Astronics Corp
Annual Report 2014

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 OF 1934For the Fiscal Year Ended December 31, 2014Commission 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 x Accelerated filer ¨Non-accelerated filer ¨ Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of January 31, 2015, 21,957,218 shares were outstanding, consisting of 16,652,188 shares of Common Stock $.01 Par Value and 5,305,030 shares ofClass B Stock $.01 Par Value. The aggregate market value, as of the last business day of the Company’s most recently completed second fiscal quarter, of theshares of Common Stock and Class B Stock of Astronics Corporation held by non-affiliates was $890,526,577 (assuming conversion of all of the outstandingClass B Stock into Common Stock and assuming the affiliates of the Registrant to be its directors, executive officers and persons known to the Registrant tobeneficially own more than 10% of the outstanding capital stock of the Corporation).DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company’s Proxy Statement for the 2015 Annual Meeting of Shareholders to be held June 4, 2015 are incorporated by reference intoPart III of this Report. Table of ContentsTable of ContentsASTRONICS CORPORATIONIndex to Annual Reporton Form 10-KYear Ended December 31, 2014 Page PART I Item 1. Business 4-6 Item 1A. Risk Factors 6-10 Item 1B. Unresolved Staff Comments 10 Item 2. Properties 11 Item 3. Legal Proceedings 11-12 Item 4. Mine Safety Disclosures 12 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13-14 Item 6. Selected Financial Data 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15-26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8. Financial Statements and Supplementary Data 27-56 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 57 Item 9A. Controls and Procedures 57 Item 9B. Other Information 57 PART III Item 10. Directors, Executive Officers and Governance 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 58 Item 13. Certain Relationships and Related Transactions and Director Independence 58 Item 14. Principal Accountant Fees and Services 58 PART IV Item 15. Exhibits and Financial Statement Schedules 59-62 2Table of ContentsFORWARD LOOKING STATEMENTSInformation included or incorporated by reference in this report that does not consist of historical facts, including statements accompanied by orcontaining words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “approximate,” “estimates,” “predicts,”“potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are madepursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance andare subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expectedresults described in the forward-looking statements. Certain of these factors, risks and uncertainties are discussed in the sections of this report entitled “RiskFactors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” New factors, risks and uncertainties may emergefrom time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place unduereliance on forward-looking statements as predictive of future results. We disclaim any obligation to update the forward-looking statements made in thisreport. 3Table of ContentsPART I ITEM 1.BUSINESSAstronics Corporation (“Astronics” or the “Company”) is a leading supplier of products to the global aerospace, defense, consumer electronics andsemi-conductor industries. Our products include advanced, high-performance lighting and safety systems, electrical power generation and distributionsystems, aircraft structures, avionics products and automatic test systems.We have operations in the United States, Canada and France. We design and build our products through our wholly owned subsidiaries AstronicsAdvanced 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”); Astronics Test Systems, Inc. and Armstrong Aerospace, Inc. (“Armstrong”). We have two reportable segments, Aerospace and Test Systems.Recent AcquisitionsOn July 18, 2013, Astronics acquired all of the outstanding capital stock of Peco. Peco designs and manufactures highly engineered commercialaerospace interior components and systems for the aerospace industry. Peco is included in 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 included in our Aerospace segment.On December 5, 2013, Astronics acquired all of the outstanding capital stock of PGA. The purchase price was paid with a combination of cash andAstronics’ stock. PGA designs and manufactures seat motion and lighting systems primarily for business and first class aircraft seats and is Europe’s leadingprovider of in-flight entertainment/communication systems as well as cabin management systems for private aircraft. PGA is included in our Aerospacesegment.On February 28, 2014, Astronics acquired, through its 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 is included in our TestSystems segment.On January 14, 2015, the Company acquired all of the outstanding stock of Armstrong, located in Itasca, Illinois. Armstrong is a leading provider ofengineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical powersystems. Armstrong will be included in our Aerospace 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 operators suchas airlines and branches of the U.S. Department of Defense as well as the Federal Aviation Administration and airport operators. During 2014, this segment’ssales were divided 80% to the commercial transport market, 9% to the military aircraft market, 8% to the business jet market and 3% to other markets. Most ofthis segment’s sales are a result of contracts or purchase orders received from customers, placed on a day-to-day basis or for single year procurements ratherthan long-term multi-year contract commitments. On occasion, the Company does receive contractual commitments or blanket purchase orders from ourcustomers covering multiple-year deliveries of hardware to our customers.Our Test Systems segment designs, develops, manufactures and maintains automatic test systems that support the semiconductor, aerospace,communications and weapons test systems as well as training and simulation devices for both commercial and military applications. In the Test SystemsSegment, Astronics’ products are sold to a global customer base including OEMs and prime government contractors for both consumer electronics andmilitary products. During 2014, this segment’s sales were divided 79% to the commercial electronics market and 21% to the military test market. During2013, and before the acquisition of ATS in February 2014, this segment’s sales were all to the military market. 4Table of ContentsSales by segment, geographic region, major customer and foreign operations are provided in Note 18 of Item 8, Financial Statements andSupplementary Data in this report.We have a significant concentration of business with three major customers, Apple Inc. (“Apple”), Panasonic Avionics Corporation (“Panasonic”) andThe Boeing Company (“Boeing”). Sales to Apple accounted for 17.9% of sales in 2014. Accounts receivable from this customer at December 31, 2014 were$4.3 million. Sales to Panasonic accounted for 17.7% of sales in 2014, 29.6% of sales in 2013 and 38.0% of sales in 2012. Accounts receivable from thiscustomer at December 31, 2014 and 2013 were $21.8 million and $14.1 million, respectively. Sales to Boeing accounted for 14.1% of sales in 2014, 14.5% ofsales in 2013 and 5.5% of sales in 2012. Accounts receivable from this customer at December 31, 2014 and 2013 were $6.9 million and $6.5 million,respectively.StrategyOur strategy is to increase our value by developing technologies and capabilities either internally or through acquisition, and using those capabilitiesto provide innovative solutions to the aerospace and defense, consumer electronics, semi-conductor and other markets where our technology can bebeneficial.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 12% of our consolidated sales were made to the military aircraftand military 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 disruptivein the short-term, would not materially affect our operations in the long-term.SeasonalityOur business is typically not seasonal.BacklogAt December 31, 2014, our backlog was $370.7 million. At December 31, 2013, our backlog was $214.2 million. Backlog in the Aerospace segmentwas $223.7 million at December 31, 2014, of which $205.5 million is expected to be realized in 2015. Backlog in the Test Systems segment was $147.0million at December 31, 2014, of which $116.3 million is expected to be realized in 2015.PatentsWe have a number of patents. While the aggregate protection of these patents is of value, our only material business that is dependent upon theprotection afforded by these patents is our cabin power distribution products. Our patents and patent applications relate to electroluminescence, instrumentpanels, keyboard technology and a broad patent covering the cabin power distribution technology. We regard our expertise and techniques as proprietaryand rely upon trade 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, developmentand engineering costs amounted to approximately $76.7 million in 2014, $52.8 million in 2013 and $44.9 million in 2012. 5Table of ContentsEmployeesWe employed approximately 2,000 employees at December 31, 2014. We consider our relations with our employees to be good. Except for the hourlyproduction workforce at Peco, none of our employees are subject to collective bargaining agreements.Stock DistributionOn August 21, 2014, the Company announced a one-for-five distribution of Class B Stock to holders of both Common and Class B Stock. Stockholdersreceived one share of Class B Stock for every five shares of Common and Class B Stock held on the record date of September 5, 2014. Fractional shares werepaid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of this distribution.Available informationWe file our financial information and other materials as electronically required with the Securities and Exchange Commission (“SEC”). These materialscan be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through ourwebsite at www.astronics.com. ITEM 1A.RISK FACTORSThe loss of Apple, Panasonic or Boeing as major customers or a significant reduction in sales to any or all of those three customers would reduceour sales and earnings. In 2014, we had a concentration of sales to Apple, Panasonic and Boeing representing approximately 17.9%, 17.7% and 14.1% ofour sales, respectively. The loss of one or all of these customers or a significant reduction in sales to 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 operational andfinancial flexibility. As of December 31, 2014, we had approximately $183.0 million of debt outstanding, of which $180.2 million is long-term debt.Changes to our level of debt subsequent to December 31, 2014 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 financingarrangement be achieved. This could result in our being unable to borrow under our bank credit facility or being obliged to refinance and renegotiate theterms of our bank indebtedness. Historically both choices have been available to us, however, it is difficult to predict the availability of these options in thefuture.Our future operating results could be impacted by estimates used to calculate impairment losses on long term assets. The preparation of financialstatements 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 whethera potential 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. At December 31,2014, goodwill and purchased intangible assets were approximately 17.8% and 16.9% of our total assets respectively. Our goodwill and other intangibleassets may increase in the future since our strategy includes growing through acquisitions. We may have to write off all or part of our goodwill or purchasedintangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and net worthsignificantly.The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating resultsto fluctuate. In our Aerospace segment, demand by the business jet markets for our products is dependent upon 6Table of Contentsseveral factors, including capital investment, product innovations, economic growth and wealth creation, and technology upgrades. In addition, thecommercial airline industry is highly cyclical and sensitive to fuel price increases, labor disputes, global economic conditions, availability of capital to fundnew aircraft purchases and upgrades of existing aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount ofair travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would reduce orders for new aircraft and would likelyreduce airlines’ spending for cabin upgrades for which we supply products, thus reducing our sales and profits. A reduction in air travel may also result in ourcommercial airline customers being unable to pay our invoices on a timely basis or not at all.We are a supplier on various new aircraft programs just entering or expected to begin production in the future. As with any new program, there is risk asto whether the aircraft or program will be successful and accepted by the market. As is customary for our business, we purchase inventory and invest inspecific capital equipment to support our production requirements generally based on delivery schedules provided by our customer. If a program or aircraft isnot successful we may have to write off all or a part of the inventory, accounts receivable and capital equipment related to the program. A write off of theseassets could result in a significant reduction of earnings and cause covenant violations relating to our debt agreements. This could result in our being unableto borrow additional funds under our bank credit facility or being obliged to refinance or renegotiate the terms of our bank indebtedness.In our Test Systems segment, the market for our products is concentrated with a limited number of significant customers accounting for a substantialportion of the purchases of test equipment. In 2014, our largest customer accounted for 17.9% of our consolidated revenue. In any one reporting period, asingle customer or several customers may contribute an even larger percentage of our consolidated net revenues. In addition, our ability to increase sales willdepend, in part, on our ability to obtain orders from current or new significant customers. The opportunities to obtain orders from these customers may belimited, which may impair our ability to grow revenues. We expect that sales of our Test Systems products will continue to be concentrated with a limitednumber of significant customers for the foreseeable future. Additionally, demand for some of our test products is dependent upon government funding levelsfor our products, our ability to compete successfully for those contracts and our ability to develop products to satisfy the demands of our customers.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, productdevelopment, conformity to customer specifications, quality of support after the sale, timeliness of delivery and effectiveness of the distribution organization.Maintaining and improving our competitive position will require continued investment in manufacturing, engineering, quality standards, marketing,customer service and support and our distribution networks. If we do not maintain sufficient resources to make these investments, or are not successful inmaintaining our competitive 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. The loss ofmembers of our management team could have a material and adverse effect on our business. In addition, competition for qualified technical personnel in ourindustry 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 other disturbancescould lead to further economic instability and decreases in demand for our products, which could negatively impact our business, financial condition andresults of operations. Terrorist attacks world-wide have caused instability from time to time in global financial markets and the aviation industry. The long-term effects of terrorist attacks on us are unknown. These attacks and the U.S. government’s continued efforts against terrorist organizations may lead toadditional armed hostilities or to further acts of terrorism and civil disturbance in the U.S. or elsewhere, which may further contribute to economic instability.Our business operations may be adversely affected by information systems interruptions or intrusions. We are dependent on various informationtechnologies throughout our company to administer, store and support multiple business activities. Disruptions or cyber security attacks such asunauthorized access, malicious software and other intrusions may lead to exposure of proprietary and confidential information as well as potential datacorruption. Any intrusion may cause operational stoppages, diminished competitive advantages through reputational damages and increased operationalcosts.Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrictour ability to compete. We rely on patents, trademarks and proprietary knowledge and technology, both internally developed and acquired, in order tomaintain 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. 7Table of ContentsIf 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 enhancementsmay not 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.We depend on government contracts and subcontracts with defense prime contractors and sub-contractors that may not be fully funded, may beterminated, or may be awarded to our competitors. The failure to be awarded these contracts, the failure to receive funding or the termination of one ormore of these contracts could reduce our sales. Sales to the U.S. government and its prime contractors and subcontractors represent a significant portion ofour business. The funding of these programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change. Inaddition, government expenditures for defense programs may decline or these defense programs may be terminated. A decline in governmental expendituresor the termination of existing contracts may result in a reduction in the volume of contracts awarded to us. We have resources applied to specific governmentcontracts 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 obtain futurebusiness could be materially and adversely impacted. Many of our contracts involve subcontracts with other companies upon which we rely to perform aportion of the services we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding thequality and timeliness of work performed by the subcontractor or customer concerns about the subcontractor. Failure by our subcontractors to satisfactorilyprovide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform ourobligations with our customer. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A default terminationcould expose us to liability and substantially impair our ability to compete for future contracts and orders. In addition, a delay in our ability to obtaincomponents 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 theyear ended December 31, 2014, fixed-price contracts represented almost all of the Company’s sales. On fixed-price contracts, we agree to perform the scope ofwork 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 our insurancecoverage, thereby requiring us to pay significant damages. Defects in the design and manufacture of our products may necessitate a product recall. Weinclude complex system design and components in our products that could contain errors or defects, particularly when we incorporate new technology intoour products. If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims.Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. We are also exposed to product liabilityclaims. We carry aircraft and non-aircraft product liability insurance consistent with industry norms. However, this insurance coverage may not be sufficientto fully cover the payment of any potential claim. A product recall or a product liability claim not covered by insurance could have a material adverse effecton our business, financial condition and results of operations.Changes in discount rates and other estimates could affect our future earnings and equity. Our goodwill impairment evaluations are determinedusing valuations that involve several assumptions, including discount rates, cash flow estimates, growth rates and terminal values. Certain of theseassumptions, particularly the discount rate, are based on market conditions and are outside of our control. Changes in these assumptions could affect ourfuture earnings and equity. 8Table of ContentsAdditionally, pension obligations and the related costs are determined using actual results and actuarial valuations that involve several assumptions.The most critical assumption is the discount rate. Other assumptions include mortality, salary increases and retirement age. The discount rate assumptions arebased 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 inthe availability, terms and cost of capital, and increases in interest rates could cause our cost of doing business to increase and place us at a competitivedisadvantage. At December 31, 2014, approximately 10% of our debt was at fixed interest rates with the remaining percentage subject to variable interestrates.Contracting in the defense industry is subject to significant regulation, including rules related to bidding, billing and accounting kickbacks andfalse claims, and any non-compliance could subject us to fines and penalties or possible debarment. Like all government contractors, we are subject torisks associated with this contracting. These risks include the potential for substantial civil and criminal fines and penalties. These fines and penalties couldbe imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accountingstandards, receiving or paying kickbacks or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations bygovernment agencies. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in suspensionor debarment from future government 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 local legal and regulatory environments. In2014, approximately 9.7% of our sales were made by our subsidiaries in France and Canada. Our financial results may be adversely affected by fluctuations inforeign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars. We expect internationaloperations and export sales to continue to contribute to our earnings for the foreseeable future. Both the sales from international operations and export salesare subject in varying degrees to risks inherent in doing business outside of the U.S. Such risks include the possibility of unfavorable circumstances arisingfrom host country laws or regulations, changes in tariff and trade barriers and import or export licensing requirements, and political or economicreprioritization, insurrection, civil disturbance or war.Government regulations could limit our ability to sell our products outside the United States and could otherwise adversely affect our business.Certain of our sales are subject to compliance with U.S. export regulations. Our failure to obtain, or fully adhere to the limitations contained in, the requisitelicenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the sale of ourproducts outside the U.S. Compliance with these government regulations may also subject us to additional fees and operating costs. The absence ofcomparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Unioncountries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a significant quantity of ourproducts, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations,including regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices and anti-boycott provisions. Our failure, orfailure by an authorized agent or representative that is attributable to us, to comply with these laws and regulations could result in administrative, civil orcriminal liabilities and could, in the extreme case, result in monetary penalties, suspension or debarment from government contracts or suspension of ourexport privileges, which would have a material adverse effect on us.Our stock price is volatile. For the year ended December 31, 2014, our stock price ranged from a low of $42.11 to a high of $59.97. 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 and new products; and • news reports relating to trends in our markets. 9Table of ContentsIn 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.In addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not perform as planned, doesnot increase 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, could materiallyimpact our financial condition. As an aerospace company, we may become a party to litigation in the ordinary course of our business, including, amongothers, matters alleging product liability, warranty claims, breach of commercial or government contract or other legal actions. In general, litigation claimscan be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly impact results ofoperations 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. On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statementof Claim in the Regional State Court of Mannheim, Germany. Lufthansa’s claim asserts that our subsidiary, Astronics Advanced Electronic Systems Corp.(“AES”) sold, marketed and brought into use in Germany a power supply system which infringes upon a German patent held by Lufthansa. The relief soughtby Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing productssold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of damages and a damagesclaim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement.On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does notrequire AES to recall products which are already installed in aircraft or have been sold to other end users. However, if Lufthansa provides the required bankguarantees specified in the decision, the Company may be required to offer a recall of products which are in the distribution channels in Germany, andprovide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. No such bankguarantees have been issued to date.The Company expects to appeal and believes it has valid defenses to refute the decision. The appeal process is estimated to extend up to two years. Asa result, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neitherprobable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2014.On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in thisaction alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent atissue in the U.S. action is based on technology similar to that involved in the German action. However, the U.S. court will not be bound by the ultimatedetermination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and intends to contest this mattervigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potentialexposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to thislitigation as of December 31, 2014. ITEM 1B.UNRESOLVED STAFF COMMENTSNone 10Table of ContentsITEM 2.PROPERTIESOn December 31, 2014, we own or lease 1.1 million square feet of space in the U.S., Canada and France, distributed as follows: Owned Leased Total Aerospace: East Aurora, NY 125,000 — 125,000 Clackamas, OR 237,000 — 237,000 Ft. Lauderdale, FL 96,000 — 96,000 Kirkland, WA 97,000 32,000 129,000 Lebanon, NH 80,000 — 80,000 Portland, OR — 159,000 159,000 Montierchaume, France* — 80,000 80,000 Montreal, Quebec, Canada — 25,000 25,000 Everett, WA — 16,000 16,000 Amherst, NH — 21,000 21,000 Hillsboro, OR — 1,000 1,000 Aerospace Square Feet 635,000 334,000 969,000 Test SystemsIrvine, CA* — 99,000 99,000 Orlando, FL — 51,000 51,000 Washington Heights, MO — 4,000 4,000 Test Systems Square Feet — 154,000 154,000 Total Square Feet 635,000 488,000 1,123,000 * - Acquired pursuant to capital lease.The lease for the PGA Montierchaume facility expires in December 2018. At the end of the lease, title to this building will transfer to PGA. The leasefor the DME Orlando facility expires in February 2020 with one renewal option for five years. The lease for the ATS Irvine facility expires in May 2022 withseveral renewal options. Upon the expiration of our current leases, we believe that we will be able to either secure renewal terms or enter into leases foralternative locations at market terms. We believe that our properties have been adequately maintained and are generally in good condition.In January 2014, Peco purchased real estate that included two buildings totaling 237,000 square feet in Clackamas, Oregon and began moving itsoperations into the buildings in the fourth quarter of 2014. The leases on our two existing buildings in Portland expire in June 2015 and June 2017. Peco hasgiven notice of termination on these two building leases, and expects to vacate the leased facilities in 2015. In January 2015, we acquired three buildingstotaling 46,000 square feet in Itasca, Illinois in conjunction with the Armstrong acquisition. ITEM 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 couldbe materially adversely affected.On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim, Germany.Lufthansa’s claim asserts that our subsidiary, Astronics Advanced Electronic Systems Corp. (“AES”) sold, marketed and brought into use in Germany a powersupply system which infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketingthe allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 andcompensation for damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorableruling on the determination of infringement.On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does notrequire AES to recall products which are already installed in aircraft or have been sold to other end users. 11Table of ContentsHowever, if Lufthansa provides the required bank guarantees specified in the decision, the Company may be required to offer a recall of products which are inthe distribution channels in Germany, and provide certain financial information regarding sales of the infringing product to enable Lufthansa to make anestimate of requested damages. No such bank guarantees have been issued to date.The Company expects to appeal and believes it has valid defenses to refute the decision. The appeal process is estimated to extend up to two years. Asa result, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neitherprobable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2014.On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in thisaction alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent atissue in the U.S. action is based on technology similar to that involved in the German action. However, the U.S. court will not be bound by the ultimatedetermination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and intends to contest this mattervigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potentialexposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to thislitigation as of December 31, 2014.Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in material adverseeffect on our financial condition or results of operations. ITEM 4.MINE SAFETY DISCLOSURESNot Applicable 12Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESThe 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, 2015, was 884 for Common Stock and 1,321 for Class BStock. 2014 High Low First $59.97 $42.11 Second $53.22 $43.43 Third $56.75 $42.63 Fourth $55.31 $42.69 2013 High Low First $20.71 $15.83 Second $28.51 $17.63 Third $35.31 $26.86 Fourth $44.16 $32.38 The Company has not paid any cash dividends in the three-year period ended December 31, 2014. The Company has no plans to pay cash dividends asit plans to retain all cash from operations as a source of capital to finance growth in the business.On August 21, 2014, 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 September 5, 2014.Fractional shares were paid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect theimpact of this distribution.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 2015 Annual Meeting of Shareholders is incorporated herein byreference.The Company repurchased and subsequently retired approximately 42,601 and 4,073 shares of common stock in conjunction with the exercise of stockoptions in 2014 and 2013, respectively. 13Table of ContentsThe following graph and table shows the performance of the Company’s common stock compared with the S&P 500 Index — Total Return and theNASDAQ US and Foreign Companies for a $100 investment made December 31, 2009: 2009 2010 2011 2012 2013 2014 Astronics Corp. Return % — 145.61 85.02 -27.61 122.90 30.51 Cum $ 100.00 245.61 454.44 328.99 733.32 957.06 S&P 500 Index - Total Returns Return % — 15.06 2.11 16.00 32.39 13.69 Cum $ 100.00 115.06 117.49 136.30 180.44 205.14 NASDAQ Stock Market (US and Foreign Companies) Return % — 18.02 -0.85 17.41 40.10 14.42 Cum $ 100.00 118.02 117.02 137.40 192.50 220.26 14Table of ContentsITEM 6.SELECTED FINANCIAL DATAFive-Year Performance Highlights 2014 (5) 2013 (4) 2012 (3) 2011 (2) 2010 (Amounts in thousands, except for employee and per share data) RESULTS OF OPERATIONS: Sales $661,039 $339,937 $266,446 $228,163 $195,754 Impairment Loss $— $— $— $(2,500) $— Net Income $56,170 $27,266 $21,874 $21,591 $14,948 Net Margin 8.5% 8.0% 8.2% 9.5% 7.6% Diluted Earnings per Share (1) $2.48 $1.24 $1.00 $1.01 $0.73 Weighted Average Shares Outstanding – Diluted (1) 22,662 22,031 21,789 21,381 20,554 Return on Average Equity 28.1% 18.4% 19.2% 24.0% 21.8% YEAR-END FINANCIAL POSITION:Working Capital$136,602 $125,961 $60,042 $58,833 $65,855 Total Assets$562,910 $491,271 $211,989 $174,905 $150,888 Indebtedness$183,008 $200 320 $29,983 $33,263 $38,578 Shareholders’ Equity$228,177 $171,509 $125,134 $102,863 $77,215 Book Value Per Share (1)$10.40 $8.00 $5.98 $5.00 $3.87 OTHER YEAR-END DATA:Depreciation and Amortization$27,254 $11,059 $6,905 $4,943 $4,881 Capital Expenditures$40,882 $6,868 $16,720 $14,281 $3,568 Shares Outstanding (1) 21,930 21,430 20,925 20,593 19,942 Number of Employees 2,041 1,715 1,156 1,081 1,010 (1) - Diluted Earnings Per-Share, Weighted Average Shares Outstanding-Diluted, Book Value Per-Share and Shares Outstanding have been adjusted for theimpact of the September 5, 2014 twenty percent Class B stock distribution, the October 10, 2013 twenty percent Class B stock distribution, theOctober 29, 2012 three-for-twenty Class B stock distribution and the August 16, 2011 one-for-ten Class B stock distribution.(2) - Information includes the results of Ballard, acquired on November 30, 2011, from the acquisition date forward.(3) - Information includes the results of Max-Viz, acquired on July 30, 2012, from the acquisition date forward.(4) - 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.(5) - Information includes the results of ATS, acquired on February 28, 2014, from the acquisition date forward. ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWAstronics, through its subsidiaries, designs and manufactures advanced, high-performance electrical power generation and distribution systems,lighting and safety systems, avionics products and aircraft structures for the global aerospace industry as well as test, training and simulation systemsprimarily for the military, semi-conductor and consumer electronics markets.Our strategy is to invest significantly in engineering, research and development to develop and maintain positions of technical leadership. We expectto leverage those positions to increase our ship set content, growing the amount of content and volume of products we sell and to selectively acquirebusinesses with similar technical capabilities.We have two reportable segments, Aerospace and Test Systems. Our Aerospace segment has eleven principal operating facilities located in New YorkState, Florida, Illinois, two in New Hampshire, two in Oregon, two in Washington State, Quebec, Canada and Montierchaume, France. Our Test Systemssegment has facilities located in Florida and California.Our Aerospace segment serves three primary markets. They are the military, commercial transport and business jet markets. The Test Systems segmentserves the military and defense markets. With the addition of ATS in 2014, the Test Systems segment also serves the commercial electronics and semi-conductor markets.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 new aircraft and the rates at which aircraft owners, including 15Table of Contentscommercial airlines, refurbish or install upgrades to their aircraft. New aircraft build rates and aircraft owners spending on upgrades and refurbishments iscyclical and dependent on the strength of the global economy. Once designed into a new aircraft, the spare parts business is frequently retained by theCompany. With the acquisition of ATS in 2014, future growth and profitability of the test business is dependent on developing and procuring new andfollow-on business in commercial electronics and semi-conductor markets as well as with the military. The nature of our test systems business is such that itpursues large multi-year projects. There can be significant periods of time between orders in this business which may result in large fluctuations of sales andprofit levels and backlog from period to period.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 lookfor opportunities 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 onmany things, primarily revenue growth and the Company’s ability to control operating expenses and to identify means of creating improved productivity.Revenue is driven by increased build rates for existing aircraft, market acceptance and economic success of new aircraft, continued government funding ofdefense programs, the Company’s ability to obtain production contracts for parts we currently supply or have been selected to design and develop for newaircraft platforms and continually identifying and winning new business for our Test Systems segment. Reduced aircraft build rates driven by a weakeconomy, tight credit markets, reduced air passenger travel and an increasing supply of used aircraft on the market would likely result in reduced demand forour products, which will result in lower profits. Reduction of defense spending may result in fewer opportunities for us to compete, which could result inlower profits in the future. Many of our newer development programs are based on new and unproven technology and at the same time we are challenged todevelop the technology on a schedule that is consistent with specific programs. We will continue to address these challenges by working to improveoperating efficiencies and focusing on executing on the growth opportunities currently in front of us.ACQUISITIONSOn January 14, 2015, the Company purchased 100% of the equity of Armstrong for approximately $52.0 million in cash. Armstrong, located in Itasca,Illinois, is a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment,and electrical power systems. Armstrong will be included in our Aerospace segment.On February 28, 2014, Astronics completed the acquisition of substantially all of the assets and liabilities of EADS North America’s Test and Servicesdivision. 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, commercial aerospace and defense industries. The purchase price was approximately $69.4 million in cash.On December 5, 2013, we acquired 100% of the stock of PGA, located in Chateauroux, France. PGA designs and manufactures seat motion and lightingsystems primarily for premium class aircraft seats and is a provider of in-flight entertainment/communication systems as well as cabin management systemsfor private aircraft. The purchase price was approximately $31.3 million, comprised of $9.1 million of cash and the balance paid with 264,168 shares ofAstronics stock valued at $51.00/share. PGA is included in our Aerospace segment.On October 1, 2013, we acquired certain assets and liabilities from AeroSat Corporation and related entities, a supplier of aircraft antenna systems, for$12 million in cash, plus contingent purchase consideration of up to a maximum of $53.0 million based upon the achievement of certain revenue levels in2014 and 2015. The fair value of the estimated contingent consideration at December 31, 2014 is approximately $1.5 million. AeroSat is included in ourAerospace segment.On July 18, 2013, we acquired 100% of the stock of Peco, which designs and manufacturers highly engineered commercial aerospace interiorcomponents and systems for the aerospace industry. The company specializes in overhead Passenger Service Units (“PSUs”), which incorporate air handling,emergency oxygen, electrical power management and cabin lighting systems. It also manufactures a wide range of fuel access doors that meet stringentstrength, fuel sealing and anti-corrosion requirements. We purchased the outstanding stock of Peco for $136.0 million in cash. Peco is included in ourAerospace segment. 16Table of ContentsMARKETSCommercial 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 $396.1 million or 60.0% of our consolidated sales in 2014.Maintaining and growing sales to the commercial transport market will depend on airlines’ capital spending budgets for cabin upgrades as well as thepurchase of new aircraft by global airlines. This spending by the airlines is impacted by their profits, cash flow and available financing as well as competitivepressures between the airlines to improve the travel experience for their passengers. We expect that new aircraft will be equipped with more IFE and in-seatpower than previous generation aircraft. This market has experienced strong growth as the airlines are installing in-seat passenger power systems on theiraircraft. Our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors andmaintain our relationships with major IFE suppliers and global airlines.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 6.5% of our consolidated revenue in 2014 and amounted to $42.4 million in 2014.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.Business 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 5.9% of our consolidated revenue in 2014 and amounted to $38.8 million.Sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft. Business jet OEM build rates continueto be significantly impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years bythe slow recovery from the global recession. Our sales to the business jet market will continue to be challenged in the upcoming year as business jet aircraftproduction rates are not expected to increase significantly during 2015 as the global economy continues to struggle. Despite the current market conditions,we continue to see opportunities on new aircraft currently in the design phase to employ our lighting & safety, electrical power and avionics technologies inthe business jet market. There is risk involved in the development of any new aircraft including the risk that the aircraft will not ultimately be produced orthat it will be produced in lower quantities than originally expected and thus impacting our return on our engineering and development efforts.Other AerospaceSales of our other aerospace products include sales of airfield lighting products and other Peco products. Sales to this market totaled approximately2.6% of our total revenue in 2014 and amounted to $17.4 million in 2014.Tests Systems ProductsOur Test Systems segment accounted for approximately 25.0% of our consolidated sales in 2014 and amounted to $166.3 million. Sales to thecommercial electronics market were approximately $130.9 million, and were attributable to the acquisition of ATS in February 2014. Sales to the military testmarket were approximately $35.4 million in 2014.CRITICAL ACCOUNTING POLICIESOur financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation ofthe Company’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. 17Table of ContentsRevenue RecognitionThe vast majority of our sales agreements are for standard products and services, with revenue recognized on the accrual basis at the time of shipmentof goods, transfer of title and customer acceptance, where required. There are no significant contracts allowing for right of return. To a limited extent, as aresult of the acquisition of ATS, certain of our contracts involve multiple elements (such as equipment and service). The Company recognizes revenue fordelivered elements when they have stand-alone value to the customer, they have been accepted by the customer, and for which there are only customaryrefund or return rights. Arrangement consideration is allocated to the deliverables by use of the relative selling price method. The selling price used for eachdeliverable is based on vendor-specific objective evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated sellingprice if neither VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used to establish the price to sell thedeliverable on a standalone basis.For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates thecosts are incurred on other than a straight-line basis.Revenue of approximately $2.7 million, $4.4 million and $4.2 million for the years ending December 31, 2014, 2013 and 2012, respectively, wasrecognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting.Reviews for 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, 2014, we had approximately$100.2 million of goodwill. As of December 31, 2013, we had approximately $101.0 million of goodwill. The change in goodwill is due to the adjustmentsto the final purchase price allocations of Peco, AeroSat and PGA, acquired in 2013, coupled with currency translation adjustments, collectively decreasinggoodwill by $0.8 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 itsown reporting 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 beingprojected revenue growth rates, operating profit margins and cash flows, the terminal growth rate and the discount rate. Management projects revenue growthrates, operating margins and cash flows based on each reporting unit’s current business, expected developments and operational strategies. If the carryingvalue of the 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 2014, we performed quantitative assessments for the seven reporting units which have goodwill and concluded that it is more likely than not thattheir fair values exceed their carrying values. Based on our quantitative assessments of our reporting units, we concluded that goodwill was not impaired. 18Table of ContentsAmortized Intangible Asset Impairment TestingAmortizable intangible assets with a carrying value of $95.0 million at December 31, 2014 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 associated with the asset to its carrying amount. An impairment loss wouldthen be recognized for the carrying amount in excess of its fair value. There were no impairment charges in 2014, 2013 or 2012.Depreciable Asset Impairment TestingProperty, plant and equipment with a carrying value of $116.3 million at December 31, 2014 are depreciated over their assigned useful lives. We testthese long-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. There were no impairment charges in 2014, 2013 or 2012.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 aswell as reserving for specifically identified inventory that we believe is no longer salable. At December 31, 2014, our reserve for inventory valuation was$12.3 million, or 9.6% of gross inventory. At December 31, 2013, our reserve for inventory valuation was $11.0 million, or 11.5% 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 taxexpense and the carrying value of these assets when we determine that these factors have changed.As of December 31, 2014, we had net deferred tax liabilities of $13.2 million. Included in the deferred tax liabilities are approximately $20.3 million indeferred tax assets net of a $3.1 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.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.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 2014 and 2013.Supplemental Executive Retirement Plan (SERP) AssumptionsWe 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 2014 was $1.6 million. Plan obligations and the related costs are determined using actuarial valuations thatinvolve several assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions hadbeen used. The most critical assumptions include the discount rate, future wage increases, retirement age and life expectancy. The discount rate is used tostate expected future cash flows at present value. Using a lower discount rate increases the present value of pension obligations and increases pensionexpense. For determining the discount rate the Company considers long-term interest rates for high-grade corporate bonds. The discount rate for determiningthe expense recognized in 2014 was 5.1% compared with 4.2% in 2013. We will use a discount rate of 4.05% in determining our 2015 expense. Theassumption for compensation increases takes a long-term view of inflation and performance based salary adjustments based on the Company’s approach toexecutive compensation. The rate used for future wage increases was 5%. It was assumed that each participant retires after fully vesting in the plan at age 62or 65. A 100 point increase in the discount rate we used would decrease our annual pension expense for 2015 by $0.3 million. If we had assumed annual wageincreases of 6%, our 2015 pension expense would increase approximately $0.2 million. 19Table of ContentsStock-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 $1.7 million for 2014, $1.4 million for 2013 and $1.4 million for 2012. We determine the fair value of the option awards at the dateof grant using a Black-Scholes model. Option pricing models require management to make assumptions and to apply judgment to determine the fair value ofthe award. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee stockoption exercise behaviors and future employee turnover rates. Changes in these assumptions can materially affect the fair value estimate.AcquisitionsThe Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805provides 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 2014 and 2013 were approximately $0.3 and$1.9 million, respectively, and were insignificant in 2012.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.Significant judgment is necessary to determine the fair value of the purchase price when the transaction includes an earn-out provision, such as the earn-outprovision included in our 2013 acquisition of AeroSat. We engage valuation specialists to assist in the determination of the fair value of contingentconsideration. Key assumptions used to value the contingent consideration include future projections and discount rates.During 2014, acquisitions added approximately $17.1 million in property, plant and equipment and $10.1 million in purchased intangible assets. SeeNote 19 in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, regarding the acquisitions in 2014and 2013.CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK 2014 (3) 2013 (2) 2012 (1) (Dollars in thousands) Sales $661,039 $339,937 $266,446 Gross Margin 25.3% 25.8% 26.1% SG&A Expenses as a Percentage of Sales 12.1% 13.4% 13.8% Interest Expense $8,255 $4,094 $1,042 Effective Tax Rate 29.0% 28.6% 30.7% Net Income $56,170 $27,266 $21,874 (1)Our results of operations for 2012 include the operations of Max-Viz, beginning July 30, 2012.(2)Our results of operations for 2013 include the operations of Peco beginning July 18, 2013, AeroSat beginning October 1, 2013 and PGA beginningDecember 5, 2013.(3)Our results of operations for 2014 include the operations of ATS, beginning February 28, 2014.A discussion by segment can be found at “Segment Results of Operations and Outlook” in this MD&A.CONSOLIDATED OVERVIEW OF OPERATIONSConsolidated sales in 2014 increased by 94.5%, or $321.1 million, to $661.0 million, compared with $339.9 million in 2013. The increase was due to acombination of acquisitions and organic sales volume growth. Acquisitions contributed $270.4 million (comprised of $111.2 million in the Aerospacesegment and $159.2 million in the Test Systems segment), while organic sales increased by $50.7 million or 14.9% from the prior year. On a segment basis,Aerospace sales of $494.7 million increased by $164.2 million, while Test Systems sales of $166.3 million increased by $156.9 million compared with theprior year. 20Table of ContentsThe 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 in 2013, compared with $266.4 million in 2012. Acquisitions contributed $39.5 million, all in theAerospace segment, while organic sales increased by $34.0 million or 12.8% from 2012. Aerospace sales of $330.5 million increased by $75.6 million, whileTest Systems sales of $9.4 million decreased by $2.1 million, compared with 2012.Consolidated cost of products sold increased $241.9 million to $494.0 million in 2014 from $252.1 million in the prior year. The increase was due tothe cost of products sold associated with increased organic sales volumes and the incremental costs of products sold associated with sales from acquiredbusinesses totaling $208.0 million. Consolidated cost of products sold as a percentage of sales was 74.7% in 2014 as compared with 74.2% in the prior year.Leverage achieved from increased organic sales volume was offset by lower margins from the acquired businesses, which were impacted by higher costsrelated to the fair value step-up of acquired inventory. Expense related to the fair value step-up of inventory from acquired businesses was $19.4 million and$5.5 million in 2014 and 2013, respectively. Consolidated cost of products sold was also negatively impacted by increased depreciation expenses of $3.0million, increased warranty costs of $2.9 million and increased engineering & development (“E&D”) costs. Total E&D costs were $76.7 million in 2014,including $19.1 million acquired businesses. E&D costs were $52.8 million in 2013.Consolidated cost of products sold increased $55.1 million to $252.1 million in 2013 from $197.0 million in 2012. The increase was due to the impactof increased organic sales volumes and the additional costs of products sold associated with 2013 acquisitions. Cost of products sold as a percentage of saleswas 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 and included $5.5million for the expensing of fair value cost step-up of acquired inventory and increased E&D costs. These costs were slightly offset by lower warranty andinventory obsolescence expenses of approximately $2.9 million. E&D costs were $52.8 million for the full year of 2013 compared with $44.9 million in theprior-year period.Selling, general and administrative (“SG&A”) expenses in 2014 were $79.7 million, or 12.1% of sales compared with $45.6 million, or 13.4% of sales,in the prior year. The increase was due primarily to $34.8 million in incremental SG&A costs of acquired businesses, including $10.4 million of incrementalamortization expense for acquired intangible assets. Additionally, higher SG&A expense reflects increased headcount and compensation costs to supportgrowth. SG&A expenses in 2014 were positively affected by the $5.0 million fair value writedown of a contingent consideration liability related to theBallard and AeroSat acquisitions.SG&A expenses in 2013 were $45.6 million, or 13.4% of sales compared with $36.8 million, or 13.8% of sales, in 2012. The increase was due primarilyto $7.8 million of additional SG&A costs for the acquired businesses, including $3.2 million of purchased intangible asset amortization expense associatedwith these acquisitions and $1.8 million relating to the acquisition transactions including financing, legal and diligence efforts.Interest expense increased in 2014 compared to 2013 due to increased debt levels used primarily to finance the acquisition of ATS, somewhat offset bylower interest rates due to the September 2014 debt refinancing. Interest expense increased in 2013 compared to 2012 due to increased debt levels usedprimarily to finance acquisitions and increased interest rates related to higher leverage ratios.Our effective tax rates for 2014, 2013 and 2012 were 29.0%, 28.6% and 30.7%, respectively. Our tax rate is affected by recurring items, such as tax ratesin 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 also affectedby 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 had themost significant impact on the difference between our statutory U.S. federal income tax rate of 35% and our effective tax rate:2014: 1.Recognition of $1.8 million of 2014 U.S. R&D tax credits as well as $1.6 million of U.S. R&D tax credits recognizedrelating to prior years. 2.Permanent differences, primarily the impact of the Domestic Production Activities Deduction. 3.Foreign tax credits.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 credits recognizedrelating to 2012. The 2012 R&D tax credits were not recognized in 2012, as the American Tax Payer Relief Act 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. 21Table of Contents2012: 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.2015 OutlookWe expect consolidated sales in 2015 to be between $680 million and $740 million, including the January 2015 addition of Armstrong. Ourconsolidated backlog at December 31, 2014 was $370.7 million of which approximately $321.8 million is expected to ship in 2015.We expect our capital equipment spending in 2015 to be in the range of $20 million to $25 million, excluding Armstrong. E&D costs are estimated tobe in the range of $75 million to $80 million, excluding Armstrong.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 othernon-operating revenue and expenses. Cost of sales and operating expenses are directly attributable to the respective segment. Operating profit is reconciledto earnings before income taxes in Note 18 of Item 8, Financial Statements and Supplementary Data, of this report.AEROSPACE SEGMENT (in thousands, except percentages) 2014 2013 2012 Sales $494,747 $330,530 $254,955 Operating Profit $79,753 $55,200 $44,137 Operating Margin 16.1% 16.7% 17.3% (in thousands) 2014 2013 Total Assets $468,481 $428,619 Backlog $223,769 $207,101 Sales by Market (in thousands) 2014 2013 2012 Commercial Transport $396,075 $237,725 $179,104 Military 42,434 48,669 36,511 Business Jet 38,819 29,784 29,379 Other 17,419 14,352 9,961 $494,747 $330,530 $254,955 Sales by Product Line (in thousands) 2014 2013 2012 Electrical Power & Motion $254,455 $188,221 $160,136 Lighting & Safety 148,212 102,233 69,597 Avionics 57,879 18,733 15,261 Structures 14,594 6,331 — Other 19,607 15,012 9,961 $494,747 $330,530 $254,955 Sales for the Aerospace segment increased $164.2 million in 2014 compared with the prior year. Organic sales grew 16.0%, or $53.0 million.Incremental sales from acquired businesses were $111.2 million.Sales to the commercial transport market increased $158.3 million. Organic sales were up $64.2 million and sales from acquired businesses added$94.1 million. The organic sales increase was primarily from electrical power & motion products, which increased approximately $42.2 million as globaldemand for passenger power systems continued to be strong. Additionally, organic sales of lighting & safety products to this market increased approximately$11.9 million, while organic sales of avionics products increased $8.6 million.Military aircraft sales decreased $6.2 million when compared with the prior year. The acquired businesses added $1.8 million while organic sales were$8.0 million lower due primarily to general reduction of volumes.Sales to the business jet market increased $9.0 million when compared with the prior year. The acquired businesses added $10.7 million in sales, morethan offsetting lower organic sales which decreased $1.7 million, primarily from the lighting & safety and electrical power & motion product lines. 22Table of ContentsThe $3.1 million increase in 2014 to other markets reflected approximately $4.6 million from acquired businesses offset by a $1.5 million decrease oforganic sales.Aerospace operating profit for 2014 was $79.8 million, or 16.1% of sales, compared with $55.2 million, or 16.7% of sales, in the prior year. Theacquired businesses contributed approximately $9.4 million in incremental operating profit in 2014. Leverage achieved from higher organic sales volumewas partially offset by increased organic E&D costs of approximately $5.0 million and an increase in organic warranty costs of $2.3 million. Additionallyimpacting Aerospace operating margins, cost of products sold had expense related to the fair value step-up of inventory from acquired businesses ofapproximately $2.6 million and $5.5 million in 2014 and 2013, respectively. Aerospace SG&A expense increased $19.4 million in 2014 compared to 2013.The increase was due primarily to the incremental SG&A of acquired businesses, which added $16.7 million, including $4.4 million of acquired intangibleasset amortization expense.Sales for the Aerospace segment in 2013 increased $75.6 million compared with 2012. 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 in 2013 primarily from electrical power & motion product sales. Salesto the commercial transport market increased in 2013 due to increased volume of electrical power & motion, lighting & safety products and structuresproducts. Sales of the electrical power & motion products grew as global demand for passenger power systems continues to be strong. Lighting & safetyproduct sales increased in 2013 due primarily to the acquisition of Peco, which added $25.9 million in sales to this product line. Peco also contributed $6.3million of structures sales to the commercial transport market in 2013. Sales of avionics products to this market were flat when compared to 2012. Militarysales were up compared with 2012 as a result of higher sales volume of lighting & safety products, electrical power & motion products and avionics products.Sales to the business jet market were down slightly when compared with 2012 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 in 2013 due primarilyto the acquisition 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 2012. The increase in theoperating profit was due to leverage from a higher volume of sales, lower warranty and inventory obsolescence expense of $2.9 million and lower legalexpenses of $1.1 million which more than offset the $5.5 million fair value expense for the step-up of acquired inventory from the 2013 acquisitions andhigher E&D expenses of $8.0 million, of which approximately $1.9 million was from the acquired businesses. SG&A costs for the businesses acquired in2013 totaled $6.6 million for 2013, including $3.2 million of purchased intangible asset amortization expense associated with these acquisitions.It is our intention to continue investing in capabilities and technologies as needed that allows us to execute our strategy to increase the ship setcontent and value we provide on aircraft in all markets that we serve. The rate of spending on these activities, however, will continue to be driven by marketopportunities.2015 Outlook for Aerospace – We expect 2015 Aerospace segment sales to be in the range of $550 million to $580 million. The Aerospace segment’sbacklog at December 31, 2014 was $223.7 million, compared to $207.1 million at December 31, 2013. Approximately $205.5 million of the backlog atDecember 31, 2014 is expected to be shipped over the next 12 months.TEST SYSTEMS SEGMENT (in thousands, except percentages) 2014 2013 2012 Sales $166,292 $9,407 $11,491 Operating Profit (Loss) $12,401 $(3,756) $(4,985) Operating Margin 7.4% (37.2)% (43.4)% 2014 2013 Total Assets $69,247 $11,035 Backlog $146,964 $7,062 Sales by Market 2014 2013 2012 Commercial Electronics $130,859 $— $— Military 35,433 9,407 11,491 $166,292 $9,407 $11,491 Sales in 2014 increased $156.9 million to $166.3 million compared with sales of $9.4 million for 2013. Incremental sales to both the CommercialElectronics and Military markets from the acquisition of ATS drove the growth. Sales from this acquired business were $159.2 million in 2014; organic testsystem sales were $7.1 million for 2014. Sales from ATS’s largest customer were $118.1 million in 2014. 23Table of ContentsSales in 2013 and 2012 were all to the military market. Test Systems’ military market continues to face headwinds as military spending has slowed andthere are fewer opportunities for large programs.Operating profit for 2014 was $12.4 million compared with an operating loss of $3.8 million for 2013. All of the improvement was due to the marginprovided by the ATS acquisition. Included in 2014 cost of products sold was the impact of $16.8 million of expense related to the fair value step-up ofacquired inventory. Incremental SG&A and E&D costs of the acquired business were approximately $18.2 million and $9.1 million, respectively.2015 Outlook for Test Systems – We expect 2015 Test System segment sales to be in the range of $130 million to $160 million. The Test Systemsegment’s backlog at December 31, 2014 was $147.0 million (compared with $7.1 million at December 31, 2013), with approximately $116.3 millionscheduled to be shipped over the next 12 months. By December 31, 2014, we have delivered the final unit under our current contract with our majorcustomer. A follow on order from this customer was received in 2014, which is expected to begin shipping in 2015.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, 2014: Payments Due by Period (In thousands) Total 2015 2016-2017 2018-2019 After 2019 Long-term Debt $183,008 $2,796 $5,554 $169,682 $4,976 Purchase Obligations 126,560 123,871 2,562 127 — Interest on Long-term Debt 17,727 3,868 7,392 6,135 332 Supplemental Retirement Plan and Post Retirement Obligations 21,980 403 807 804 19,966 Operating Leases 8,952 2,579 3,513 2,727 133 Other Long-term Liabilities 1,893 94 1,701 26 72 Total Contractual Obligations$360,120 $133,611 $21,529 $179,501 $25,479 Notes to Contractual Obligations TableLong-term Debt — See item 8, Financial Statements and Supplementary Data, Note 6, Long-Term Debt and Note Payable in this report.Interest on Long-term Debt — Future interest payments have been calculated using the applicable interest rate of each debt facility as of December 31,2014. Actual future rates may differ from these estimates.Purchase Obligations — Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.Operating Leases — Operating lease obligations are primarily related to facility leases for our AES, AeroSat, Ballard, DME, Max-Viz, Peco and LSICanada.LIQUIDITY AND CAPITAL RESOURCES (in thousands) 2014 2013 2012 Net cash provided (used) by: Operating Activities $99,874 $49,549 $24,178 Investing Activities $(109,120) $(166,710) $(27,379) Financing Activities $(23,113) $164,334 $(341) Our cash flow from operations and available borrowing capacity provide us with the financial resources needed to run our operations and reinvest inour business.Operating ActivitiesCash provided by operating activities was $99.9 million in 2014 compared with $49.5 million in 2013. The increase of $50.4 million in 2014 wasprimarily a result of higher net income as adjusted for non-cash expenses and the impact of decreases in net operating assets in 2014 when compared with2013 net of the effects from acquisitions of business. 24Table of ContentsCash 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 offset by cash used for net working capital components.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 and employees. Sales and operating results of our Aerospace segment are influenced by the build rates of newaircraft, which are subject to general economic conditions, airline passenger travel and spending for government and military programs. Our Test Systemssegment depends on capital expenditures of the semiconductor and consumer electronics industries which, in turn, depend on current and future demand forthose products. A reduction in demand for our customers’ products would adversely affect our operating results and cash flows.Investing ActivitiesCash used for investing activities in 2014 was $109.1 million. The acquisition of ATS used approximately $69.4 million of cash in 2014 and purchasesof property, plant and equipment (“PP&E”) used $40.9 million, primarily related to the acquisition and modification of the new buildings for our Pecooperation in Clackamas, Oregon ($24.7 million).Cash used for investing activities in 2013 was approximately $166.7 million. The acquisitions of Peco, AeroSat and PGA used approximately $159.8million of cash in 2013 and purchases of PP&E used $6.9 million.Our expectation for 2015 is that we will invest between $20 million and $25 million for PP&E, excluding Armstrong. Future requirements for PP&Edepend on numerous factors, including expansion of existing product lines and introduction of new products. Management believes that our cash flow fromoperations and current borrowing arrangements will provide for these capital expenditures. We expect to continue to evaluate acquisition opportunities inthe future.Financing ActivitiesOur ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operatingresults could 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 Amendedand Restated Credit Agreement, dated as of July 18, 2013, which provided for a $75 million five-year revolving credit facility and a $190 million five-yearterm loan, both maturing on June 30, 2018. The amended facilities carried an interest rate ranging from 225 basis points to 350 basis points above LIBOR,depending on the Company’s leverage ratio as defined in the Credit Agreement. Principal installments were payable on the term loan in varying quarterlyamounts through March 31, 2018 and the entire unpaid principal balance together with interest due and payable on June 30, 2018 and with mandatoryprepayments being required in certain circumstances. The credit facility was secured by substantially all of the Company’s assets. In addition, the Companywas required to pay a commitment fee of between 25 basis points and 50 basis points quarterly on the unused portion of the revolving credit facility, basedon the Company’s leverage ratio under the Credit Agreement.The proceeds of the term loan were used to finance acquisitions, pay off $7.0 million outstanding under the existing term loan, $7.0 millionoutstanding under the existing revolving credit facility and $0.5 million of other term debt and to pay transaction expenses. There was no balanceoutstanding on our revolving credit facility at December 31, 2013.On February 28, 2014, in connection with the funding of the acquisition of ATS, the Company amended its existing credit facility to exercise itsoption to increase the revolving credit commitment. The Credit Agreement provided for a $125 million five-year revolving credit facility maturing onJune 30, 2018, of which $58.0 million was drawn to finance the acquisition. The amended facility temporarily increased the maximum leverage ratiopermitted under the agreement. There were no changes to the other covenants, interest rates being charged or commitment fees.On September 26, 2014, the Company modified and extended its existing credit facility (the “Original Facility”) by entering into the Fourth Amendedand Restated Credit Agreement (the “Agreement”). On the closing date, there were $180.5 million of term loans, $6.0 million of revolving loans and letters ofcredit with a face amount of $8.7 million outstanding under the Original Facility. Pursuant to the Agreement, the Original Facility was replaced with a $350million revolving credit line with the option to increase the line by up to $150 million. The outstanding balances in the Original Facility were rolled into theAgreement on the date of entry. In addition, the maturity date of the loans under the Agreement is now September 26, 2019. The credit facility allocates up to$20 million of the $350 million revolving credit line for the issuance of letters of credit, including certain existing letters of credit. At December 31, 2014,outstanding letters of credit totaled $1.1 million. 25Table of ContentsThe primary financing activities in 2014 relate to borrowings on our senior credit facility to fund the acquisition of ATS and principal paymentsagainst our outstanding balance on the senior facility. In February 2014, we borrowed $58.0 million to fund the acquisition of ATS. During 2014, we madeprincipal payments of $78.3 million on the senior credit facility, primarily using cash generated by operations. We also terminated our outstanding IndustrialRevenue Bonds, which were repaid in full in November 2014 ($7.6 million). In 2013, we borrowed $190.0 million to fund the acquisitions of Peco, AeroSatand PGA and made principal payments of $17.8 million on the senior debt facility through December 31, 2013.The maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in the Agreement) is 3.5 to 1, increasing to 4.0 to 1 for up totwo fiscal quarters following the closing of an acquisition permitted under the Agreement. The Company will pay interest on the unpaid principal amount ofthe facility at a rate equal to one-, three- or six-month LIBOR plus between 137.5 basis points and 225 basis points based upon the Company’s leverage ratio.The Company will also pay a commitment fee to the Lenders in an amount equal to between 17.5 basis points and 35 basis points on the undrawn portion ofthe credit facility, based upon the Company’s leverage ratio. The fixed charge coverage ratio under the Original Facility has been replaced with a minimuminterest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of the Agreement. At December 31, 2014, the Company was incompliance with all of the covenants pursuant to the Agreement. The Company’s interest coverage ratio was 18.7 to 1 at and the leverage ratio was 1.28 to 1at December 31, 2014.The Company’s cash needs for working capital, debt service and capital equipment during 2015 is expected to be met by cash flows from operationsand cash balances and, if necessary, utilization of the revolving credit facility.In the event of voluntary or involuntary bankruptcy of the Company or any subsidiary, all unpaid principal and other amounts owing under theAgreement 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, 2014, we were in compliance with allof the covenants pursuant to the Agreement.DIVIDENDSManagement believes that it should retain the capital generated from operating activities for investment in advancing technologies, acquisitions anddebt retirement. Accordingly, there are no plans to institute a cash dividend program.BACKLOGAt December 31, 2014, the Company’s backlog was approximately $370.7 million compared with approximately $214.2 million at December 31,2013.RELATED-PARTY TRANSACTIONSInformation regarding certain relationships and related transactions is incorporated herein by reference to the information included in the Company’s2015 Proxy Statement which will be filed with the Commission within 120 days after the end of the Company’s 2014 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. Over 90% of the Company’sconsolidated sales are transacted in U.S. dollars.Net assets held in or measured in Canadian dollars amounted to $7.6 million at December 31, 2014. Annual disbursements transacted in Canadiandollars were approximately $13.3 million in 2014. A 10% change in the value of the U.S. dollar versus the Canadian dollar would have had an insignificantimpact to 2014 net income; however it could be significant in the future.Net assets held in or measured in Euros amounted to $30.4 million at December 31, 2014. Disbursements transacted in Euros in 2014 wereapproximately $48.1 million. A 10% change in the value of the U.S. dollar versus the Euros would have had an insignificant impact to 2014 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 $165.0 million atDecember 31, 2014. A change of 1% in interest rates of all variable rate debt would impact annual net income by approximately $1.1 million. 26Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders of Astronics CorporationWe have audited the accompanying consolidated balance sheets of Astronics Corporation as of December 31, 2014 and 2013, 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, 2014. 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 Corporationat December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2014, 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, 2014, 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 February 27, 2015 expressed an unqualified opinion thereon./s/ Ernst & Young LLPBuffalo, New YorkFebruary 27, 2015 27Table 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, 2014 based uponthe framework in Internal Control – Integrated Framework originally issued in 1992 by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of December 31,2014.We completed an acquisition in 2014, which was excluded from our management’s report on internal control over financial reporting as ofDecember 31, 2014. We acquired Astronics Test Systems, Inc. on February 28, 2014. This acquisition was included in our 2014 consolidated financialstatements and constituted $60.4 million and $11.7 million of total and net assets, respectively, as of December 31, 2014 and $159.2 million and$6.8 million of sales and net income, 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. GundermannFebruary 27, 2015Peter J. GundermannPresident & Chief Executive Officer(Principal Executive Officer)/s/ David C. BurneyFebruary 27, 2015David C. BurneyExecutive Vice President and Chief Financial Officer(Principal Financial Officer) 28Table 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, 2014, 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). AstronicsCorporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal 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 reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the 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 Astronics Test Systems, Inc. acquired on February 28, 2014,which is included in the 2014 consolidated financial statements of Astronics Corporation and constituted $60.4 million and $11.7 million of total and netassets, respectively, as of December 31, 2014 and $159.2 million and $6.8 million of sales and net income, respectively, for the year then ended. Our audit ofinternal control over financial reporting of Astronics Corporation also did not include an evaluation of the internal control over financial reporting ofAstronics Test Systems, Inc.In our opinion, Astronics Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, basedon the 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, 2014 and 2013 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, 2014 of Astronics Corporation and our report dated February 27, 2015expressed an unqualified opinion thereon./s/ Ernst & Young LLPBuffalo, New YorkFebruary 27, 2015 29Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In thousands, except per share data) 2014 2013 2012 Sales $661,039 $339,937 $266,446 Cost of Products Sold 493,997 252,079 197,004 Gross Profit 167,042 87,858 69,442 Selling, General and Administrative Expenses 79,680 45,553 36,817 Income from Operations 87,362 42,305 32,625 Interest Expense, Net of Interest Income 8,255 4,094 1,042 Income Before Income Taxes 79,107 38,211 31,583 Provision for Income Taxes 22,937 10,945 9,709 Net Income$56,170 $27,266 $21,874 Basic Earnings Per Share$2.59 $1.30 $1.06 Diluted Earnings Per Share$2.48 $1.24 $1.00 See notes to consolidated financial statements. 30Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (In thousands) 2014 2013 2012 Net Income $56,170 $27,266 $21,874 Other Comprehensive (Loss) Income: Foreign Currency Translation Adjustments (4,638) (131) 183 Mark to Market Adjustments for Derivatives – Net of Tax 69 73 114 Retirement Liability Adjustment – Net of Tax (3,769) 1,230 (4,194) Other Comprehensive (Loss) Income (8,338) 1,172 (3,897) Comprehensive Income$47,832 $28,438 $17,977 See notes to consolidated financial statements. 31Table of ContentsASTRONICS CORPORATIONCONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share and per share data) 2014 2013 ASSETS Current Assets: Cash and Cash Equivalents $21,197 $54,635 Accounts Receivable, Net of Allowance for Doubtful Accounts 88,888 60,942 Inventories 115,053 85,269 Prepaid Expenses and Other Current Assets 12,918 5,061 Deferred Income Taxes 7,762 5,291 Total Current Assets 245,818 211,198 Property, Plant and Equipment, at Cost:Land 10,008 6,742 Buildings and Improvements 74,755 45,551 Machinery and Equipment 73,062 54,369 Construction in Progress 4,757 1,527 162,582 108,189 Less Accumulated Depreciation 46,266 37,289 Net Property, Plant and Equipment 116,316 70,900 Other Assets 5,632 5,474 Intangible Assets, Net of Accumulated Amortization 94,991 102,701 Goodwill 100,153 100,998 Total Assets$562,910 $491,271 LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:Current Maturities of Long-term Debt$2,796 $12,279 Accounts Payable 27,903 25,255 Accrued Payroll and Employee Benefits 18,145 16,214 Accrued Income Taxes 1,900 1,318 Other Accrued Expenses 13,420 8,454 Customer Advanced Payments and Deferred Revenue 44,661 20,747 Billings in Excess of Recoverable Costs and Accrued Profits on Uncompleted Contracts 391 — Deferred Income Taxes — 970 Total Current Liabilities 109,216 85,237 Long-term Debt 180,212 188,041 Supplemental Retirement Plan and Other Liabilities for Pension Benefits 21,577 14,550 Other Liabilities 2,789 7,704 Deferred Income Taxes 20,939 24,230 Total Liabilities 334,733 319,762 Shareholders’ Equity:Common Stock, $.01 par value, Authorized 40,000,000 Shares 16,608,140 Shares Issued and Outstanding at December 31, 201413,268,299 Shares Issued and Outstanding at December 31, 2013 166 133 Convertible Class B Stock, $.01 par value, Authorized 10,000,000 Shares 5,322,160 Shares Issued and Outstanding atDecember 31, 2014 8,161,839 Shares Issued and Outstanding at December 31, 2013 53 81 Additional Paid-in Capital 49,659 40,791 Accumulated Other Comprehensive Loss (11,949) (3,611) Retained Earnings 190,248 134,115 Total Shareholders’ Equity 228,177 171,509 Total Liabilities and Shareholders’ Equity$562,910 $491,271 See notes to consolidated financial statements. 32Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2014 2013 2012 Cash Flows from Operating Activities Net Income $56,170 $27,266 $21,874 Adjustments to Reconcile Net Income to Cash Provided By Operating Activities, Excluding the Effects ofAcquisitions: Depreciation and Amortization 27,254 11,059 6,905 Provision for Non-Cash Losses on Inventory and Receivables 1,959 216 1,632 Stock Compensation Expense 1,730 1,384 1,351 Deferred Tax Benefit (4,677) (722) (1,544) Non-cash Adjustment to Contingent Consideration (4,971) (39) 9 Other 268 (578) 154 Cash Flows from Changes in Operating Assets and Liabilities, net of the Effects from Acquisitions ofBusinesses: Accounts Receivable (18,850) 3,493 (8,097) Inventories 25,732 (5,222) (9,330) Prepaid Expenses (2,806) 380 335 Accounts Payable (8,005) 5,831 (537) Accrued Expenses 6,826 3,559 3,365 Income Taxes Payable (4,084) 2,271 669 Customer Advanced Payments and Deferred Revenue 21,664 (359) 6,490 Billings in Excess of Recoverable Costs and Accrued Profits on Uncompleted Contracts 391 (188) (76) Supplemental Retirement Plan and Other Liabilities 1,273 1,198 978 Cash Provided By Operating Activities 99,874 49,549 24,178 Cash Flows from Investing ActivitiesAcquisition of Business, Net of Cash Acquired (68,201) (159,761) (10,659) Payment of Contingent Consideration (37) (81) — Capital Expenditures (40,882) (6,868) (16,720) Cash Used For Investing Activities (109,120) (166,710) (27,379) Cash Flows from Financing ActivitiesProceeds From Long-term Debt 245,894 190,000 — Principal Payments on Long-term Debt (275,544) (19,498) (10,307) Proceeds from Note Payable — — 10,000 Payments on Note Payable — (7,000) (3,000) Debt Acquisition Costs (573) (2,288) — Proceeds from Exercise of Stock Options 1,848 1,922 1,714 Income Tax Benefit from Exercise of Stock Options 5,262 1,198 1,252 Cash (Used For) Provided By Financing Activities (23,113) 164,334 (341) Effect of Exchange Rates on Cash (1,079) 82 3 (Decrease) Increase in Cash and Cash Equivalents (33,438) 47,255 (3,539) Cash and Cash Equivalents at Beginning of Year 54,635 7,380 10,919 Cash and Cash Equivalents at End of Year$21,197 $54,635 $7,380 Supplemental Cash Flow Information:Interest Paid$7,816 $3,543 $1,068 Income Taxes Paid, Net of Refunds$26,619 $8,025 $9,330 Value of Shares Issued as Consideration for Acquisition$— $13,473 $— See notes to consolidated financial statements. 33Table of ContentsASTRONICS CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Year Ended December 31, ($ In thousands) 2014 2013 2012 Common Stock Beginning of Year $133 $109 $97 Issuance of Common Shares as Consideration for Acquisition — 3 Exercise of Stock Options and Stock Compensation Expense – Net of Taxes 2 1 2 Retirement of Treasury Stock — — (2) Class B Stock Converted to Common Stock 31 20 12 End of Year$166 $133 $109 Convertible Class B StockBeginning of Year$81 $100 $115 Exercise of Stock Options and Stock Compensation Expense – Net of Taxes 3 1 — Retirement of Treasury Stock — — (3) Class B Stock Converted to Common Stock (31) (20) (12) End of Year$53 $81 $100 Treasury StockBeginning of Year$— $— $(2,281) Retirement of Treasury Shares — — 2,281 End of Year$— $— $— Additional Paid in CapitalBeginning of Year$40,791 $22,819 $19,196 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 8,868 4,502 4,316 End of Year$49,659 $40,791 $22,819 Accumulated Comprehensive LossBeginning of Year$(3,611) $(4,783) $(886) Foreign Currency Translation Adjustments (4,638) (131) 183 Mark to Market Adjustments for Derivatives – Net of Taxes 69 73 114 Retirement Liability Adjustment – Net of Taxes (3,769) 1,230 (4,194) End of Year$(11,949) $(3,611) $(4,783) Retained EarningsBeginning of Year$134,115 $106,889 $86,622 Net income 56,170 27,266 21,874 Retirement of Treasury Stock — — (1,583) Cash Paid in Lieu of Fractional Shares from Stock Distribution (37) (40) (24) End of Year$190,248 $134,115 $106,889 Total Shareholders’ Equity$228,177 $171,509 $125,134 Common StockBeginning of Year 13,268 10,865 9,681 Issuance of Common Shares as Consideration for Acquisition — 264 — Exercise of Stock Options 216 145 194 Retirement of Treasury Shares — — (179) Class B Stock Converted to Common Stock 3,124 1,994 1,169 End of Year 16,608 13,268 10,865 Convertible Class B StockBeginning of Year 8,162 10,060 11,543 Exercise of Stock Options 284 96 35 Retirement of Treasury Shares — — (349) Class B Stock Converted to Common Stock (3,124) (1,994) (1,169) End of Year 5,322 8,162 10,060 Treasury StockBeginning of Year — — 528 Retirement of Treasury Shares — — (528) End of Year — — — See notes to consolidated financial statements 34Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICESDescription of the BusinessAstronics Corporation (“Astronics” or the “Company”) is a leading supplier of products to the global aerospace, defense, consumer electronics andsemiconductor industries. Our products include advanced, high-performance electrical power generation and distribution systems, lighting and safetysystems, avionics products, aircraft structures and automatic test and simulation systems.We have operations in the United States (“U.S.”), Canada and France. We design and build our products through our wholly owned subsidiariesAstronics 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”); PGAElectronic s.a. (“PGA”); Astronics Test Systems, Inc. and Armstrong Aerospace, Inc. (“Armstrong”).On July 18, 2013, Astronics acquired all of the outstanding capital stock of Peco. Peco designs and manufactures highly engineered commercialaerospace interior components and systems for the aerospace industry. On October 1, 2013, Astronics acquired certain assets and liabilities from AeroSatCorporation and related entities, a supplier of aircraft antenna systems. On December 5, 2013, Astronics acquired 100% of the stock of PGA. PGA designs andmanufactures seat motion and lighting systems primarily for business and first class aircraft seats and is Europe’s leading provider of in-flight entertainment/communication systems as well as cabin management systems for private aircraft. Peco, AeroSat and PGA are all included in 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 is included in our TestSystems segment.At December 31, 2014, 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 January 14, 2015, the Company acquired 100% of the equity of Armstrong for approximately $52.0 million in cash. Armstrong, located in Itasca,Illinois, is a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment,and electrical power systems. Armstrong will be included in our Aerospace 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.For additional information on the acquired businesses, see Note 19.Revenue and Expense RecognitionThe vast majority of our sales agreements are for standard products and services, with revenue recognized on the accrual basis at the time of shipmentof goods, transfer of title and customer acceptance, where required. There are no significant contracts allowing for right of return. To a limited extent, as aresult of the acquisition of ATS, certain of our contracts involve multiple elements (such as equipment and service). The Company recognizes revenue fordelivered elements when they have stand-alone value to the customer, they have been accepted by the customer, and for which there are only customaryrefund or return rights. Arrangement consideration is allocated to the deliverables by use of the relative selling price method. The selling price used for eachdeliverable is based on vendor-specific objective evidence (“VSOE”) if available, third party-evidence (“TPE”) if VSOE is not available, or estimated sellingprice if neither VSOE nor TPE is available. Estimated selling price is determined in a manner consistent with that used to establish the price to sell thedeliverable on a standalone basis. - 35 -Table of ContentsFor prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates thecosts are incurred on other than a straight-line basis.Revenue of approximately $2.7 million, $4.4 million and $4.2 million for the years ended December 31, 2014, 2013 and 2012, respectively, wasrecognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting.Cost 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 $76.7 million in 2014, $52.8 million in 2013 and$44.9 million in 2012. Selling, general and administrative (“SG&A”) expenses include costs primarily related to our sales, marketing and administrativedepartments.Shipping and HandlingShipping and handling costs are expensed as incurred and are included in costs of products sold.Stock DistributionOn August 21, 2014, the Company announced a one-for-five distribution of Class B Stock to holders of both Common and Class B Stock. Stockholdersreceived one share of Class B Stock for every five shares of Common and Class B Stock held on the record date of September 5, 2014. Fractional shares werepaid in cash. All share quantities, share prices and per share data reported throughout this report have been adjusted to reflect the impact of this distribution.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 tooutside directors 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% each year, from the date of grant.The tax benefits from share based payment arrangements were approximately $5.3 million in 2014, $1.2 million in 2013 and $1.3 million in 2012.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 onour knowledge of the business, specific customers, review of the receivables’ aging and a specific identification of accounts where collection is at risk.Account balances are charged against the allowance after all means of collections have been exhausted and recovery is considered remote. The Companytypically does not require collateral.InventoriesInventories are stated at the lower of cost or market, cost being determined primarily in accordance with the first-in, first-out method. The Companyrecords 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, the Company considers the age of inventory on hand, the overall inventory levels in relation to forecasted demands aswell as reserving for specifically identified inventory that the Company believes is no longer salable. - 36 -Table of ContentsProperty, Plant and EquipmentDepreciation of property, plant and equipment is computed using the straight-line method for financial reporting purposes and using acceleratedmethods for income tax purposes. Estimated useful lives of the assets are as follows: buildings, 25-40 years; machinery and equipment, 4-10 years. Leasedbuildings and associated leasehold improvements are amortized over the shorter of the terms of the lease or the estimated useful lives of the assets, with theamortization of such assets included within depreciation expense.The cost of properties sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the accounts and the resulting gainor loss, as well as maintenance and repair expenses, are reflected in income. Replacements and improvements are capitalized.Depreciation expense was approximately $10.6 million, $5.7 million and $4.4 million in 2014, 2013 and 2012, respectively.Buildings acquired under capital leases amounted to $12.7 million ($16.0 million, net of $3.3 million of accumulated amortization) and $6.4 million($8.8 million, net of $2.4 million accumulated amortization) at December 31, 2014 and 2013, respectively. Future minimum lease payments associated withthese capital leases are expected to be $1.8 million in 2015, $2.0 million in 2016, $2.2 million in 2017, $2.3 million in 2018 and $1.7 million in 2019.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 ten reporting units, however as of November 1,2014 (the annual testing date), only seven 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 projectedrevenue growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of thereporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. To determine the amount of the impairment loss, theimplied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognizedintangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwillexceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.There were no impairment charges in 2014, 2013 or 2012.Intangible AssetsAcquired intangibles are generally valued based upon future economic benefits such as earnings and cash flows. Acquired identifiable intangibleassets are 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 amounts of those assetsare below their estimated fair values.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 2014, 2013 and 2012. - 37 -Table of ContentsFinancial InstrumentsThe Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable and long-term debt. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Companydoes not hold or issue financial instruments for trading purposes. Due to their short-term nature, the carrying values of cash and equivalents, accountsreceivable, accounts payable, and notes payable approximate fair value. The carrying value of the Company’s variable rate long-term debt instruments alsoapproximates fair value due to the variable rate feature of these instruments.DerivativesThe 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 cash flow hedges for interest rate risk associated with long-term debt. All such instruments were terminated in 2014. Interest rateswaps were used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swaps were designated as hedges ofthe amount of future cash flows related to interest payments on variable-rate debt that, in combination with the interest payments on the debt, converted aportion of the variable-rate debt to fixed-rate debt. The Company records all derivatives on the balance sheet at fair value. The related gains or losses, to theextent the derivatives are effective as a hedge, are deferred in shareholders’ equity as a component of Accumulated Other Comprehensive Income (Loss)(“AOCI”) and reclassified into earnings at the time interest expense is recognized on the associated long-term debt. Any ineffectiveness is recorded in theConsolidated Statements of Operations.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts ofrevenues and expenses during 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 2014, 2013 and 2012.DividendsThe Company has not paid any cash dividends in the three-year period ended December 31, 2014. 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 liabilitiesfor probable 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 Topic 805provides 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 2014 and 2013 were approximately $0.3million and $1.9 million, respectively. Acquisition expenses were insignificant in 2012. See Note 19 regarding the acquisitions in 2014, 2013 and 2012.Newly Adopted and Recent Accounting PronouncementsOn January 1, 2014, the Company adopted the new provisions of ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized TaxBenefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires the netting of unrecognizedtax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Unrecognized taxbenefits are required to be netted against all available same-jurisdiction loss or other tax carryforwards, rather than only against carryforwards that are createdby the unrecognized tax benefits. This ASU did not have a material impact on the Company’s financial statements. - 38 -Table of ContentsIn May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard iseffective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersedeexisting revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts thatreflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect thetiming of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of thenew standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. TheCompany is currently evaluating the impacts of adoption and the implementation approach to be used.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) 2014 2013 Trade Accounts Receivable $87,575 $58,224 Long-term Contract Receivables: Amounts Billed — — Unbilled Recoverable Costs and Accrued Profits 1,606 2,858 Total Long-term Contract Receivables 1,606 2,858 Total Receivables 89,181 61,082 Less Allowance for Doubtful Accounts (293) (140) $88,888 $60,942 NOTE 3 — INVENTORIESInventories at December 31 are as follows: (In thousands) 2014 2013 Finished Goods $28,763 $21,627 Work in Progress 28,488 15,017 Raw Material 57,802 48,625 $115,053 $85,269 At December 31, 2014, the Company’s reserve for inventory valuation was $12.3 million, or 9.6% of gross inventory. At December 31, 2013, theCompany’s reserve for inventory valuation was $11.0 million, or 11.5% of gross inventory.NOTE 4 — INTANGIBLE ASSETSThe following table summarizes acquired intangible assets as follows: December 31, 2014 December 31, 2013 (In thousands) WeightedAverage Life Gross CarryingAmount AccumulatedAmortization Gross CarryingAmount AccumulatedAmortization Patents 6 Years $2,146 $1,077 $2,146 $891 Trade Names 9 Years 8,304 1,288 7,453 552 Completed and Unpatented Technology 7 Years 18,107 4,396 15,377 2,620 Backlog and Customer Relationships 12 Years 93,448 20,253 88,998 7,210 Total Intangible Assets9 Years$122,005 $27,014 $113,974 $11,273 Amortization is computed on the straight-line method for financial reporting purposes, with the exception of backlog. Amortization expense forintangibles was $15.8 million, $4.9 million and $2.3 million for 2014, 2013 and 2012, respectively. - 39 -Table of ContentsBased upon acquired intangible assets at December 31, 2014, amortization expense for each of the next five years is estimated to be: (In thousands) 2015 $9,148 2016 $8,691 2017 $8,273 2018 $7,960 2019 $7,559 NOTE 5 — GOODWILLThe following table summarizes the changes in the carrying amount of goodwill for 2014 and 2013: (In thousands) 2014 2013 Balance at Beginning of the Year $100,998 $21,923 Acquisition — 79,155 Foreign Currency Translations and Other (845) (80) Balance at End of the Year$100,153 $100,998 Goodwill$116,695 $117,540 Accumulated Impairment Losses (16,542) (16,542) Goodwill - Net$100,153 $100,998 As discussed in Note 1, goodwill is not amortized but is periodically tested for impairment. For the seven reporting units with goodwill at November 1,2014, 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. There was no impairment to the carrying value of goodwill in 2013or 2012. All goodwill relates to the Aerospace segment; the acquisition of ATS did not result in the recognition of goodwill.NOTE 6 — LONG-TERM DEBT AND NOTES PAYABLELong-term debt consists of the following: (In thousands) 2014 2013 Revolving Credit Line issued under the Fourth Amended and Restated Credit Agreementdated September 26, 2014. Interest is at LIBOR plus between 1.375 and 2.25% (1.67%at December 31, 2014). $165,000 $— Senior Term Note issued under the Third Amended and Restated Credit Agreement datedJuly 18, 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. The entireamount was paid off in November 2014. — 4,720 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. The entire amount was paid off inNovember 2014. — 1,545 Series 1998 Industrial Revenue Bonds issued through the Business Finance Authority ofthe State of New Hampshire payable $400,000 annually through 2018 with interestreset weekly. The entire amount was paid off in November 2014. — 2,050 Other Bank Debt 3,102 2,936 Capital Lease Obligations 14,906 3,819 183,008 200,320 Less Current Maturities 2,796 12,279 $180,212 $188,041 - 40 -Table of ContentsPrincipal maturities of long-term debt are approximately: (In thousands) 2015 $2,796 2016 2,725 2017 2,829 2018 2,808 2019 166,874 Thereafter 4,976 $183,008 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, to the SecondAmended and Restated Credit Agreement, which provided for an increase in the Company’s revolving credit facility from $35 million to $75 million and foran extension of the maturity date. Interest remained at a rate of LIBOR plus between 1.50% and 2.50% based on the Company’s leverage ratio under theCredit Agreement.On 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, which continued to provide for a $75 million five-year revolving credit facility and a new $190million five-year term loan, both expiring on June 30, 2018. The amended facilities carried an interest rate ranging from 225 basis points to 350 basis pointsabove LIBOR, depending on the Company’s leverage ratio as defined in the Credit Agreement. Variable principal payments on the term loan were requiredquarterly through March 31, 2018 with a balloon payment at maturity. In addition, the Company was required to pay a commitment fee 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 under the CreditAgreement.In connection with the funding of the acquisition of ATS, the Company amended its existing credit facility to exercise its option to increase therevolving credit commitment. The credit agreement provided for a $125 million, five-year revolving credit facility maturing on June 30, 2018, of which$58.0 million was drawn to finance the acquisition. In addition, the Company was required to pay a commitment fee quarterly at a rate of between 0.25% and0.50% per annum on the unused portion of the total revolving credit commitment, based on the Company’s leverage ratio.On September 26, 2014, the Company modified and extended its existing credit facility (the “Original Facility”) by entering into the Fourth Amendedand Restated Credit Agreement (the “Agreement”). On the closing date, there were $180.5 million of term loans outstanding and $6 million of revolvingloans outstanding under the Original Facility. Pursuant to the Agreement, the Original Facility was replaced with a $350 million revolving credit line withthe option to increase the line by up to $150 million. The outstanding balances in the Original Facility were rolled into the Agreement on the date of entry. Inaddition, the maturity date of the loans under the Agreement is now September 26, 2019. The credit facility allocates up to $20 million of the $350 millionrevolving credit line for the issuance of letters of credit, including certain existing letters of credit. At December 31, 2014, outstanding letters of credit totaled$1.1 million.Covenants in the Agreement have been modified to where the maximum permitted leverage ratio of funded debt to Adjusted EBITDA (as defined in theAgreement) is 3.5 to 1, increasing to 4.0 to 1 for up to two fiscal quarters following the closing of an acquisition permitted under the Agreement. TheCompany will pay interest on the unpaid principal amount of the facility at a rate equal to one-, three- or six-month LIBOR plus between 137.5 basis pointsand 225 basis points based upon the Company’s leverage ratio. The Company will also pay a commitment fee to the Lenders in an amount equal to between17.5 basis points and 35 basis points on the undrawn portion of the credit facility, based upon the Company’s leverage ratio. The fixed charge coverage ratiounder the Original Facility has been replaced with a minimum interest coverage ratio (Adjusted EBITDA to interest expense) of 3.0 to 1 for the term of theAgreement. The Company’s interest coverage ratio was 18.7 to 1 at December 31, 2014. The Company’s leverage ratio was 1.28 to 1 at December 31, 2014.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. - 41 -Table of ContentsThe Industrial Revenue Bonds were held by institutional investors and were guaranteed by a bank letter of credit, which was collateralized by certainproperty, plant and equipment assets, the carrying value of which approximated the principal balance on the bonds. In September 2014, the Companydirected the optional redemption in whole of its Industrial Revenue Bonds, pursuant to which all of the principal and interest due was paid and all letters ofcredit in support of the obligations were cancelled prior to December 31, 2014.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) 2014 2013 2012 Balance at Beginning of the Year $2,796 $2,551 $1,092 Warranty Liabilities Acquired 564 671 — Warranties Issued 3,431 722 2,430 Reassessed Warranty Exposure (34) (222) — Warranties Settled (1,873) (926) (971) Balance at End of the Year$4,884 $2,796 $2,551 NOTE 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.ASC Topic 740-10, Overall - Uncertainty in Income Taxes (“ASC Topic 740-10”), clarifies the accounting and disclosure for uncertainty in taxpositions. ASC Topic 740-10 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related toaccounting for income taxes. The Company is subject to the provisions of ASC Topic 740-10 and has analyzed filing positions in all of the federal and statejurisdictions 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 liabilityfor uncertain tax benefits, any interest associated with that liability will be recorded as interest expense. Penalties, if any, would be recognized as operatingexpenses.The provision (benefit) for income taxes consists of the following: (In thousands) 2014 2013 2012 Current U.S. Federal $22,705 $10,904 $11,173 State 3,797 682 78 Foreign 1,112 81 2 Deferred (4,677) (722) (1,544) $22,937 $10,945 $9,709 The effective tax rates differ from the statutory federal income tax rate as follows: 2014 2013 2012 Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% Permanent Items Non-deductible Stock Compensation Expense 0.6% 1.0% 1.1% Domestic Production Activity Deduction (2.6)% (3.0)% (3.0)% Non-deductible Acquisition Costs — % 1.0% — % Other 0.1% — % 0.1% Foreign Tax Benefits (1.7)% (0.3)% (1.2)% State Income Tax (Benefits), Net of Federal Income Tax Effect 2.6% (0.1)% (0.1)% Research and Development Tax Credits (4.3)% (5.0)% (1.1)% Other (0.7)% — % (0.1)% Effective Tax Rate 29.0% 28.6% 30.7% - 42 -Table of ContentsDeferred 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 ($8.0 million atDecember 31, 2014) considered to be permanently reinvested. It is not practicable to determine the amount of tax that would be payable if these amountswere repatriated to the U.S.Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows: (In thousands) 2014 2013 Deferred Tax Assets: Goodwill and Intangible Assets $2,470 $3,367 Asset Reserves 4,497 5,780 Deferred Compensation 8,895 6,564 Capital Lease Basis Difference 1,935 — State Investment Tax Credit Carryforwards, Net of Federal Tax 1,028 665 Customer Advanced Payments and Deferred Revenue 1,795 956 State Net Operating Loss Carryforwards and Other 2,853 2,639 Total Gross Deferred Tax Assets 23,473 19,971 Valuation Allowance for State and Foreign Deferred Tax Assets and Tax CreditCarryforwards, Net of Federal Tax (3,134) (2,509) Deferred Tax Assets 20,339 17,462 Deferred Tax Liabilities:Depreciation 8,586 7,164 Intangible Assets 23,693 27,742 Other 1,237 2,465 Deferred Tax Liabilities 33,516 37,371 Net Deferred Tax Liabilities$(13,177) $(19,909) The net deferred tax assets and liabilities presented in the Consolidated Balance Sheets are as follows at December 31: (In thousands) 2014 2013 Deferred Tax Asset — Current $7,762 $5,291 Deferred Tax Liabilities — Current — (970) Deferred Tax Liabilities — Long-term (20,939) (24,230) Net Deferred Tax Liabilities$(13,177) $(19,909) At December 31, 2014, state and foreign tax credit carryforwards amounted to approximately $1.4 million. These state and foreign tax creditcarryforwards will expire from 2015 through 2029.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 theCompany’s state operating loss carryforwards before they expire, the Company has recorded a valuation allowance accordingly. These state net operatingloss carryforwards amount to approximately $23.3 million and expire at various dates from 2028 through 2034. The excess tax benefits associated with stockoption exercises are recorded directly to shareholders’ equity only when realized and amounted to approximately $5.3 million and $1.2 million for the yearsended December 31, 2014 and 2013, 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 2015 to the reserves cannot be made as ofDecember 31, 2014. A reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties which are insignificant, is as follows: (in thousands) 2014 2013 2012 Balance at Beginning of the Year $1,940 $840 $880 Increases (Decreases) as a Result of Tax Positions Taken in Prior Years (1,901) 145 (220) Increases as a Result of Tax Positions Taken in the Current Year 142 955 180 Balance at End of the Year$181 $1,940 $840 - 43 -Table of ContentsThere are no penalties or interest liabilities accrued as of December 31, 2014 or 2013, nor are any penalties or interest costs included in expense foreach of the years ended December 31, 2014, 2013 and 2012. The years under which we conducted our evaluation coincided with the tax years currently stillsubject to examination by major federal and state tax jurisdictions, those being 2012 through 2014 for federal purposes and 2011 through 2014 for statepurposes.Pretax income from the Company’s foreign subsidiaries amounted to $4.3 million, $0.2 million and $1.0 million for 2014, 2013 and 2012,respectively. The balance of pretax earnings for each of those years were domestic.In January 2013, the American Taxpayer Relief Act of 2012 extended the research and development tax credits for the year ended December 31, 2012.As the 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 endedDecember 31, 2012. The Company recognized a total benefit of $1.1 million in 2013 related to the 2012 credit.NOTE 9 — PROFIT SHARING/401(k) PLANThe Company offers eligible domestic full-time employees participation in certain profit sharing/401(k) plans. The plans provide for annualcontributions based on percentages of pretax income. In addition, employees may contribute a portion of their salary to the plans which is partially matchedby the Company. The plans may be amended or terminated at any time.Total charges to income before income taxes for these plans were approximately $5.1 million, $3.7 million and $3.0 million in 2014, 2013 and 2012,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. The accumulated benefit obligation of the plans as of December 31, 2014 and 2013 amounts to $16.5 million and $10.1 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, 2014or 2013 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 itspension plans in accordance with the recognition and disclosure provisions of ASC Topic 715, Compensation, Retirement Benefits (“ASC Topic 715”),which requires 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 $3.1 million ($4.8 million net of $1.7 million in taxes) and unrecognized actuarial losses of $5.1 million ($7.8million net of $2.7 million in taxes) are included in AOCI at December 31, 2014 and have not yet been recognized in net periodic pension cost. The priorservice cost included in AOCI that is expected to be recognized in net periodic pension cost during the fiscal year-ended December 31, 2015 is $0.3 million($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 fiscal year-ended December 31, 2015 is $0.3 million ($0.5 million net of $0.2 million in taxes). - 44 -Table of ContentsThe 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) 2014 2013 Funded Status Projected Benefit Obligation Beginning of the Year — January 1 $14,314 $15,042 Service Cost 247 295 Interest Cost 721 624 Actuarial (Gain) Loss 6,056 (1,299) Benefits Paid (348) (348) End of the Year — December 31$20,990 $14,314 The increase in the 2014 projected benefit obligation is due primarily to the implementation of an updated mortality table and a decrease in thediscount rate.The assumptions used to calculate the projected benefit obligation as of December 31 are as follows: 2014 2013 Discount Rate 4.05% 5.10% Future Average Compensation Increases 5.00% 5.00% The plans are unfunded at December 31, 2014 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 $20.7 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) 2014 2013 2012 Net Periodic Cost Service Cost — Benefits Earned During Period $247 $295 $303 Interest Cost 721 624 548 Amortization of Prior Service Cost 495 495 426 Amortization of Losses 108 128 91 Net Periodic Cost$1,571 $1,542 $1,368 The assumptions used to determine the net periodic cost are as follows: 2014 2013 2012 Discount Rate 5.10% 4.20% 4.50% 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 $1.8 million in the aggregate for the next five yearsafter that. 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 datefor determining 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) 2014 2013 Funded Status Accumulated Postretirement Benefit Obligation Beginning of the Year — January 1 $630 $593 Service Cost 3 3 Interest Cost 31 24 Actuarial Loss 373 55 Benefits Paid (47) (45) End of the Year — December 31$990 $630 - 45 -Table of ContentsThe assumptions used to calculate the accumulated postretirement benefit obligation as of December 31 are as follows: 2014 2013 Discount Rate 4.05% 5.10% The following table summarizes the components of the net periodic cost for the years ended December 31: (In thousands) 2014 2013 2012 Net Periodic Cost Service Cost — Benefits Earned During Period $3 $3 $2 Interest Cost 31 24 24 Amortization of Prior Service Cost 25 25 26 Amortization of (Gains) Losses — — — Net Periodic Cost$59 $52 $52 The assumptions used to determine the net periodic cost are as follows: 2014 2013 2012 Discount Rate 5.10% 4.20% 4.50% Future Average Healthcare Benefit Increases 5.48% 5.76% 6.00% Unrecognized prior service costs of $0.1 million and unrecognized actuarial losses of $0.3 million for medical, dental and long-term care insurancebenefits (net of taxes of $0.2 million) are included in AOCI at December 31, 2014 and have not been recognized in net periodic cost. The Company estimatesthat the prior service costs and net losses in AOCI as of December 31, 2014 that will be recognized as components of net periodic benefit cost during the yearended December 31, 2014 for the Plan will be insignificant. For measurement purposes, a 5.6% and 6.1% increase in the cost of health care benefits wasassumed for 2015 and 2016, respectively, and a range between 3.8% and 6.6% from 2017 through 2060. A one percentage point increase or decrease in thisrate would change the post retirement benefit obligation by approximately $0.1 million. The plan is recognized in the accompanying Consolidated BalanceSheets as a current accrued pension liability of $0.1 million and a long-term accrued pension liability of $0.9 million. The Company expects the benefits tobe paid in each of the next five years to be less than $0.1 million per year and approximately $0.3 million in the aggregate for the next 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 toemployees based on years of service to the Company. Contributions are based on the hours worked and are expensed on a current basis. The Plan is 90.7%funded as of January 1, 2014. The Company’s contributions to the plan were $0.9 million in 2014 and $0.3 million in 2013 for the post-acquisition period.These contributions represent less than 1% of total contributions to the plan. There was no participation in multiemployer plans prior to 2013.NOTE 11 — SHAREHOLDERS’ EQUITYReserved Common StockAt December 31, 2014, approximately 8.7 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 other than via gift, devise or bequest and cannot receivedividends unless an equal or greater amount 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 aregenerally recorded based on an effective tax rate of approximately 35%. No income tax effect is recorded for currency translation adjustments. - 46 -Table of ContentsThe components of accumulated other comprehensive income (loss) are as follows: (In thousands) 2014 2013 Foreign Currency Translation Adjustments $(3,354) $1,284 Mark to Market Adjustments for Derivatives – Before Tax — (107) Tax Benefit — 38 Mark to Market Adjustments for Derivatives – After Tax — (69) Retirement Liability Adjustment – Before Tax (13,223) (7,423) Tax Benefit 4,628 2,597 Retirement Liability Adjustment – After Tax (8,595) (4,826) Accumulated Other Comprehensive Loss$(11,949) $(3,611) The components of other comprehensive income (loss) are as follows: (In thousands) 2014 2013 2012 Foreign Currency Translation Adjustments $(4,638) $(131) $183 Reclassification to Interest Expense 103 109 209 Mark to Market Adjustments for Derivatives 4 2 (34) Tax Expense (38) (38) (61) Mark to Market Adjustments for Derivatives 69 73 114 Retirement Liability Adjustment (5,800) 1,893 (6,451) Tax Benefit (Expense) 2,031 (663) 2,257 Retirement Liability Adjustment (3,769) 1,230 (4,194) Other Comprehensive (Loss) Income$(8,338) $1,172 $(3,897) NOTE 12 — EARNINGS PER SHAREEarnings per share computations are based upon the following table: 2014 2013 2012 (In thousands, except per share data) Net Income $56,170 $27,266 $21,874 Basic Earnings Weighted Average Shares 21,713 20,981 20,572 Net Effect of Dilutive Stock Options 949 1,050 1,217 Diluted Earnings Weighted Average Shares 22,662 22,031 21,789 Basic Earnings Per Share$2.59 $1.30 $1.06 Diluted Earnings Per Share$2.48 $1.24 $1.00 The above information has been adjusted to reflect the impact of the one-for-five distribution of Class B Stock for shareholders of record onSeptember 5, 2014.Stock options with exercise prices greater than the average market price of the underlying common shares are excluded from the computation ofdiluted earnings per share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common shares coveredby out-of-the-money stock options were insignificant at December 31, 2014 and 2013 and 0.2 million for the year ended December 31, 2012. - 47 -Table of ContentsNOTE 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. Stockoption grants are designed to reward long-term contributions to the Company and provide incentives for recipients to remain with the Company. The exerciseprice, 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. Optionsbecome 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 ultimatelyexpected to vest during the period. Vesting requirements vary for directors, officers and key employees. In general, options granted to outside directors vestsix months from 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. 2014 2013 2012 Weighted Average Fair Value of the Options Granted $25.59 $19.35 $8.28 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: 2014 2013 2012Risk-free Interest Rate 0.12% – 2.30% 0.88% – 2.22% 0.89% – 1.00%Dividend Yield 0.0% 0.0% 0.0%Volatility Factor 0.42 – 0.52 0.51 – 0.56 0.52 – 0.64Expected Life in Years 4.0 – 8.0 5.0 – 8.0 5.0 – 8.0To 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’shistory and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractualterms.The following table provides compensation expense information based on the fair value of stock options for the years ended December 31, 2014, 2013and 2012: (In thousands) 2014 2013 2012 Stock Compensation Expense $1,730 $1,384 $1,351 Tax Benefit (122) (112) (136) Stock Compensation Expense, Net of Tax$1,608 $1,272 $1,215 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) 2014 2013 2012 Options WeightedAverageExercisePrice AggregateIntrinsicValue Options WeightedAverageExercisePrice AggregateIntrinsicValue Options WeightedAverageExercisePrice AggregateIntrinsicValue Outstanding at January 1 1,691,734 $8.70 $78,846 1,825,532 $6.86 $65,072 1,993,736 $5.59 $20,532 Options Granted 73,830 $48.45 $506 83,664 $35.56 $581 156,600 $15.07 $129 Options Exercised (487,001) $4.80 $(24,599) (217,462) $3.54 $(8,472) (324,804) $3.06 $(4,168) Options Forfeited (3,577) $15.13 $(144) — $— $— — $— $— Outstanding at December 31 1,274,986 $12.48 $54,609 1,691,734 $8.70 $57,181 1,825,532 $6.86 $16,493 Exercisable at December 31 1,037,137 $8.71 $48,331 1,379,438 $6.51 $49,648 1,402,154 $5.60 $14,431 The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stockprice of Common Stock which would have been received by the option holders had all option holders exercised their options as of that date. The Company’sclosing stock price of Common Stock was $55.31, $42.50 and $15.89 as of December 31, 2014, 2013 and 2012, respectively. - 48 -Table of ContentsThe weighted average fair value of options vested during 2014, 2013 and 2012 was $8.11, $5.17 and $5.15, respectively. The total fair value ofoptions that vested during the year amounted to $1.2 million, $1.0 million and $1.0 million for the years ended December 31, 2014, 2013 and 2012,respectively. At December 31, 2014, total compensation costs related to non-vested awards not yet recognized amounts to $4.4 million and will berecognized over 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 31,2014: Outstanding Exercisable Exercise Price Range Shares Weighted AverageRemaining Lifein Years Weighted AverageExercise Price Shares Weighted AverageRemaining Lifein Years WeightedAverageExercise Price $ 2.23 - $ 2.88 53,022 0.1 $2.87 53,022 0.1 $2.87 $ 4.03 - $ 5.89 566,855 3.9 4.41 566,855 3.9 4.41 $ 7.63 - $ 8.39 113,057 2.2 7.76 113,057 2.2 7.76 $11.68 - $20.73 406,602 6.6 15.40 279,879 6.2 15.52 $34.50 - $54.47 135,450 9.4 45.17 24,324 9.0 47.76 1,274,986 5.1 12.48 1,037,137 4.3 8.71 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 afive-year period. The exercise price for the options is equal to the share price at the date of grant. At December 31, 2014, the Company had optionsoutstanding for 1,061,202 shares under the plans. At December 31, 2014, there were 575,989 options available for future grant under the plan established in2011.The 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, 2014, the Company had optionsoutstanding for 213,784 shares under the plans. At December 31, 2014, there were 162,666 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 havebeen withheld from the employees’ pay during the year to pay for all the shares that the employee opted for under the program. At December 31, 2014,employees had subscribed to purchase 69,195 shares at $39.22 per share. The weighted average fair value of the options was approximately $11.11, $7.76and $4.16 for options granted during the year ended December 31, 2014, 2013 and 2012, 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: 2014 2013 2012 Risk-free Interest Rate 0.10% 0.10% 0.17% Dividend Yield 0.0% 0.0% 0.0% Volatility Factor .42 .37 .37 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 value andexpands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements.The statement indicates, among other things, that a fair value - 49 -Table of Contentsmeasurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of aprincipal market, the most advantageous market for the asset or liability. ASC Topic 820 defines fair value based upon an exit price model. The Company’sassessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and involves consideration of factorsspecific 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 theinputs into three broad levels as follows:Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, eitherdirectly or indirectly through market corroboration, for substantially the full term of the financial instrument.Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.On a Recurring Basis:A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair valuemeasurement. The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2014 andDecember 31, 2013: (In thousands) Classification Total Level 1 Level 2 Level 3 Interest Rate Swaps Other Liabilities December 31, 2014 $— $— $— $— December 31, 2013 $(108) $— $(108) $— Acquisition Contingent Consideration December 31, 2014 Current Liabilities $— $— $— $— December 31, 2013 $(137) $— $— $(137) December 31, 2014 Other Liabilities $(1,651) $— $— $(1,651) December 31, 2013 $(5,709) $— $— $(5,709) Interest rate swaps are securities with no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are 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$5.5 million if certain revenue growth targets are met over the next five years and the 2013 AeroSat acquisition, to be paid up to a maximum of $53.0 millionif certain revenue growth targets are met over the next two years.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 haveno observable Level 1 or Level 2 inputs. The change in the balance of contingent consideration during fiscal 2014 was primarily due to accretion of $0.9million, which was offset by fair value adjustments of $5.0 million, resulting from the re-evaluation of the probability of the achievement of the contingentconsideration targets. This adjustment was recorded within SG&A expenses in the Consolidated Statement of Operations.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 observableinputs for assets of a similar nature. The Company utilizes a discounted cash flow method to estimate the fair value of reporting units utilizing unobservableinputs. The fair value measurement of the reporting unit under the step-one and step-two analysis of the quantitative goodwill impairment test are classifiedas Level 3 inputs. There were no impairment charges to goodwill in any of the Company’s reporting units in 2014, 2013 or 2012.Intangible assets that are amortized are evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carryingvalue may not be recoverable. The recoverability test consists of comparing the undiscounted projected cash flows with the carrying amount. Should thecarrying amount exceed undiscounted projected cash flows, an impairment loss would be recognized to the extent the carrying amount exceeds fair value.There were no impairment charges to any of the Company’s intangible assets in either of the Company’s segments in 2014, 2013, or 2012. - 50 -Table of ContentsAt December 31, 2014, the fair value of goodwill and intangible assets classified using Level 3 inputs are as follows: • The Peco, AeroSat and PGA goodwill and intangible assets acquired in 2013 were valued at fair value using a discounted cash flow methodologyand are classified as Level 3 inputs. • The ATS intangible assets acquired on February 28, 2014 were valued using a discounted cash flow methodology and are classified as Level 3inputs.Due to their short-term nature, the carrying value of cash and equivalents, accounts receivable, accounts payable, and notes payable approximate fairvalue. 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.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, relatedto the Company’s Series 1999 New York Industrial Revenue Bond, which effectively fixed the rate at 3.99% plus a spread based on the Company’s leverageratio on this obligation through February 1, 2016. In November 2014, the Company terminated the interest rate swap in connection with the redemption ofthe underlying Series 1999 New York Industrial Revenue Bonds (See Note 6 - Long-term Debt and Notes Payable).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, the fair value of the interest rate swap was a liability of $0.1 million, which is included in other liabilities at such date (See Note14 - Fair Value).Activity in AOCI related to these derivatives is summarized below: (In thousands) 2014 2013 2012 Derivative Balance at the Beginning of the Year in AOCI $(69) $(142) $(256) Net Deferral in AOCI of Derivatives:Net Decrease (Increase) in Fair Value of Derivatives 4 2 (34) Tax Effect (2) — 14 2 2 (20) Net Reclassification from AOCI into Earnings:Reclassification from AOCI into Earnings – Interest Expense 103 109 209 Tax Effect (36) (38) (75) 67 71 134 Net Change in Derivatives for the Year 69 73 114 Derivative Balance at the End of the Year in AOCI$— $(69) $(142) To the extent the interest rate swaps are not perfectly effective in offsetting the change in the value of the payments being hedged; the ineffectiveportion of these contracts is recognized in earnings immediately as interest expense. Ineffectiveness, if any, was not significant for the years endedDecember 31, 2014, 2013 and 2012. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from therespective hedged items. - 51 -Table of ContentsNOTE 16 — SELECTED QUARTERLY FINANCIAL INFORMATIONThe following table summarizes selected quarterly financial information for 2014 and 2013: Quarter Ended (Unaudited) Dec. 31, Sept. 27, June 28, March 29, Dec. 31, Sept. 28, June 30, March 30, (In thousands, except for per share data) 2014 2014 2014 2014 2013 2013 2013 2013 Sales $166,083 $179,442 $174,563 $140,951 $105,456 $89,681 $70,833 $73,967 Gross Profit (sales less cost of products sold) $42,525 $51,310 $43,202 $30,005 $25,173 $23,785 $18,681 $20,219 Income Before Income Taxes $24,411 $23,470 $19,922 $11,304 $8,902 $10,747 $7,718 $10,844 Net Income $18,439 $17,080 $13,144 $7,507 $6,389 $7,155 $5,158 $8,564 Basic Earnings Per Share $0.84 $0.79 $0.61 $0.35 $0.30 $0.34 $0.25 $0.41 Diluted Earnings Per Share $0.81 $0.75 $0.58 $0.33 $0.29 $0.32 $0.24 $0.39 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, 2014, 2013 and 2012 was $3.0million, $2.4 million and $3.2 million, respectively. The following table represents future minimum lease payment commitments as of December 31, 2014: (In thousands) 2015 $2,579 2016 1,876 2017 1,637 2018 1,466 2019 1,261 Thereafter 133 $8,952 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, 2014 were $126.6 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 couldbe materially adversely affected.On December 29, 2010, Lufthansa Technik AG (“Lufthansa”) filed a Statement of Claim in the Regional State Court of Mannheim,Germany. Lufthansa’s claim asserts that our subsidiary, Astronics Advanced Electronic Systems Corp. (“AES”) sold, marketed and brought into use inGermany a power supply system which infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stopselling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers sinceNovember 26, 2003 and compensation for damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa onlyif it receives a favorable ruling on the determination of infringement.On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does notrequire AES to recall products which are already installed in aircraft or have been sold to other end users. However, if Lufthansa provides the required bankguarantees specified in the decision, the Company may be required to offer a recall of products which are in the distribution channels in Germany, andprovide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate of requested damages. No such bankguarantees have been issued to date. - 52 -Table of ContentsThe Company expects to appeal and believes it has valid defenses to refute the decision. The appeal process is estimated to extend up to two years. Asa result, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neitherprobable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2014.On November 26, 2014, Lufthansa filed a complaint in the United States District for the Western District of Washington. Lufthansa’s complaint in thisaction alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent atissue in the U.S. action is based on technology similar to that involved in the German action. However, the U.S. court will not be bound by the ultimatedetermination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and intends to contest this mattervigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potentialexposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to thislitigation as of December 31, 2014.NOTE 18 — SEGMENTSSegment information and reconciliations to consolidated amounts for the years ended December 31 are as follows: (In thousands) 2014 2013 2012 Sales: Aerospace $494,747 $330,530 $254,955 Test Systems 166,769 10,103 11,491 Less Inter-segment Sales (477) (696) — 166,292 9,407 11,491 Total Consolidated Sales$661,039 $339,937 $266,446 Operating Profit (Loss) and Margins:Aerospace$79,753 $55,200 $44,137 16.1% 16.7% 17.3% Test Systems 12,401 (3,756) (4,985) 7.4% (37.2)% (43.4)% Total Operating Profit 92,154 51,444 39,152 13.9% 15.1% 14.7% Deductions from Operating Profit:Interest Expense, Net of Interest Income (8,255) (4,094) (1,042) Corporate and Other Expenses, Net (4,792) (9,139) (6,527) Income before Income Taxes$79,107 $38,211 $31,583 Depreciation and Amortization:Aerospace$17,847 $10,058 $6,043 Test Systems 8,786 590 634 Corporate 621 411 228 Total Depreciation and Amortization$27,254 $11,059 $6,905 Identifiable Assets:Aerospace$468,481 $428,619 $177,168 Test Systems 69,247 11,035 18,121 Corporate 25,182 51,617 16,700 Total Assets$562,910 $491,271 $211,989 Capital Expenditures:Aerospace$35,650 $6,711 $16,324 Test Systems 3,472 61 396 Corporate 1,760 96 — Total Capital Expenditures$40,882 $6,868 $16,720 - 53 -Table of ContentsOperating 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, 2014, 2013 and 2012, there was no goodwill or purchased intangible asset impairment losses in either the Aerospaceor Test System segment. In the Aerospace segment, goodwill amounted to $100.2 million and $101.0 million at December 31, 2014 and 2013, respectively.In the Test Systems segment, there was no goodwill as of December 31, 2014 and 2013.The following table summarizes the Company’s sales into the following geographic regions for the years ended December 31: 2014 2013 2012 (In thousands) North America $452,994 $300,368 $233,245 Asia 141,247 15,570 14,030 Europe 64,742 21,190 16,188 South America 1,192 1,851 1,937 Other 864 958 1,046 $661,039 $339,937 $266,446 The following table summarizes the Company’s property, plant and equipment by country for the years ended December 31: 2014 2013 2012 (In thousands) United States $105,698 $59,803 $53,235 France 10,347 10,771 — Canada 271 326 302 $116,316 $70,900 $53,537 Sales recorded by the Company’s foreign operations were $64.5 million, $16.5 million and $14.2 million in 2014, 2013 and 2012, respectively. Netincome from these locations was $4.1 million, $0.2 million and $1.0 million in 2014, 2013 and 2012, respectively. Net assets held outside of the UnitedStates total $38.0 million and $40.1 million at December 31, 2014 and 2013, respectively. The exchange loss included in determining net income wasinsignificant in each of the years ending December 31, 2014, 2013 and 2012. Cumulative translation adjustments amounted to $(3.4) million and $1.3million at December 31, 2014 and 2013, respectively.The Company has a significant concentration of business with three major customers; Apple Inc. (“Apple”), Panasonic Aviation Corporation(“Panasonic”), and The Boeing Company (“Boeing”). The following is information relating to the activity with those customers: 2014 2013 2012 Percent of Consolidated Revenue Apple 17.9% — — Panasonic 17.7% 29.6% 38.0% Boeing 14.1% 14.5% 5.5% (In thousands) 2014 2013 Accounts Receivable at December 31, Apple $4,342 $— Panasonic $21,808 $14,090 Boeing $6,874 $6,458 Sales to Apple are in the Test Systems segment. Sales to Panasonic are all in the Aerospace segment. Sales to Boeing occur in both segments.NOTE 19 — ACQUISITIONSAstronics Test SystemsOn February 28, 2014, our wholly owned subsidiary, ATS, purchased substantially all of the assets and liabilities of the Test and Services Division ofEADS North America, Inc. for approximately $69.4 million in cash, including a net working capital adjustment of approximately $16.4 million. Located inIrvine, California, ATS is a leading provider of highly-engineered automatic test systems, subsystems and instruments for the semi-conductor, consumerelectronics, commercial aerospace and defense industries. ATS provides fully customized testing systems and support services for these markets. It alsodesigns and manufactures test equipment under the test instrument brands known as Racal and Talon. The acquisition strengthens our service offerings andexpertise in the test market. This subsidiary is included in our Test Systems segment. The purchase price allocation for this acquisition has been finalized.Purchased intangible assets are deductible for tax purposes. - 54 -Table of ContentsThe allocation of the purchase price based on appraised fair values is as follows (in thousands): Accounts Receivable$10,593 Inventory 58,796 Other Current and Non-current Assets 725 Fixed Assets 17,100 Purchased Intangible Assets 10,123 Current Portion of Long Term Debt (1,124) Accounts Payable (11,303) Accrued Expenses and Other Current Liabilities (3,489) Long-term Debt (11,976) Total Purchase Price$69,445 PGA 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$31.3 million for which approximately $9.1 million, net of cash acquired, was paid in cash and the balance paid with 264,168 shares of Astronics stockvalued at $51.00 per share. PGA is included in our Aerospace reporting segment. The purchase price allocation for this acquisition is 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 in2014 and 2015. The addition of AeroSat further diversifies the products and technologies that Astronics offers. The additional contingent purchaseconsideration was recorded at its estimated fair value of approximately $5.0 million at the date of acquisition based upon the Company’s assessment of theprobability of AeroSat achieving the revenue growth targets. Substantially all of the goodwill and purchased intangible assets are expected to be deductiblefor tax purposes over 15 years. AeroSat is included in our Aerospace reporting segment. The purchase price allocation for this acquisition is complete.Peco, 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 passenger service units (“PSUs”) which incorporate air handling, emergencyoxygen, electrical power management and cabin lighting systems. It also manufactures a wide range of fuel access doors that meet stringent strength, fuelsealing and anti-corrosion requirements. The addition of Peco diversifies the products and technologies that Astronics offers. We purchased the outstandingstock of Peco for $136.0 million in cash. Peco’s unaudited 2013 revenue prior to the acquisition date was approximately $46.2 million. Peco is included inour Aerospace reporting segment. Purchased intangible assets and goodwill are not deductible for tax purposes. The purchase price allocation for thisacquisition is complete.Adjustments made to the preliminary purchase price valuation for the 2013 and 2014 acquisitions during the respective measurement periods were notmaterial.The following is a summary of the sales and amounts included in income from operations for Peco included in the consolidated financial statements ofthe Company from the date of acquisition to December 31, 2013 (in thousands): Sales$36,452 Operating Income$122 - 55 -Table of ContentsThe 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 $1.40 $1.18 Diluted earnings per share $1.34 $1.12 The 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. We purchased the outstanding stock of Max-Viz for $10.7 millionin 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 fair value estimate of the contingent consideration at December 31, 2014 is zero as it is notprobable that the revenue growth targets will be achieved. Substantially all of the goodwill and purchased intangible assets are expected to be deductible fortax purposes over 15 years. The purchase price allocation for this acquisition is complete.NOTE 20 — SUBSEQUENT EVENTSOn January 14, 2015, the Company purchased 100% of the equity of Armstrong for approximately $52.0 million in cash. Armstrong, located in Itasca,Illinois, is a leading provider of engineering, design and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment,and electrical power systems. - 56 -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 inreports filed or submitted under the Exchange Act is made known to them on a timely basis, and that these disclosure controls and procedures are effective toensure such 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 FinancialReporting.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 materiallyaffected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B.OTHER INFORMATIONNone - 57 -Table of ContentsPART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe 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 2015 Proxy to be filed within 120 days of the end of our fiscal year is incorporated herein byreference.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 of Executive Officer Positions and Offices with Astronics Year FirstElected OfficerPeter J. GundermannAge 52 President, Chief Executive Officer and Director of theCompany 2001David C. BurneyAge 52 Executive Vice President, Secretary and Chief Financial Officerof the Company 2003Mark A. PeabodyAge 55 Astronics Advanced Electronic Systems Executive VicePresident 2010James S. KramerAge 51 Luminescent Systems Inc. Executive Vice President 2010The 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 STOCKHOLDER MATTERSThe 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 hereinby reference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information contained under the captions “Certain Relationships and Related 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. - 58 -Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (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, 2014, 2013 and 2012 (ii)Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 (iii)Consolidated Balance Sheets as of December 31, 2014 and 2013 (iv)Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 (v)Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012 (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 elsewherein the consolidated financial statements or the notes thereto. 3.Exhibits ExhibitNo. Description 3 (a) Restated Certificate of Incorporation, incorporated by reference to the registrant’s 2013 Annual Report on Form 10-K, Exhibit 3(a), filed March7, 2014. (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 (FileNo. 000-07087). (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. 10.1* Restated Thrift and Profit Sharing Retirement Plan, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K,Exhibit 10.1, filed March 3, 2011. 10.2* 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. 10.3* 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. 10.4* 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. 10.5* Employment Termination Benefits Agreement dated December 16, 2003 between Astronics Corporation and Peter J. Gundermann, Presidentand Chief Executive Officer of Astronics Corporation, incorporated by reference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit10.6, filed March 3, 2011. 10.6* 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. 10.7* 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. 10.8* 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. 10.9* 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 (File No. 000-07087). - 59 -Table of Contents 10.10*First Amendment of the Employment Termination Benefits Agreement dated December 30, 2008 between Astronics Corporation and DavidC. Burney, Vice President and Chief Financial Officer of Astronics Corporation , incorporated by reference to the registrant’s 2008 AnnualReport on Form 10-K, Exhibit 10.12, filed March 11, 2009 (File No. 000-07087). 10.11*Employment Termination Benefits Agreement Dated February 18, 2005 between Astronics Corporation and Mark A. Peabody, ExecutiveVice President of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010 Annual Report on Form10-K, Exhibit 10.13, filed March 3, 2011. 10.12*First Amendment of the Employment Termination Benefits Agreement dated December 31, 2008 between Astronics Corporation and MarkA. Peabody, Executive Vice President of Astronics Advanced Electronic Systems, Inc., incorporated by reference to the registrant’s 2010Annual Report on Form 10-K, Exhibit 10.14, filed March 3, 2011. 10.13*Form of Indemnification Agreement as executed by each of Astronics Corporation’s Directors and Executive Officers, incorporated byreference to the registrant’s 2010 Annual Report on Form 10-K, Exhibit 10.15, filed March 3, 2011. 10.14*2011 Employee Stock Option Plan, incorporated by reference to the registrant’s Form S-8, Exhibit 4.1 filed on August 4, 2011. 10.15*Supplemental Retirement Plan II, incorporated by reference to the registrant’s 2012 Annual Report on Form 10-K, Exhibit 10.18, filedFebruary 22, 2013. 10.16Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Company incorporated by reference to theregistrant’s Form 8-K, Exhibit 10.1, filed May 29, 2013. 10.17Amendment to the Stock Purchase Agreement between Astronics Corporation, Peco, Inc., and the shareholders of the Company incorporatedby reference to the registrant’s Form 8-K, Exhibit 10.1, filed July 19, 2013. 10.18Asset Purchase Agreement by and among Astronics AS Corporation, AeroSat Corporation, AeroSat Airborne Internet LLC, AeroSat Avionics,LLC and AeroSat Tech Licensing, LLC incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1, filed October 1, 2013. 10.19Sale 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 5, 2013. 10.20Purchase 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 21, 2014. 10.21Fourth 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’s Form 8-K, Exhibit 10.1,filed September 26, 2014. 10.22Stock Purchase Agreement between Planesite Holdings Inc., the shareholders of Planesite, Robert Abbinante and Astronics Corporationdated as of December 23, 2014, incorporated by reference to the registrant’s Form 8-K, Exhibit 10.1 filed December 24, 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 Document - 60 -Table of Contents101.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 - 61 -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) 2014 Allowance for Doubtful Accounts $140 $— $119 $34 $293 Reserve for Inventory Valuation 11,041 — 1,840 (605) 12,276 Deferred Tax Valuation Allowance 2,509 — 625 — 3,134 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 - 62 -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 onits behalf by the undersigned; thereunto duly authorized, on February 27, 2015. Astronics Corporation By /s/ Peter J. Gundermann By /s/ David C. BurneyPeter J. Gundermann President and Chief Executive Officer David C. Burney, Executive Vice President, Chief Financial OfficerPursuant 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. Gundermann President and Chief Executive Officer(Principal Executive Officer) February 27, 2015Peter J. Gundermann /s/ David C. Burney Executive Vice President, Chief Financial Officer (Principal FinancialOfficer) February 27, 2015David C. Burney /s/ Nancy L. Hedges Corporate Controller and Principal Accounting Officer February 27, 2015Nancy L. Hedges /s/ Raymond W. Boushie Director February 27, 2015Raymond W. Boushie /s/ Robert T. Brady Director February 27, 2015Robert T. Brady /s/ John B. Drenning Director February 27, 2015John B. Drenning /s/ Peter J. Gundermann Director February 27, 2015Peter J. Gundermann /s/ Kevin T. Keane Director February 27, 2015Kevin T. Keane /s/ Robert J. McKenna Director February 27, 2015Robert J. McKenna - 63 -EXHIBIT 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% FranceAstronics Air II LLC 100% New Hampshire, USAArmstrong Aerospace, Inc. 100% Illinois, USAEXHIBIT 23Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements: (a)Registration Statements (Form S-8 No. 333-139292, Form S-8 No. 333-87463) pertaining to the Astronics Corporation Employee Stock Purchase Plan, (b)Registration Statement (Form S-8 No. 333-127137) pertaining to the Astronics Corporation 2005 Director Stock Option Plan, (c)Registration Statement (Form S-8 No. 33-65141) pertaining to the 1993 Director Stock Option Plan, (d)Registration Statement (Form S-8 No. 333-143564) pertaining to the Astronics Corporation 2001 Stock Option Plan, (e)Registration Statements (Form S-8 No. 333-176044) pertaining to the Astronics Corporation 2011 Employee Stock Option Plan, (f)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 February 27, 2015 with respect to the consolidated financial statements and schedule of Astronics Corporation and the effectiveness ofinternal control over financial reporting of Astronics Corporation included in this Annual Report (Form 10-K) of Astronics Corporation for the year endedDecember 31, 2014./s/ Ernst & Young LLPBuffalo, New YorkFebruary 27, 2015Exhibit 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 statementsfor external 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, tothe registrant’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: February 27, 2015/s/ Peter J. GundermannPeter J. GundermannChief Executive OfficerExhibit 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, Executive 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 statementsfor external 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, tothe registrant’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: February 27, 2015/s/ David C. BurneyDavid C. BurneyChief Financial OfficerExhibit 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 Astronics Corporation(the “Company”) hereby certify that:The Company’s Annual Report on Form 10-K for the year ended December 31, 2014 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: February 27, 2015/s/ Peter J. GundermannPeter J. GundermannTitle: Chief Executive OfficerDated: February 27, 2015/s/ David C. BurneyDavid C. BurneyTitle: 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 Actof 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by the Company into such filing.

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