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No. of Recommendations: 11
Management

Peter J. Gundermann – age 52
President and Chief Executive Officer

Appointed President and Chief Executive Officer in 2003, Peter Gundermann has been with the Company since 1988. Mr. Gundermann has been a director of Astronics since 2001. He holds a B.A. in Applied Mathematics and Economics from Brown University and an M.B.A. from Duke University. Gunderman appears to be clearly in charge of all major daily operating decisions from what I have seen. He is also clearly aggressive in view of the string of acquisitions taken on by the company. Some have questioned his smoothness on conference calls. I would give him fairly high marks overall based upon the progress of the company demonstrated since 2006 when I started tracking ATRO.

Kevin T. Keane – age 82
Chairman of the Board, Astronics Corporation

Kevin T. Keane has been Chairman of the Company since 1974. Mr. Keane was previously the President and Chief Executive Officer of the Company. Mr. Keane began his career with the Company as Executive Vice President in 1970 and remains active in his role as Chairman of the Board of the Company. He holds an A.B. in Economics and a M.B.A. from Harvard University. I have not seen direct evidence of Keane’s influence over key decisions. However in view of his large ownership position (see discussion below) I would presume he is involved in the major strategic decisions such as acquisitions. Keane is also Chairman of Mod-pac Corporation.

David C. Burney
Executive Vice President and Chief Financial Officer

Appointed Chief Financial Officer of Astronics in 2003, David Burney held the position of Controller for Astronics' Aerospace segment from 1996 until his appointment as Chief Financial Officer. Prior to Astronics, he held similar positions in other companies. Mr. Burney started his career with Deloitte & Touche. He holds a B.A. in Business Administration from Muskingum College.

Burney is also the Investor Relations contact. I have talked to him several times over the years and he has been reasonably open and responsive.

Other top executives listed on the company website have all had long careers with the company. The Board includes two individuals with experience with other related aerospcace/electronics companies.
As Astronics continues to grow I would like to see them bring in more high level executives from other aerospace companies both in their operations and on the Board of Directors.
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Insider Ownership/B Shares

The company has two classes of stock A and B. Each outstanding share of Common Stock is entitled to one vote and each outstanding share of Class B Stock is entitled to ten votes. Insiders control about 52.6% of the B shares giving them effective control of all corporate matters. Keane owns 27% and Gunderman 8.7%. The company has been issuing B shares as a form of stock dividends in recent years. The B shares are not directly tradable and must first be converted to A shares. My recommendation would be to convert the B shares to A as the amount becomes significant, in order to maximize the ability to sell if needed. Insiders control only about 1% of the A shares.

The high ownership position and advanced age of Kevin T. Keane are of possible interest. His son Daniel G. Keane (age 50) was previously involved in the business up until 2002. As of December 17, 2002, Daniel G. Keane resigned as a director and officer of the Company in connection with the spin-off of Mod-Pac CORP. which became a fully separate, publicly traded company on March 14, 2003. Daniel Keane and wife (Leslie) are listed as owning 3.2% of the B shares as of 2003, but are not subsequently listed in proxy filings apparently indicating that all or most of the shares were sold. Daniel Keane continues to hold the position of President/CEO of Mod-pac a Buffalo N.Y. packaging company. Mod-pac went private in 2013 under an agreement under which Kevin T. Keane, Chairman, and Daniel G. Keane, President and CEO, and their associates and affiliates acquired the approximately 81.3% of the Company's outstanding capital stock that they did not already own for $9.25 per share in cash. The total transaction is valued at approximately $24.6 million. If Mod-pac serves as a possible model for Astronics, it would appear that keeping family control is a priority and that there is a reasonable possibility that Daniel Keane could return to Astronics in some capacity including Chairman. However one could also argue that if this were the long term plan, it did not make sense for him to leave the company to head up Mod-PAC, a company that is now in a much different business area.

Daniel G. Keane holds a Bachelor of Arts in Economics modified with Mathematics from Dartmouth College and a M.B.A. from Duke University.
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Other Issue

Lufthansa lawsuit (from most recent 10-K)

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 power supply system which infringes upon a German patent held by Lufthansa. The relief sought by Lufthansa includes requiring AES to stop selling and marketing the allegedly infringing power supply system, a recall of allegedly infringing products sold to commercial customers since November 26, 2003 and compensation for damages. The claim does not specify an estimate of damages and a damages claim will be made by Lufthansa only if it receives a favorable ruling on the determination of infringement.
On February 6, 2015, the Regional State Court of Mannheim, Germany rendered its decision that the patent was infringed. The judgment does not require AES to recall products which are already installed in aircraft or have been sold to other end users.

However, if Lufthansa provides the required bank guarantees specified in the decision, the Company may be required to offer a recall of products which are in the distribution channels in Germany, and provide certain financial information regarding sales of the infringing product to enable Lufthansa to make an estimate 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. As a result, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of 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 this action alleges that AES manufactures, uses, sells and offers for sale a power supply system which infringes upon a U.S. patent held by Lufthansa. The patent at issue in the U.S. action is based on technology similar to that involved in the German action. However, the U.S. court will not be bound by the ultimate determination made by the German court. The Company believes it has valid defenses to refute Lufthansa’s claims and intends to contest this matter vigorously. As this matter is in the early stages of fact discovery, we do not currently have sufficient information to provide an estimate of AES’s potential exposure related to this matter. As loss exposure is neither probable nor estimable at this time, the Company has not recorded any liability with respect to this litigation as of December 31, 2014.
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Valuation

P/E based upon 2014 earnings is currently 28.2, forward P/E based upon 2015 projected earnings is about 22.6. Price/sales is currently around 2.3. My view given the entire picture is that ATRO is currently trading toward the upper end of fair valuation. I would consider adding shares around 55- 58 or below in the absence of any significant factors effecting the long term business case.

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Historic Stock volatility and trends

Astronics stock has had historically high volatility. Value Line rates ATRO stock price stability at 15, a very low number. I believe that some of this volatility derives from factors such as low float, low analyst coverage etc. I have been able to profit from the sharp price swings buying the extreme price drops and selling in periods when the valuation became high. My most recent purchases in the second half of 2014 were made in the $43-47 range. With increasing size ATRO is starting to pick up more recognition from the analyst community and future volatility may be somewhat lower than in the past.
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Analyst Coverage

ATRO reports only 4 analyst providing estimates:. Davidson, Key Banc, Dougherty, and, Canaccord. Sidoti and G2 Partners have also participated in recent earnings conference calls. Canaccord issued a BUY rating with an $80 price target in May 2015.
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Conclusion

I continue to like Astronics as an attractive investment vehicle to participate in the strong positive long term trends in commercial aerospace particularly in areas such as in flight electronics, entertainment and new lighting systems. I think the company has done an excellent job in growing its businesses in this area through both organic progress and targeted acquisitions. I think there is still much further room for growth in markets such as power for in flight entertainment and connectivity where ATRO should participate. Concerns include that the very aggressive pace of recent acquisitions may be press the company’s ability to deal with such rapid growth. I also have some concerns about the EADS acquisition and the entrance of the company into the consumer electronics test market where appears outside of its main strategic focus and where the company may have less of a sustainable moat. The Lufthansa patent lawsuit is another concern. In my investment experience the most likely outcomes for such litigation is some type of settlement. At this time it is difficult to forecast the magnitude of the outcome, but it would not appear to have the potential to substantially damage the basic business case. I think the present stock price around $70 is toward the upper end of fair valuation. I would consider adding shares in the 55-58 range assuming there is no fundamental change in the business case. The high insider ownership of Kevin T. Keane remains another factor to watch in the overall story.


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