive, take or otherwise acquire, own, hold, improve, employ, use and otherwise deal in the assets, property, rights and good willof any corporation, firm, association or entity, engaged in any business which the Corporation is authorized to engage in.To have and exercise all powers necessary or convenient to effect any or all of the purposes for which the Corporation is formed.The foregoing enumeration of purposes and powers shall not be deemed to limit or restrict in any manner the general powers of the Corporation,and the enjoyment and exercise thereof as conferred by the law of the State of New York upon corporations organized under the provisions of theBusiness Corporation Law.The office of the Corporation is to be located in the County of Erie and State of New York.The aggregate number of shares which the Corporation shall have authority to issue is fifty million (50,000,000) shares, consisting of forty million(40,000,000) shares of Common Stock, Par Value $.01 per share, and ten million (10,000,000) shares of Class B Stock, Par Value $.01 per share.The relative rights, preferences and limitations of each class of capital stock are to be fixed as follows: A.DividendsHolders of Common Stock and Class B Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of theCorporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor,provided that in the case of cash dividends, no dividend may be paid on the Class B Stock unless an equal or greater dividend is paid concurrently on theCommon Stock, and cash dividends may be paid on the Common Stock in excess of dividends paid, or without paying dividends, on the Class B Stock. Inthe case of dividends or other distributions payable in stock of the Corporation, including share distributions or stock splits or divisions of stock of theCorporation, such distributions, splits or divisions shall be in the same proportion with respect to each class of stock, and the Common Stock and Class BStock will be treated equally. A dividend or share distribution declared in shares of Common Stock will be distributed pro rata, as Common Stock, to theholders of Common Stock and Class B Stock. A dividend or share distribution declared in shares of Class B Stock will be distributed pro rata, as Class BStock, to the holders of Common Stock and Class B Stock. In the case of any combination or reclassification of the Common Stock, the shares of Class BStock shall also be combined or reclassified so that the relationship between the number of shares of Class B Stock and Common Stock outstandingimmediately following such combination or reclassification shall be the same as the relationship between the Class B Stock and the Common Stockimmediately prior to such combination or reclassification. B.Voting(1) At every meeting of the shareholders every holder of Common Stock shall be entitled to one (1) vote in person or by proxy for each share of CommonStock standing in his name on the transfer books of the Corporation and every holder of Class B Stock shall be entitled to ten (10) votes in person or by proxyfor each share of Class B Stock standing in his name on the transfer books of the Corporation.(2) Except in connection with share distributions, stock splits and stock dividends and anti-dilutive adjustments determined by the Board of Directorsfor options, stock subscriptions and warrants outstanding on the date of record for the share distribution, stock split or stock dividend, the Corporation maynot effect the issuance of any shares of Class B Stock unless and until such issuance is authorized by the holders of a majority of the voting power of theshares of Common Stock and of Class B Stock entitled to vote, each voting separately as a class.(3) No shareholder shall have the right to cumulate votes in the election of directors.(4) Except as may be otherwise required by law or the Certificate of Incorporation, the holders of Common Stock and Class B Stock shall vote togetheras a single class. C.Transfer(1) No person holding shares of Class B Stock of record (hereinafter called a “Class B Holder”) may transfer the Class B Stock, except by gift, deviseor bequest, by a transfer to the estate of a shareholder upon the death of such shareholder, or by a transfer of shares held in a trust to the grantor of such trustor to any person to whom or for whose benefit the principal of such trust may be distributed; and the Corporation and the transfer agent shall not register thetransfer of such shares of Class B Stock, whether by sale, assignment, appointment or otherwise. Any purported transfer of shares of Class B Stock, otherthan a transfer of the type described above, shall be null and void and of no effect and the purported transfer by a Class B Holder will result in the immediateand automatic conversion of the shares of Class B Stock held by such Class B Holder into shares of Common Stock, on a one (1) share for one (1) sharebasis. The purported transferee shall have no rights as a shareholder of the Corporation and no other rights against, or with respect to, the Corporation exceptthe right to receive shares of Common Stock upon the immediate and automatic conversion of his shares of Class B Stock into shares of Common Stock. Theestate of any deceased shareholder, a transferee upon the distribution of the assets of such an estate, any transferee of the Class B Stock by gift, devise orbequest or a transferee from a trust of which such transferee was the grantor or a principal beneficiary shall hold the transferred shares of Class B Stocksubject to the same restrictions on transferability as apply to all Class B Holders under this Paragraph Fourth.(2) Shares of Class B Stock shall be registered in the name(s) of the beneficial owner(s) thereof (as hereafter defined) and not in “street” or “nominee”names; provided, however, certificates representing shares of Class B Stock issued as or in connection with a share distribution, stock split or stockdividend on the Corporation’s then outstanding Common Stock or Class B Stock may be registered in the same name and manner as the certificatesrepresenting the shares of Common Stock or Class B Stock with respect to which the shares of Class B Stock are issued. For the purposes of this Section Cthe term “beneficial owner(s)” of any shares of Class B Stock shall mean the person or persons who possess the power to dispose, or to direct the disposition,of such shares. Any shares of Class B Stock registered in “street” or “nominee” name may be transferred to the beneficial owner of such shares on the recorddate for such share distribution, stock split or stock dividend, upon proof satisfactory to the Corporation and the transfer agent that such person was in factthe beneficial owner of such shares on the record date for such share distribution, stock split or stock dividend.(3) Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such holder’s shares of Class B Stock to a pledgeepursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to orregistered in the name of the pledgee and shall remain subject to the provisions of this Section C. In the event of foreclosure or other similar action by thepledgee, such pledged shares of Class B Stock may not be transferred to the pledgee without first being converted into shares of Common Stock.(4) For purposes of this Section C:(a) Each joint owner of shares of Class B Stock shall be considered a “Class B Holder” of such shares.(b) A minor for whom shares of Class B Stock are held pursuant to a Uniform Gifts to Minors Act or similar law shall be considered a Class BHolder of such shares.(c) Unless otherwise specified, the term “person” means both natural persons and legal entities.(d) Persons participating in a thrift or employee stock purchase plan of the Corporation (or any similar or successor plans) shall be deemed to bethe Class B Holders of the shares of Class B Stock allocated to their accounts pursuant to such plans.(5) Any transfer of shares of Class B Stock not permitted hereunder shall result in the conversion of the transferee’s shares of Class B Stock intoshares of Common Stock, on a one (1) share for one (1) share basis, effective the date on which certificates representing such shares are presented for transferon the books of the Corporation. The Corporation may, in connection with preparing a list of shareholders entitled to vote at any meeting of shareholders, or asa condition to the transfer or the registration of shares of Class B Stock on the Corporation’s books, require the furnishing of such affidavits or other proof asit deems necessary to establish that any person is the beneficial owner of shares of Class B Stock. D.Conversion Rights(1) Subject to the terms and conditions of this Section D, each share of Class B Stock shall be convertible at any time or from time to time, at the optionof the respective holder thereof, at the office of any transfer agent for Class B Stock, and at such other place or places, if any, as the Board of Directors maydesignate or, if the Board of Directors shall fail so to designate, at the principal office of the Corporation (attention of the Secretary of the Corporation), into one(1) fully paid and nonassessable share of Common Stock. Upon conversion, the Corporation shall make no payment or adjustment on account of dividendsaccrued or in arrears on Class B Stock surrendered for conversion or on account of any dividends on the Common Stock issuable on such conversion. Beforeany holder of Class B Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Class B Stockat the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be dulyendorsed to the Corporation or in blank or accompanied by proper instruments of transfer to the Corporation (such endorsements or instruments of transfer tobe in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Class B Stock inaccordance with the terms of this Section D, and shall state in writing therein the name or names in which he wishes the certificate or certificates for CommonStock to be issued. Subject to the provision of subsection (3) of this Section D, such conversion shall be deemed to have been made as of the date of suchsurrender of the Class B Stock to be converted; and the person or persons entitled to receive the Common Stock issuable upon conversion of such Class BStock shall be treated for all purposes as the record holder or holders of such Common Stock on such date.(2) The issuance of certificates for shares of Common Stock upon conversion of shares of Class B Stock shall be made without charge for any stampor other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares ofClass B Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable inrespect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid.(3) The Corporation shall not be required to convert Class B Stock, and no surrender of Class B Stock shall be effective for that purpose, while thestock transfer books of the Corporation are closed for any purpose; but the surrender of Class B Stock for conversion during any period while such booksare so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such ClassB Stock was surrendered.(4) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the outstandingshares of Class B Stock, such number of shares of Common Stock as shall be issuable upon the conversion of all such outstanding shares, provided thatnothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares ofClass B Stock by delivery of shares of Common Stock which are held in the treasury of the Corporation. The Corporation covenants that all shares ofCommon Stock which shall be issued upon conversion of the shares of Class B Stock, will, upon issue, be fully paid and nonassessable and not entitled toany preemptive rights. All shares of Class B Stock converted into Common Stock shall be cancelled and restored to the status of authorized but unissuedshares of Class B Stock.(5) At any time when the Board of Directors and the holders of a majority of the outstanding shares of Class B Stock approve the conversion of all ofthe Class B Stock into Common Stock, then the outstanding shares of Class B Stock shall be converted into shares of Common Stock. In the event of such aconversion, certificates formerly representing outstanding shares of Class B Stock shall thereupon and thereafter be deemed to represent the like number ofshares of Common Stock. E.Liquidation RightsIn the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provisionfor payment of the debts and other liabilities of the Corporation, the remaining assets and funds of the Corporation, if any, shall be divided among and paidratably to the holders of Common Stock and the holders of Class B Stock. A merger or consolidation of the Corporation with or into any other corporation or asale or conveyance of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution ofassets to shareholders) shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning ofthis Section E. F.Preemptive RightsSubject to any conversion rights of any shares of Class B Stock, no holder of stock of the Corporation of any class shall be entitled as of right tosubscribe for or receive any part of the authorized stock of the Corporation or any part of any new, additional or increased issues of stock of any class or ofany obligations convertible into any class or classes of stock, but the Board of Directors may, without offering any such shares of stock or obligationsconvertible into stock to shareholders of any class, issue and sell or dispose of the same to such persons and for such consideration permitted by law as itmay from time to time in its absolute discretion determine.The Secretary of State of the State of New York is designated as the agent of the Corporation upon whom process against it may be served, and the postoffice address to which the Secretary of State shall mail a copy of any such process served upon him is Astronics Corporation, 130 Commerce Way, EastAurora, New York 14052.The following provisions are inserted for the regulation and conduct of the business and affairs of the Corporation and are in furtherance of and not inlimitation or exclusion of any powers conferred upon it by statute:The affirmative vote of the holders of not less than 80% of the outstanding shares of the Corporation entitled to vote thereon shall be required:to adopt any agreement for the merger or consolidation of the Corporation or any “subsidiary” (as hereinafter defined) with or into any other“person” (as hereinafter defined) or the merger of any other person into the Corporation or any subsidiary;to authorize any sale, lease, exchange, mortgage, pledge or disposition to any other person of all or substantially all of the property andassets of the Corporation or any subsidiary, or any part of such assets having a then fair market value greater than 50% of the then fair marketvalue of the total assets of the Corporation or such subsidiary; orto authorize the issuance or transfer by the Corporation or any subsidiary of any voting securities of the Corporation in exchange orpayment for the securities or property and assets (including cash) of any other person.The Provisions of this Paragraph Sixth shall not apply to any transaction described in clauses (i), (ii) or (iii) of Section A of this Paragraph Sixthif:prior to the consummation of such transaction, the Board of Directors of the Corporation shall have adopted a resolution approving thewritten agreement pursuant to which such transaction shall thereafter be consummated or a written memorandum of understanding with respect tothe terms upon which such transaction shall thereafter be consummated; orthe Corporation or a subsidiary of the Corporation is, at the time such transaction is agreed to, the beneficial owner of a majority, by vote,of the voting interest in the other party or parties to the transaction.For purposes of this Paragraph Sixth:a “security” or “securities” shall include both equity and debt securities;any specified person shall be deemed to be the “beneficial owner” or to “beneficially own” any securities (a) as to which such person or anyaffiliate or associate of such person has the right, along or with others, to direct the manner of exercise of the voting rights of such securities,whether or not such person or any affiliate or associate of such person has any interest in any income or distribution with respect to suchsecurities, or (b) which such specified person or any of its affiliates or associates has the right to acquire pursuant to any agreement, or uponexercise of conversion rights, warrants or options, or pursuant to the automatic termination of a trust, discretionary account or similararrangement, or otherwise, or (c) which are beneficially owned, within the meaning of clause (a) and (b) hereof, by any other person with whichsuch specified person or any of its affiliates or associates has any agreement, arrangement, or relationship or understanding for the purpose ofacquiring, holding, voting, or disposing of such securities;a “person” is any individual, corporation or other entity;an “affiliate” of a specified person is any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by,or is under common control with such specified person;an “associate” of a specified person is (a) any person of which such specified person is an executive officer, principal, member or partneror is, directly or indirectly, the beneficial owner of 5% or more of any class of equity securities of such person, (b) any person that bears to thespecified person the relationship described in sub-clause (a) of this clause (v), (c) any trust or other estate in which such specified person has asubstantial beneficial interest or as to which such specified person serves as a trustee or in a similar fiduciary capacity, (d) any relative or spouseof the specified person, or any relative of such spouse, who has the same home (or is a member of the same household) as such specified person,(e) any person which controls or is controlled by such specified person, or (f) any other member or partner in a partnership, limited partnership,joint venture, syndicate or other group of which the specified person is a member or partner and which is acting together with the specified personfor the purpose of acquiring, holding or disposing of any interest in the Corporation or a subsidiary of the Corporation;a “subsidiary” of a specified person is any person, a majority, by vote, of the voting interest of which is beneficially owned, directly orindirectly, by such specified person.The Board of Directors of the Corporation shall determine the meaning and applicability of each of the above definitions based on information thenknown to it, and any determination of the Board of Directors of the Corporation concerning such matters shall be inclusive and binding for all purposes andwith respect to all persons.Special meetings of the shareholders of the Corporation may be called at any time on the written request of two-thirds (2/3) of the directors thenserving on the board, or upon the written request of the holders of not less than 80% of the outstanding shares of each class of capital stock of theCorporation entitled to vote generally in the election of directors as of the date on which such request is actually received by the Corporation.The provisions set forth in Sections A, B, C, D and E of Paragraph Sixth of this Restated Certificate of Incorporation may not be altered,amended or repealed in any respect unless such alteration, amendment or repeal is approved by an affirmative vote of holders of not less than 80% of theoutstanding shares of the Corporation entitled to vote thereon.No director of the Corporation shall be personally liable to the Corporation or its shareholders for damages for any breach of his duty as a director;provided, however, that nothing in this paragraph SEVENTH shall eliminate or limit the liability of any director if a judgment or other final adjudicationadverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personallygained in fact a financial profit or other advantages to which he was not legally entitled or that his acts violated Section 719 of the Business Corporation Lawof the State of New York. Notwithstanding the foregoing, nothing in this paragraph SEVENTH shall eliminate or limit the liability of a director for any act oromission occurring prior to the date of the filing of the Certificate of Amendment to the Certificate of Incorporation of the Corporation that includes thisparagraph SEVENTH.The changes to the Restated Certificate of Incorporation, as amended, and the restatement thereof were authorized as follows:as to the changes specified above in Paragraph 3, pursuant to Section 803(b) of the Business Corporation Law, by a unanimous vote of the Boardof Directors of the Corporation at a meeting duly called and held on December 11, 2013, at which a quorum was present and acting throughout, andas to the restatement of the Certificate of Incorporation, pursuant to Section 807 of the Business Corporation Law, by a unanimous vote of theBoard of Directors of the Corporation at a meeting duly called and held on December 11, 2013, at which a quorum was present and acting throughout.IN WITNESS WHEREOF, the undersigned has made and subscribed this Certificate this 13th day of December, 2013. /s/ David C. BurneyDavid C. Burney, SecretaryVERIFICATION STATE OF NEW YORK ) : SS.:COUNTY OF ERIE ) David C. Burney, being duly sworn, deposes and says, that he is one of the persons described in and who executed the foregoing certificate, thathe has read the same and knows the contents thereof, and that the statements contained therein are true. /s/ David C. BurneyDavid C. Burney Subscribed to before methe 13th day of December, 2013./s/ Linda M. CurtisEXHIBIT 21ASTRONICS CORPORATIONSUBSIDIARIES OF THE REGISTRANT Subsidiary OwnershipPercentage State (Province),Country ofIncorporationAstronics Test Systems, Inc. 100% Delaware, USADME Corporation 100% Florida, USAAstronics AeroSat Corporation 100% New Hampshire, USALuminescent Systems, Inc. 100% New York, USAAstronics Air, LLC 100% New York, USAMax-Viz, Inc. 100% Oregon, USAPeco. Inc. 100% Oregon, USABallard Technology, Inc. 100% Washington, USAAstronics Advanced Electronic Systems Corp. 100% Washington, USALSI - Europe B.V.B.A. 100% BelgiumLuminescent Systems Canada, Inc. 100% Quebec, CanadaPGA Electronic s.a. 100% FranceAstronics France 100% FranceEXHIBIT 23Consent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements: (a)the Registration Statements (Form S-8 No. 333-139292, Form S-8 No. 333-87463) pertaining to the Astronics Corporation Employee Stock PurchasePlan, (b)the Registration Statement (Form S-8 No. 333-127137) pertaining to the Astronics Corporation 2005 Director Stock Option Plan, (c)the Registration Statement (Form S-8 No. 33-65141) pertaining to the 1993 Director Stock Option Plan, (d)the Registration Statement (Form S-8 No. 333-143564) pertaining to the Astronics Corporation 2001 Stock Option Plan, (e)the Registration Statements (Form S-8 No. 333-176044) pertaining to the Astronics Corporation 2011 Employee Stock Option Plan, (f)the Registration Statement (Form S-3 No. 333-176160) and related prospectus of Astronics Corporation for the registration of common stock, preferredstock, warrants, rights, stock purchase contracts, units and debt securities;of our reports dated March 7, 2014 with respect to the consolidated financial statements and schedule of Astronics Corporation and the effectiveness of internalcontrol over financial reporting of Astronics Corporation included in this Annual Report (Form 10-K) of Astronics Corporation for the year endedDecember 31, 2013. /s/ Ernst & Young LLPBuffalo, New YorkMarch 7, 2014Exhibit 31.1Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a) as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2001I, Peter J. Gundermann, President and Chief Executive Officer, certify that: 1.I have reviewed this annual report on Form 10-K of the Astronics Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 7, 2014/s/ Peter J. GundermannPeter J. GundermannChief Executive OfficerExhibit 31.2Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a) as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2001I, David C. Burney, Vice President and Chief Financial Officer, certify that: 1.I have reviewed this annual report on Form 10-K of the Astronics Corporation; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 7, 2014/s/ David C. BurneyDavid C. BurneyChief Financial OfficerExhibit 32Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, the undersigned officers of AstronicsCorporation (the “Company”) hereby certify that:The Company’s Annual Report on Form 10-K for the year ended December 31, 2012 fully complies with the requirements of section 13(a) or 15(d) of theSecurities and Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition andresults of operations of the Company. Dated: March 7, 2014 /s/ Peter J. Gundermann Peter J. Gundermann Title: Chief Executive OfficerDated: March 7, 2014 /s/ David C. Burney David C. Burney Title: Chief Financial OfficerThis certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), orotherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of1933, as amended, or the Exchange Act, except to the extent specifically incorporated by the Company into such filing.

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