Kaman customers trust our people and
our solutions when nothing less than one
hundred percent performance is required.
Performance when it counts
100%
performance is critical to Kaman’s global customer base,
whether we’re supplying bearings for the landing gear
of passenger aircraft, contributing components to next-
generation medical testing equipment, or providing critical
parts to rockets that deliver satellites into space.
AR2017
Kaman customers trust our people and
our solutions when nothing less than one
hundred percent performance is required.
100%
performance is critical to Kaman’s global customer base,
whether we’re supplying bearings for the landing gear
of passenger aircraft, contributing components to next-
generation medical testing equipment, or providing critical
parts to rockets that deliver satellites into space.
Neal J. Keating
Chairman, President and
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Dear Shareholders,
For nearly three-quarters of a century, Kaman has
to revalue our deferred tax assets resulting in a non-
successfully delivered what our customers need
recurring charge of $9.7 million, or $0.35 per diluted
most: absolute, uncompromising performance.
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Our customers’ success requires nothing less than
from a lower federal tax rate, which will allow for
this, whether we’re manufacturing landing gear
increased investments in our business, expansion of
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our operations, and the return of additional capital
lights on around the clock by providing parts and
to shareholders. In 2017, we generated $79.9 million
services for power generation.
net cash provided by operating activities, compared to
Everyone at Kaman understands the vital role we play
in the safety, growth, and prosperity of our customers.
Performance underlies everything we do, and it’s the
$107.7 million during 2016. This change was primarily
driven by the timing of shipments at year-end, which
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reason our customers continue to rely on Kaman.
Our January 2018 dividend payment represents
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performance, which remained strong when adjusted
for restructuring and tax reform. In 2017, Kaman
reported net earnings of $49.8 million, or $1.75 per
diluted share, compared to $58.9 million, or $2.10
the 48th consecutive year of dividend payments,
and we remain committed to returning capital to
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program and dividends, combined, returned $33
million to shareholders.
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At Kaman, we strive to balance our focus on delivering
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strong near-term returns with an emphasis on
as continued strong performance from Aerospace.
building long-term success. In 2017, we continued to
Late in 2017, the U.S. Congress passed the Tax Cuts
strengthen our future potential through investments
and Jobs Act which, among other things, reduced the
in machinery and equipment, expanded facilities, and
federal tax rate for corporations, which required us
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Additionally, we continue to invest in our people. Our
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Women Advocating Leadership at Kaman (WALK)
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of the quarterly WALK Award program and local
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WALK chapters across the United States. Our Kaman
$2.7 million of costs associated with a restructuring
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to mature, and this year we launched our Rising Star
Mentoring Program to support the careers of our
talented employees.
At our Specialty Bearings & Engineered Products
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premier airframe bearing manufacturers in the world,
With an eye to our future, we named new executives
supplying components for virtually every aircraft
to lead both of our businesses. In September, Richard
platform. GRW, located in Germany and the Czech
R. Barnhart was appointed head of our Aerospace
Republic, has delivered sustained growth while
segment, succeeding Gregory L. Steiner, who retired
increasing our exposure to a variety of attractive
from Kaman in January 2018. Rick was most recently
industrial end markets. EXTEX, which provides
a senior executive of Barnes Aerospace and earlier
aftermarket aircraft components, has tripled its
served as President of Kaman’s Aerostructures
backlog since its acquisition in 2015.
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In November, Alphonse J. Lariviere, Jr. was appointed
in a great performance in 2017, delivering almost
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36,000 JPF units during the year. This is an outstanding
has served in various roles with Kaman Corporation
achievement for this program and we anticipate
across both of our segments since 2004, most recently
continued strong momentum going forward.
as Senior Vice President – Finance & Administration of
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service made him an ideal candidate to lead our
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Aerospace
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heavy-lift helicopters to Chinese, Swiss, and American
companies. The innovative design of the K-MAX®
has proven itself worldwide as a low-maintenance
helicopter with unique capabilities and high reliability
rates. The delivery of two helicopters to China’s
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into this large and growing aerospace market. In fact,
Our Aerospace segment reported strong results
due to the program’s success, we have extended
in 2017. Revenues for 2017 were $724.9 million,
commercial K-MAX® helicopter production into at
an increase of 3.3% from 2016 revenues of $702.1
least 2019, and continue to pursue opportunities
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around the globe. Our program to supply the Peruvian
Programmable Fuze (JPF) to the U.S. Air Force and
Navy with SH-2G maritime helicopters achieved a
foreign militaries, and an increase in sales of our
major milestone with the glass cockpit “light up” in
specialty bearings and engineered products. Operating
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Peruvian Navy with advanced capabilities, such as the
revenues were down 2.3% to $1.08 billion, from $1.11
glass cockpit, which modernizes the instrumentation
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of the aircraft and increases the situational awareness
2017 to $52.5 million, compared to $41.9 million in
of the pilots.
2016. Operating margins were 4.9% in 2017, up 110
As noted, we restructured our composite
basis points from 3.8% in 2016.
aerostructures facilities in 2017 to improve capacity
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supported by outstanding service and unparalleled
continued top-line growth. At our Jacksonville facility,
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we have delivered more than 1,300 Blackhawk cockpits
strategy. Our success in establishing and maintaining
since the inception of that program in 2005, and in
such relationships was underscored in 2017 when
2017 we were awarded a new multi-year contract with
we were named “Supplier of the Year” in the MRO
Sikorsky that will extend the program through 2022.
category by Berry Plastics for 2016. The selection
Aerosystems launched a long-term agreement with
criteria for the award included quality, delivery,
Rolls-Royce to manufacture composite components
pricing/economics, technology/technical support, and
for the production phase of the Trent 7000 engine
customer service. This marks the second time Kaman
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received this award from Berry Plastics, a Fortune
the Airbus A330neo aircraft, and promises quieter
500 global manufacturer and marketer of plastic
operations and lower fuel consumption. Components
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will be produced at our facilities in Vermont, Kansas,
and the U.K.
Our productivity initiatives program continued to
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In 2017, we also expanded our presence outside of the
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United States, increasing our stake in Kineco Kaman
to our Automation and Fluid Power product lines.
Composite Structures, a joint venture in Goa, India
As we move into 2018, we are focused on fostering
that manufactures advanced composite structures
organic growth, while taking advantage of a number of
for aerospace, imaging, and medical industries. The
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model. These include the consolidation of suppliers
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and the increased need for value-added services. As
growing Indian aerospace industry.
the large and fragmented supplier market continues
Distribution
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to consolidate, our national accounts strategy will be
increasingly important and valuable. Similarly, factory
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S H A R E H O L D E R L E T T E R
Looking Ahead
As the economy continues to gain strength, Kaman
Each year in this letter, I acknowledge the dedication
will maintain our focus on three core strategies. First,
and resourcefulness of Kaman’s 5,300 employees.
we will make investments to drive future growth while
In 2017, both of these attributes were put to the test
returning capital to shareholders. Second, we will
by the devastation caused by hurricanes in Puerto
sharpen our focus on innovation, which has been a
Rico, Florida, and Texas. Our people came through
hallmark of the company since our founder, Charlie
admirably, raising more than $65,000 for the American
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we will redouble our commitment to operational
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teamwork and commitment I see every day, and this is
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the spirit that will continue to build a bigger, stronger
Amid much to be thankful for in 2017, the entire
Kaman family was saddened by the death of Eileen
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twenty years. Eileen’s guidance was vitally important
to our company and to me personally and she will
be missed. We were proud to partner with the
company for our shareholders, our customers, our
communities, and our employees.
Connecticut Women’s Hall of Fame to establish the
Neal J. Keating
Eileen Kraus Scholarship for College-Bound Students,
Chairman, President and
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With the Company’s support and the outpouring of
memorial donations from friends and family in Eileen’s
honor, we are pleased to report that the scholarship
has become a perpetual program to forever honor
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Eileen Kraus 1939 – 2017
“ She understood what it meant to lead, not as a man or woman but
as a leader. She knew how to express her vision. She was honest,
authentic, and very no-nonsense.”
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Kaman helicopter in 1945, building
an innovative, high-performance
culture has been central to
Kaman’s success.
A E R O S P A C E
Execution when it counts
from a dam in China to forest
(cid:564)(cid:85)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:38)(cid:75)(cid:76)(cid:79)(cid:72)(cid:17)
Whether contributing to safe, reliable power generation or helping
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under the toughest conditions.
On the Yarlung Zangbo River in China, a 320 megawatt hydropower dam will, when
completed, deliver much needed power to the region. Critical to the success of this
massive project are Kaman’s self-lubricating bearings on the dam’s gate systems. Using our
proprietary KAron bearing technology, these bearings reduce maintenance costs, improve
performance, and increase life in harsh environments. The gate system bearings represent
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(cid:43)(cid:68)(cid:79)(cid:73)(cid:90)(cid:68)(cid:92)(cid:3)(cid:68)(cid:85)(cid:82)(cid:88)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:90)(cid:82)(cid:85)(cid:79)(cid:71)(cid:15)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:68)(cid:3)(cid:70)(cid:75)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:76)(cid:79)(cid:71)(cid:564)(cid:85)(cid:72)(cid:86)(cid:3)(cid:72)(cid:81)(cid:74)(cid:88)(cid:79)(cid:73)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:71)(cid:72)(cid:3)(cid:86)(cid:90)(cid:68)(cid:87)(cid:75)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:72)(cid:81)(cid:87)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
southern Chile in 2017, a K-MAX®(cid:3)(cid:75)(cid:72)(cid:79)(cid:76)(cid:70)(cid:82)(cid:83)(cid:87)(cid:72)(cid:85)(cid:3)(cid:565)(cid:72)(cid:90)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:70)(cid:88)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:522)(cid:36)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:55)(cid:85)(cid:88)(cid:70)(cid:78)(cid:523)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:71)(cid:85)(cid:82)(cid:83)(cid:3)
up to 28,000 gallons of water per hour, using a water source as small as a stream.
44.5%
of Kaman Aerospace revenues in 2017
were from outside the United States.
A E R O S P A C E
Precision when it counts
from the skies above us to the
highways that connect us.
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(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:86)(cid:87)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:88)(cid:87)(cid:82)(cid:80)(cid:82)(cid:69)(cid:76)(cid:79)(cid:72)(cid:86)(cid:3)(cid:514)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:86)(cid:82)(cid:79)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:46)(cid:68)(cid:80)(cid:68)(cid:81)(cid:3)(cid:36)(cid:72)(cid:85)(cid:82)(cid:86)(cid:83)(cid:68)(cid:70)(cid:72)(cid:17)
The Lockheed Martin F-35 represents a quantum leap in air dominance, bringing new
capabilities to the United States and its allies. Kaman provides critical composite structures
and bearing components for this next-generation aircraft, while the Joint Programmable
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Kaman Aerospace also plays a critical role in products closer to home. Our GRW bearings,
for example, improve the turbo charger systems of high-performance automobiles. GRW
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51
years since Kaman’s
Kamatics Corporation
(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:564)(cid:85)(cid:86)(cid:87)(cid:3)(cid:69)(cid:72)(cid:68)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)
problem.
75
years of leadership
in developing and
(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:68)(cid:564)(cid:81)(cid:74)(cid:3)
and arming solutions.
(cid:39) (cid:918) (cid:54) (cid:55) (cid:53) (cid:918) (cid:37) (cid:56) (cid:55) (cid:918) (cid:50) (cid:49)
Ingenuity when it counts
from housing in New England
to mining in California.
(cid:46)(cid:68)(cid:80)(cid:68)(cid:81)(cid:519)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:87)(cid:82)(cid:88)(cid:70)(cid:75)(cid:72)(cid:86)(cid:3)(cid:89)(cid:76)(cid:85)(cid:87)(cid:88)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:72)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:73)(cid:68)(cid:70)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:81)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:15)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:74)(cid:72)(cid:81)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:76)(cid:87)(cid:519)(cid:86)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:72)(cid:71)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:17)(cid:3)
A team from our Engineered Solutions Group in Franklin, MA worked closely with the new
product development team at AEGIS Energy Services Corporation to help design, build, and
program the controls portion of its Powerverter PV75/100 cogeneration system. Kaman
Automation continues to support AEGIS Energy on its cogeneration systems, which produce
both hot water and electricity (including emergency/standby) from a single fuel source,
thereby reducing overall energy costs for apartments and condominiums. It’s one example
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Across the country, Kaman specialists partnered with one of the world’s largest metals
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at an existing mine. Our solution requires less maintenance and has resulted in lower
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2,200
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(cid:39) (cid:918) (cid:54) (cid:55) (cid:53) (cid:918) (cid:37) (cid:56) (cid:55) (cid:918) (cid:50) (cid:49)
Vision when it counts
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rolling steel.
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(cid:87)(cid:82)(cid:3)(cid:46)(cid:68)(cid:80)(cid:68)(cid:81)(cid:519)(cid:86)(cid:3)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:17)
Our automation services go beyond advanced engineering and design to include
manufacturing, installing, and commissioning engineering solutions. This combination
enabled us to partner with a world leader in the design, development, and manufacture
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(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:564)(cid:71)(cid:72)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:909)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:85)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:17)
We also help transform traditional industries with new technologies. For one of
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(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:98)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:86)(cid:87)(cid:72)(cid:72)(cid:79)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:81)(cid:81)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:79)(cid:92)(cid:3)(cid:83)(cid:82)(cid:86)(cid:86)(cid:76)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:69)(cid:82)(cid:82)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:72)(cid:605)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:98)(cid:68)(cid:81)(cid:71)(cid:98)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:76)(cid:81)(cid:74)(cid:98)(cid:90)(cid:68)(cid:86)(cid:87)(cid:72)(cid:17)
220
(cid:46)(cid:68)(cid:80)(cid:68)(cid:81)(cid:3)(cid:39)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
locations across the
United States.
$35
billion addressable
market for our
distribution services.
C O R P O R A T E
Commitment when it counts
from advancing careers at
Kaman to building homes in
the community.
(cid:46)(cid:68)(cid:80)(cid:68)(cid:81)(cid:519)(cid:86)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:86)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:72)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:89)(cid:72)(cid:17)(cid:3)
At Kaman, we’re good at building things – from helicopters to engineered solutions to
customer relationships. We apply this skill to help build our communities. In 2017, for
example, for the second year, Owen Brown coordinated more than 70 Kaman employees
(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:43)(cid:68)(cid:69)(cid:76)(cid:87)(cid:68)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:43)(cid:88)(cid:80)(cid:68)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:3)(cid:564)(cid:89)(cid:72)(cid:3)(cid:75)(cid:82)(cid:80)(cid:72)(cid:86)(cid:3)(cid:81)(cid:72)(cid:68)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:75)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)
Connecticut. We are also proud to co-sponsor, with the Connecticut Women’s Hall of Fame,
the Eileen Kraus Scholarship for College-Bound Students, named for Kaman’s long-time
(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:17)(cid:3)(cid:51)(cid:76)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:564)(cid:85)(cid:86)(cid:87)(cid:3)(cid:85)(cid:72)(cid:70)(cid:76)(cid:83)(cid:76)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:49)(cid:76)(cid:81)(cid:68)(cid:3)(cid:37)(cid:72)(cid:79)(cid:79)(cid:88)(cid:86)(cid:70)(cid:76)(cid:17)
Building careers is another thing we do well. Our WALK program, now in its third year, is
increasing Kaman’s global representation of women in leadership roles. There are currently
eight local WALK chapters across the United States. Kaman is also a proud member of both
the Global Women’s Leadership Forum and Women in Manufacturing, two organizations
that share our commitment to advancing the careers of women.
51
employees admitted into the Kaman Leadership
(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:17)
Kaman will continue to work hard to
ensure that we deliver exceptional
performance for every customer.
When it counts.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File No. 001-35419
KAMAN CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut
(State or other jurisdiction
of incorporation or organization)
06-0613548
(I.R.S. Employer
Identification No.)
1332 Blue Hills Avenue
Bloomfield, Connecticut 06002
(Address of principal executive offices)
Registrant's telephone number, including area code: (860) 243-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock ($1 par value)
Name of each exchange on which registered
New York Stock Exchange LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated herein by reference in Part III of this Form 10-K or any amendment to this Form 10-K
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes
No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value on June 30, 2017, (the last business day of the Company’s most recently completed second quarter)
of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of
the stock, was approximately $1,358,278,098.
At January 26, 2018, there were 27,801,851 shares of Common Stock outstanding.
Documents Incorporated Herein By Reference
Portions of our definitive proxy statement for our 2018 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
Kaman Corporation
Index to Form 10-K
Part I
Item 1
Business...............................................................................................................................................................
Item 1A Risk Factors .........................................................................................................................................................
Item 1B Unresolved Staff Comments................................................................................................................................
Item 2
Item 3
Properties.............................................................................................................................................................
Legal Proceedings ...............................................................................................................................................
Item 4 Mine Safety Disclosures......................................................................................................................................
Part II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .............................................................................................................................................................
Item 6
Selected Financial Data .......................................................................................................................................
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations..............................
Item 7A Quantitative and Qualitative Disclosures About Market Risk ............................................................................
Item 8
Item 9
Financial Statements and Supplementary Data ...................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................
Item 9A Controls and Procedures......................................................................................................................................
Item 9B Other Information................................................................................................................................................
Part III
Item 10 Directors, Executive Officers and Corporate Governance ..................................................................................
Item 11 Executive Compensation .....................................................................................................................................
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...........
Item 13 Certain Relationships and Related Transactions, and Director Independence ....................................................
Item 14
Principal Accounting Fees and Services..............................................................................................................
Item 15 Exhibits, Financial Statement Schedule ..............................................................................................................
Item 16
Form 10-K Summary...........................................................................................................................................
Part IV
3
10
23
24
25
26
27
29
31
60
61
113
113
113
114
114
114
114
115
116
116
2
ITEM 1.
BUSINESS
GENERAL
PART I
Kaman Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945. We are a diversified company that
conducts business in the aerospace and industrial distribution markets. We report information for ourselves and our subsidiaries
(collectively, “we,” “us,” “our,” and “the Company”) in two business segments, Distribution and Aerospace. A discussion of
2017 developments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations, in this Form 10-K.
Distribution Segment
The Distribution segment brings our commitment to technological leadership and value-added services to the distribution
business. The Distribution segment is a leading power transmission, automation and fluid power industrial distributor with
operations throughout the United States. With over 5 million SKUs, we provide electro-mechanical products, bearings, power
transmission, motion control and electrical and fluid power components, along with engineered integrated solutions for our
customers' most challenging applications, serving a broad spectrum of industrial markets including both maintenance, repair
and overhaul ("MRO") and original equipment manufacturer ("OEM") customers. With approximately 220 service facilities,
including distribution centers, assembly, fabrication and repair facilities, Kaman provides products and service solutions to
approximately 60,000 active customers representing a highly diversified cross section of industries.
Aerospace Segment
The Aerospace segment produces and markets proprietary aircraft bearings and components; super precision, miniature ball
bearings for the medical, industrial and aerospace markets; complex metallic and composite aerostructures for commercial,
military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the
U.S. and allied militaries. The segment also markets the design and supply of aftermarket parts to businesses performing MRO
in aerospace markets; performs helicopter subcontract work; restores, modifies and supports our SH-2G Super Seasprite
maritime helicopters; manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters; and
provides engineering design, analysis and certification services.
Principal customers include the U.S. military, Sikorsky Aircraft Corporation, The Boeing Company, Airbus, Lockheed Martin,
Rolls Royce, Raytheon and Bell Helicopter. The SH-2G aircraft is currently in service with the Egyptian Air Force and the New
Zealand, Peruvian and Polish navies. Operations are conducted throughout the United States, as well as in facilities located in
the United Kingdom, Germany, the Czech Republic, Mexico and Singapore. Additionally, the Company maintains an
investment in a joint venture in India.
FINANCIAL INFORMATION ABOUT OUR SEGMENTS
Financial information about our segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations, and Note 18, Segment and Geographic Information, of the Notes to Consolidated Financial
Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
WORKING CAPITAL
A discussion of our working capital is included in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources, in this Form 10-K.
Our Distribution segment requires substantial working capital related to accounts receivable and inventories. Significant
amounts of inventory are carried to meet our customers’ requirements. Sales returns do not have a material effect on our
working capital requirements.
Our Aerospace segment’s working capital requirements are dependent on the nature and life cycles of the programs for which
work is performed. New programs may initially require higher working capital to complete nonrecurring start-up activities and
fund the purchase of inventory and equipment necessary to perform the work. Nonrecurring start-up costs on large and complex
programs often take longer to recover, negatively impacting working capital in the short-term and producing a corresponding
3
benefit in future periods. As these programs mature and efficiencies are gained in the production process, working capital
requirements generally decrease.
Our credit agreement includes a revolving credit facility which is available for additional working capital requirements and
investment opportunities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations,
and Note 10, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
PRINCIPAL PRODUCTS AND SERVICES
The following table sets forth the percentage contribution of each business segment’s products and services to consolidated net
sales for each of the three most recently completed years:
Years Ended December 31,
2016
2015
2017
Sales..........................................................................................................................
Distribution ...............................................................................................................
Aerospace .................................................................................................................
Total ...................................................................................................................
59.9%
40.1%
100.0%
61.2%
38.8%
100.0%
66.3%
33.7%
100.0%
AVAILABILITY OF RAW MATERIALS
While we believe we have sufficient sources for the materials, components, services and supplies used in our manufacturing
activities, we are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and
subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and
extrusions), titanium, nickel, copper and composites. Many major components and product equipment items are procured from
or subcontracted on a sole-source basis with a number of domestic and non-U.S. companies. Although alternative sources
generally exist for these raw materials, qualification of the sources could take a year or more. We are dependent upon the ability
of a large number of suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules
at anticipated costs. While we maintain an extensive qualification system to control risk associated with such reliance on third
parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and contract
profitability, while jeopardizing our ability to fulfill commitments to our customers. Although price increases for raw materials
important to some of our products (steel, copper, aluminum, titanium and nickel) may cause margin and cost pressures, we do
not foresee any near term unavailability of materials, components or supplies that would have an adverse effect on either of our
business segments. For further discussion of the possible effects of changes in the cost or availability of raw materials on our
business, see Item 1A, Risk Factors, in this Form 10-K.
PATENTS AND TRADEMARKS
We hold patents and trademarks reflecting functional, design and technical accomplishments in a wide range of areas covering
both basic production of certain aerospace products as well as highly specialized devices and advanced technology products in
defense related and commercial fields.
Although the Company's patents and trademarks enhance our competitive position, we believe that none of such patents or
trademarks is singularly or as a group essential to our business as a whole. We hold or have applied for U.S. and foreign patents
with expiration dates that range through the year 2035.
Registered trademarks of the Company include KAflex®, KAron®, and K-MAX®. In all, we maintain 30 U.S. and foreign
trademarks.
4
BACKLOG
The majority of our backlog is attributable to the Aerospace segment. We anticipate that approximately 78.0% of our Aerospace
backlog at the end of 2017 will be performed in 2018. Approximately 62.0% of the Aerospace segment's backlog at the end of
2017 is related to U.S. Government ("USG") contracts or subcontracts.
Total backlog at December 31, 2017, 2016 and 2015, and the portion of the backlog we expect to complete in 2018, is as
follows:
Total Backlog at
December 31, 2017
2017 Backlog to be
completed in 2018
Total Backlog at
December 31, 2016
Total Backlog at
December 31, 2015
In thousands
Aerospace .........................
Distribution.......................
Total ...............................
$
$
616,090
126,025
742,115
$
$
480,550
126,025
606,575
$
$
581,619
108,681
690,300
$
$
659,350
105,777
765,127
Backlog related to uncompleted contracts for which we have recorded a provision for estimated losses was $1.2 million as of
December 31, 2017. As of December 31, 2017, there was no backlog related to firm but not yet funded orders. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K,
for further discussion.
REGULATORY MATTERS
Government Contracts
The USG, and other governments, may terminate any of our government contracts at their convenience or for default if we fail
to meet specified performance measurements. If any of our government contracts were to be terminated for convenience, we
generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of
our government contracts were to be terminated for default, generally the USG would pay only for the work that has been
accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract
items, net of the work accepted from the original contract. The USG can also hold us liable for damages resulting from the
default.
During 2017, approximately 98.4% of the work performed by the Company directly or indirectly for the USG was performed
on a fixed-price basis and the balance was performed on a cost-reimbursement basis. Under a fixed-price contract, the price
paid to the contractor is negotiated at the outset of the contract and is not generally subject to adjustment to reflect the actual
costs incurred by the contractor in the performance of the contract. Cost reimbursement contracts provide for the
reimbursement of allowable costs and an additional negotiated fee.
Compliance with Environmental Protection Laws
Our operations are subject to and affected by a variety of federal, state, local and non-U.S. environmental laws and regulations
relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes.
We continually assess our compliance status and management of environmental matters in an effort to ensure our operations are
in substantial compliance with all applicable environmental laws and regulations.
Operating and maintenance costs associated with environmental compliance and management of sites are a normal, recurring
part of our operations. These costs often are allowable costs under our contracts with the USG. It is reasonably possible that
continued environmental compliance could have a material impact on our results of operations, financial condition or cash
flows if more stringent clean-up standards are imposed, additional contamination is discovered and/or clean-up costs are higher
than estimated.
See Environmental Matters in Item 3, Legal Proceedings, and Critical Accounting Estimates - Environmental Costs in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 15, Commitments and
Contingencies, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K, for further discussion of our environmental matters.
5
With respect to all other matters that may currently be pending, in the opinion of management, based on our analysis of relevant
facts and circumstances, we do not believe that compliance with relevant environmental protection laws is likely to have a
material adverse effect upon our capital expenditures, earnings or competitive position. In arriving at this conclusion, we have
taken into consideration site-specific information available regarding total costs of any work to be performed and the extent of
work previously performed. If we are identified as a “potentially responsible party” ("PRP") by environmental authorities at a
particular site, we, using information available to us, will also review and consider a number of other factors, including: (i) the
financial resources of other PRPs involved in each site and their proportionate share of the total volume of waste at the site; (ii)
the existence of insurance, if any, and the financial viability of the insurers; and (iii) the success others have had in receiving
reimbursement for similar costs under similar insurance policies issued during the periods applicable to each site.
International Operations
Our international sales are subject to U.S. and non-U.S. governmental regulations and procurement policies and practices,
including regulations relating to import-export control, investment, exchange controls and repatriation of earnings. International
sales are also subject to varying currency, political and economic risks.
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 ("ITRA") added subsection (r) to section 13 of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), requiring a public reporting issuer to disclose in its
annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions
relating to Iran, including activities not prohibited by U.S. law and conducted outside the U.S. by non-U.S. affiliates in
compliance with local law. Issuers must also file a notice with the U.S. Securities and Exchange Commission ("SEC") if any
disclosable activities under ITRA have been included in the annual or quarterly report. We did not have any disclosable
activities during the year ended December 31, 2017.
COMPETITION
The Distribution segment competes for business with several other national distributors of bearings, power transmission,
electrical and fluid power products, two of which are substantially larger, and with many regional and local distributors and
OEMs. Competitive forces have intensified due to the increasing trend towards national contracts, customers' efforts to obtain
material cost savings and the extension of supplier product authorizations within the distribution channel. We compete for
business based upon the breadth and quality of products offered, product availability, delivery performance, and price, as well
as on the basis of value-added services that we are able to provide.
The Aerospace segment operates in a highly competitive environment with many other organizations, some of which are
substantially larger than us and have greater financial strength and more extensive resources. We compete for composite and
metallic aerostructures subcontracts, and helicopter sales and structures, bearings and components business on the basis of price
and/or quality; product endurance and special performance characteristics; proprietary knowledge; the quality of our products
and services; the availability of facilities, equipment and personnel to perform contracts; and the reputation of our
business. Competitors for our business include small machine shops and offshore manufacturing facilities. We compete for
engineering design services business primarily on the basis of technical competence, the reputation of our business, the
availability of our personnel and price. We compete for advanced technology fuzing business primarily on the basis of technical
competence, product quality and price, and also on the basis of our experience as a developer and manufacturer of fuzes for
particular weapon types and the availability of our facilities, equipment and personnel. We are also affected by the political and
economic circumstances of our potential foreign customers and, in certain situations, the relationships of those foreign
customers with the USG as well as the USG's perceptions of those foreign customers.
RESEARCH AND DEVELOPMENT EXPENDITURES
Customer funded research expenditures (which are included in cost of sales) were $1.1 million in 2017, $0.9 million in 2016,
and $0.4 million in 2015. Independent research and development expenditures (which are included in selling, general and
administrative expenses) were $8.2 million in 2017, $7.7 million in 2016, and $6.7 million in 2015.
EMPLOYEES
As of December 31, 2017, we employed approximately 5,300 individuals.
6
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Financial information about geographic areas is included in Note 18, Segment and Geographic Information, of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K.
AVAILABLE INFORMATION
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to
file reports, proxy statements and other information with the SEC. Copies of these reports, proxy statements and other
information can be read and copied at:
SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC
maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with
the SEC. These materials may be obtained electronically by accessing the SEC’s website at http://www.sec.gov.
We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy
statements, and current reports on Form 8-K as well as amendments to those reports filed or furnished pursuant to Section 13 or
15(d) of the Exchange Act, together with Section 16 insider beneficial stock ownership reports, as soon as reasonably
practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our
website at www.kaman.com — select the “Investors” link, then the "Financial Information" link and then the “SEC Filings”
link.
We also make available, free of charge on our website, our Certificate of Incorporation, By–Laws, Governance Principles and
all Board of Directors' standing Committee Charters (Audit, Corporate Governance, Personnel & Compensation and Finance).
These documents are posted on our website at www.kaman.com — select the “Investors” link, then the "Corporate
Governance" link and then the "Documents and Downloads" link.
The information contained on our website is not intended to be, and shall not be deemed to be, incorporated into this
Form 10-K or any other filing under the Exchange Act or the Securities Act of 1933, as amended.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company’s executive officers as of the date of this report are as follows:
Name
Neal J. Keating
Age Position
Prior Experience
62 Chairman, President, Chief
Executive Officer and Director
Mr. Keating was appointed President and Chief Operating
Officer as well as elected a Director of the company
effective September 17, 2007. Effective January 1, 2008,
he was appointed to the offices of President and Chief
Executive Officer and effective March 1, 2008, he was
appointed to the additional position of Chairman. Prior to
joining the company, Mr. Keating served as Chief
Operating Officer at Hughes Supply, a $5.4 billion
industrial distributor that was acquired by Home Depot in
2006. Prior to that, he held senior positions at GKN
Aerospace, an aerospace subsidiary of GKN plc, and
Rockwell Collins Commercial Systems, and served as a
board member of GKN plc and Agusta-Westland.
Mr. Barnhart joined the company as President of Kaman
Aerospace Group, Inc., with overall responsibility for the
company's Aerospace segment, effective October 1, 2017.
Effective November 14, 2017, he was appointed Executive
Vice President of Kaman Corporation. He was previously
Senior Vice President Barnes Group, Inc. and President of
Barnes Aerospace, effective August 2013, and remained
in this role until his retirement in June 2016. Prior to that,
Mr. Barnhart served as President of Barnes Aerospace
from February 2012 until his appointment in August 2013,
following a
leadership and
advancement across a number of the company's Aerospace
and Distribution divisions. Prior to his service with The
Barnes Group, Mr. Barnhart was President of Kaman's
Aerostructures division. He began his career with Price
Waterhouse and spent a decade in increasingly responsible
operating roles with United Technologies and Pratt &
Whitney.
tenure of divisional
Mr. Lariviere was appointed President of Kaman Industrial
Technologies on November 9, 2017, and was appointed
Executive Vice President of Kaman Corporation effective
November 14, 2017. Mr. Lariviere has served in various
roles with Kaman Corporation since 2004, most recently
as Senior Vice President - Finance & Administration of the
Distribution segment from April 2015 through December
2017 and prior to that President Composite Structures in
the Aerospace segment from January 2013 through April
2015. Previous Kaman positions include: Aerospace
Group Vice President - Finance and Helicopters Division
Vice President - Finance. Prior to joining Kaman, he served
as Vice President Global Shared Services at Garlock
Sealing Technologies and was with Goodrich Pump &
Engine Controls working through increasingly responsible
roles, ultimately being named Vice President Finance.
Mr. Starr was appointed Executive Vice President effective
July 1, 2015, and has served as the Chief Financial Officer
of the company since July 1, 2013. Mr. Starr joined the
company in 2009 as Vice President - Treasurer. Prior to
joining Kaman, Mr. Starr served as Assistant Treasurer at
Crane Co. of Stamford, Connecticut, a then $2.6 billion
diversified manufacturer of highly engineered industrial
products. He also previously served as Managing Director,
Corporate Finance at Aetna, Inc. of Hartford, Connecticut
and as Director, Capital Markets and Risk Management at
Fisher Scientific International, Inc. of Hampton, New
Hampshire. Mr. Starr was also an associate at both
Salomon Smith Barney in New York and Chase Securities,
Inc. in New York and Singapore.
Richard R. Barnhart
57 President of Kaman Aerospace
Group, Inc. and Executive Vice
President of Kaman Corporation
Alphonse J. Lariviere Jr.
58 President of Kaman Industrial
Technologies and Executive Vice
President of Kaman Corporation
Robert D. Starr
50 Executive Vice President and
Chief Financial Officer
8
Name
Age Position
Prior Experience
Phillip A. Goodrich
61 Senior Vice President - Corporate
Development
Shawn G. Lisle
51 Senior Vice President and General
Counsel
Gregory T. Troy
62 Senior Vice President – Human
Resources and Chief Human
Resources Officer
John J. Tedone
53 Vice President, Finance and Chief
Accounting Officer
Paul M. Villani
52 Senior Vice President and Chief
Information Officer
Mr. Goodrich joined the company in 2009 as Vice
President - Corporate Development and was named Senior
Vice President - Corporate Development in February 2012.
He was previously Senior Vice President, Corporate
Development with Barnes Group, Inc. of Bristol,
Connecticut. Mr. Goodrich held similar positions with
Ametek, Inc. of Paoli, Pennsylvania; and General Signal
Corporation of Stamford, Connecticut.
Mr. Lisle joined the company in 2011 and was appointed
Senior Vice President and General Counsel effective
December 1, 2012. Prior to joining the company, Mr. Lisle
served as Senior Counsel for International Paper Company
in Memphis, Tennessee. Prior to that, he served as legal
counsel for Dana Corporation in Toledo, Ohio, and as an
attorney at Porter Wright Morris & Arthur LLP in
Columbus, Ohio. He also previously worked as a trial
attorney at the U.S. Department of Justice, Tax Division
in Washington, D.C. and was a Judge Advocate in the U.S.
Navy.
Mr. Troy joined the company as Senior Vice President –
Human Resources in March 2012. On February 19, 2013,
he was appointed to the position of Chief Human
Resources Officer. Prior to joining the company, Mr. Troy
served as Chief Human Resources Officer of Force
Protection, Inc. from April 2011 to March 2012, where he
was a member of the Executive Committee. Prior to joining
Force Protection, Mr. Troy served as Vice President and
Chief Human Resources Officer at Modine Manufacturing
Company from February 2006 to April 2011, providing
global human resources leadership in the Americas,
Europe and Asia. Mr. Troy also previously worked at
OMNOVA Solutions Inc., Bosch Corporation and Mobil
Corporation, after serving as a Transportation Officer in
the United States Army.
Mr. Tedone has served as Vice President, Finance and the
company's Chief Accounting Officer since May 2007.
From April 2006 to April 2007, Mr. Tedone served as the
company's Vice President, Internal Audit and prior to that
as Assistant Vice President, Internal Audit.
Mr. Villani joined the company in 2015 and was appointed
Senior Vice President and Chief Information Officer
effective as of January 1, 2017. From August 2015 to
December 2016, Mr. Villani served as the Senior Director,
Software Development and ERP Support at Kaman
Distribution Group. Prior to joining the company, Mr.
Villani served as Chief Information Officer at Med
Solutions, Inc. from November 2013 to June 2015; and
Chief Information Officer at Triad Healthcare, Inc. from
2007 to 2013.
Each executive officer holds office for a term of one year and until his or her successor is duly appointed and qualified, in
accordance with the Company’s By-Laws.
9
ITEM 1A.
RISK FACTORS
Our business, financial condition, operating results and cash flows can be impacted by the factors set forth below, any one of
which could cause our actual results to vary materially from recent results or from our anticipated future results.
Our future operating results may be impacted by changes in global economic and political conditions.
Our future operating results and liquidity may be impacted by changes in general economic and political conditions which may
affect, among other things, the following:
• The availability of credit and our ability to obtain additional or renewed bank financing, the lack of which may limit
our ability to invest in capital projects and planned expansions or to fully execute our business strategy;
• Market rates of interest, any increase in which would increase the interest payable on some of our borrowings and
adversely impact our cash flow;
• The investment performance of our pension plan, as well as the associated discount rate, any adverse changes in which
may result in a deterioration in the funded status of the plan and an increase in required contributions and plan
expense;
• The relationship between the U.S. dollar and other currencies, any adverse changes in which could negatively impact
our financial results;
• The ability of our customers to pay for products and services on a timely basis, any adverse change in which could
negatively impact sales and cash flows and require us to increase our bad debt reserves;
• The volume of orders we receive from our customers, any adverse change in which could result in lower operating
profits as well as less absorption of fixed costs due to a decreased business base; and
• The ability of our suppliers to meet our demand requirements, maintain the pricing of their products or continue
operations, any of which may require us to find and qualify new suppliers.
While general economic and political conditions have not impaired our ability to access credit markets and finance our
operations to date, there can be no assurance that we will not experience future adverse effects that may be material to our cash
flows, competitive position, financial condition, results of operations or our ability to access capital.
Our financial performance is significantly influenced by customer demand for the products we distribute.
The financial performance of our Distribution segment, which generated approximately 59.9% of our 2017 consolidated net
sales and approximately 30.4% of our 2017 operating income before corporate expenses and net gain on sale of assets, is
significantly influenced by customer demand for the products we distribute and the services we provide. Consequently, demand
for our products and services has been and will continue to be significantly influenced by the same factors that affect demand
for and production of our customers' goods and services, including the following:
•
•
•
•
the level of industrial production and manufacturing capacity utilization in the markets we serve;
the economic health of the manufacturing sector of the U.S. economy, as reflected by the Purchasing Managers Index®
reported by the Institute for Supply Management, as an index reading of 50 or more implies an expanding
manufacturing economy, while a reading below 50 implies a contracting manufacturing economy;
the consolidation of certain of our manufacturing customers and the trend of manufacturing operations being moved
overseas, which subsequently reduces demand for the products we distribute and the services we provide; and
the general industrial economy, which in declining conditions may cause reduced demand for industrial output.
Any adverse changes in these and other factors affecting the demand for and production of our customers' goods and materials
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
10
Our financial performance is also significantly influenced by conditions within the aerospace and defense industries.
The financial performance of our Aerospace segment, which generated approximately 40.1% of our 2017 consolidated net sales
and approximately 69.6% of our 2017 operating income before corporate expenses and net gain on sale of assets, is directly
tied to economic conditions in the commercial aviation and defense industries.
The commercial aviation industry tends to be cyclical, and capital spending by airlines and aircraft manufacturers may be
influenced by a variety of global factors including current and future traffic levels, aircraft fuel pricing, labor issues,
competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic
conditions, worldwide airline profits and backlog levels.
The defense industry may be influenced by a changing global political environment, changes in U.S. and global defense
spending, U.S. foreign policy and the activity level of military flight operations.
Changes to the aerospace and defense industries and any reductions in U.S. defense spending could have a material impact on
our current and proposed aerospace programs, which could adversely affect our operating results and future prospects. In
addition, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled, which
could put a portion of our backlog at risk.
Furthermore, because of the lengthy research and development cycle involved in bringing new products to market, we cannot
predict the economic conditions that will exist when a new product is introduced. A reduction in capital spending in the aviation
or defense industries could have a significant effect on the demand for our products, which could have an adverse effect on our
financial performance or results of operations.
Our USG programs are subject to unique risks.
We have several significant long-term contracts either directly with the USG or where the USG is the ultimate customer,
including the Sikorsky BLACK HAWK cockpit program, the Joint Programmable Fuze (“JPF”) program, the Bell Helicopter
AH-1Z program and the A-10 program. These contracts are subject to unique risks, some of which are beyond our control.
Examples of such risks include:
• The USG may modify, curtail or terminate its contracts and subcontracts at its convenience without prior notice, upon
payment for work done and commitments made at the time of termination. Modification, curtailment or termination of
our major programs or contracts could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
• Our USG business is subject to specific procurement regulations and other requirements. These requirements,
although customary in USG contracts, increase our performance and compliance costs. These costs might increase in
the future, reducing our margins, which could have a negative effect on our financial condition. Although we have
procedures designed to assure compliance with these regulations and requirements, failure to do so under certain
circumstances could lead to suspension or debarment, for cause, from USG contracting or subcontracting for a period
of time and could have a material adverse effect on our business, financial condition, results of operations and cash
flows and could adversely impact our reputation and our ability to receive other USG contract awards in the future.
• The costs we incur on our USG contracts, including allocated indirect costs, may be audited by USG representatives.
Any costs found to be improperly allocated to a specific contract would not be reimbursed, and such costs already
reimbursed would have to be refunded, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Moreover, if any audit were to reveal the existence of improper or
illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination
of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business
with the USG.
• We are from time to time subject to governmental inquiries and investigations of our business practices due to our
participation in domestic and foreign government contracts and programs and our transaction of business domestically
and internationally. Adverse findings associated with any such inquiry or investigation could also result in civil and
criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or prohibition from doing business with domestic and foreign governments.
11
Our business may be adversely affected by changes in budgetary priorities of the USG.
Because a significant percentage of our revenue is derived either directly or indirectly from contracts with the USG, changes in
federal government budgetary priorities could directly affect our financial performance. A significant decline in government
expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting
policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate
contracts at any time without penalty or not to exercise options to renew contracts.
The cost and effort to start up new aerospace programs could negatively impact our operating results and profits.
The time required and costs incurred to ramp up a new program can be significant and include nonrecurring costs for tooling,
first article testing, finalizing drawings and engineering specifications and hiring new employees able to perform the technical
work required. New programs can typically involve a greater volume of scrap, higher costs due to inefficiencies, delays in
production and learning curves that are often more extended than anticipated, all of which could have a material effect on our
business, financial condition, results of operations and cash flows.
The ability to obtain and retain product approvals issued by the Federal Aviation Administration ("FAA") and any
intellectual property claims could adversely affect our Aerospace segment’s operating results and profits.
Our Aerospace segment may be impacted by regulations set forth by the FAA to obtain Parts Manufacturer Approvals
("PMAs") to design or produce a modification or replacement aircraft part. The loss or suspension of the Company's product
and design approvals could negatively impact our operating results and profits. We believe our current design and production
processes that are subject to such regulations by the FAA are in compliance; however, there can be no assurance that we will
not lose approvals for our products in the future. Additionally, we may be subject to claims of intellectual property infringement
by third parties, including in connection with our PMA business, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Competition from domestic and foreign manufacturers may result in the loss of potential contracts and opportunities.
The aerospace markets in which we participate are highly competitive, and we often compete for work not only with large
OEMs but also sometimes with our own customers and suppliers. Many of our large customers may choose not to outsource
production due to, among other things, their own direct labor and overhead considerations and capacity utilization objectives.
This could result in these customers supplying their own products or services and competing directly with us for sales of these
products or services, all of which could significantly reduce our revenues.
Our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we
do in some areas, and we may not have the technology, cost structure, or available resources to effectively compete with them.
We believe that developing and maintaining a competitive advantage requires continued investment in product development;
engineering; supply chain management; production capabilities, including technology, equipment and facilities; and sales and
marketing, and we may not have enough resources to make the necessary investments to do so. Further, our significant
customers may attempt to use their position to negotiate price or other concessions for a particular product or service without
regard to the terms of an existing contract or the underlying cost of production.
We believe our strategies for our Aerospace segment will allow us to continue to effectively compete for key contracts and
customers, but there can be no assurance that we will be able to compete successfully in this market or against such
competitors.
12
We could be negatively impacted by the loss of key suppliers, the lack of product availability or changes in supplier
programs.
Our business depends on maintaining a sufficient supply of various products to meet our customers' demands. We have long-
standing relationships with key suppliers but these relationships generally are non-exclusive and could be terminated by either
party. If we were to lose a key supplier, or were unable to obtain the same levels of deliveries from these suppliers and were
unable to supplement those purchases with products obtained from other suppliers, it could have a material adverse effect on
our business. Additionally, we rely on foreign and domestic suppliers and commodity markets to secure raw materials used in
many of the products we manufacture within our Aerospace segment or sell within our Distribution segment. This exposes us to
volatility in the price and availability of raw materials. In some instances, we depend upon a single source of supply. Supply
interruptions could arise from shortages of raw materials, labor disputes or weather conditions affecting suppliers' production,
transportation disruptions or other reasons beyond our control. Even if we continue with our current supplier relationships, high
demand for certain products may result in us being unable to meet our customers' demands, which could put us at a competitive
disadvantage. Additionally, our key suppliers could also increase the pricing of their products, which would negatively affect
our operating results if we were not able to pass these price increases through to our customers. We base our supply
management process on an appropriate balancing of the foreseeable risks and the costs of alternative practices. To protect
ourselves against such risks, we engage in strategic inventory purchases during the year, negotiate long-term vendor supply
agreements and monitor our inventory levels to ensure that we have the appropriate inventory on hand to meet our customers'
requirements.
The adoption of new accounting guidance or changes in the interpretations of existing guidance could affect our
financial results.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These
accounting principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”) and the Securities
and Exchange Commission (“SEC”). A change in these principles or interpretations could have a significant effect on our
reported financial results, may retroactively affect previously reported results, could cause unexpected financial reporting
fluctuations and may require us to make costly changes to our operational processes and accounting systems. In May 2014, the
FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes
nearly all existing generally accepted accounting principles ("GAAP") revenue recognition guidance. The updated standard is
effective for us in the first quarter of 2018 and we will transition using the modified retrospective transition method. We have
completed our preliminary evaluation of the likely impact of ASU 2014-09 on our consolidated financial statements. For
additional information about these matters, please refer to Note 1, Summary of Significant Accounting Policies - Recent
Accounting Standards in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Our failure to comply with the covenants contained in our senior credit facility could trigger an event of default, which
could materially and adversely affect our operating results and our financial condition.
Our senior credit facility requires us to maintain certain financial ratios and comply with various operational and other
covenants. If we were unable to maintain these ratios and comply with such covenants, we would need to seek relief from our
lenders in order to avoid, cure or have waived an event of default under the facility. There can be no assurance that we would
be able to obtain such relief on commercially reasonable terms or otherwise. If an event of default occurs and is not cured or
waived, we may not be able to make further borrowings under the credit facility and our lenders could, among other things,
cause all outstanding indebtedness under the credit facility to be due and payable immediately. There can be no assurance that
our assets or cash flows would be sufficient to provide us with sufficient liquidity to fund outstanding commitments or meet
other business requirements or to enable us to fully repay those amounts or that we would be able to refinance or restructure the
indebtedness. If, as or when required, we are unable to repay, refinance or restructure the indebtedness outstanding under our
senior credit facility, or amend the financial ratios and covenants contained therein, the lenders under our senior credit facility
could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against
our assets. This, in turn, could result in an event of default under one or more of our other financing agreements, including our
convertible notes.
In addition, in the ordinary course of business, certain of our customers require us to deliver standby letters of credit to
guarantee our performance under our contractual obligations with them, which are currently issued by certain of our lenders
pursuant to our senior credit facility. If we are unable to obtain letters of credit as needed to operate our business as a result of
any of the circumstances described above or otherwise, our ability to enter into certain contracts may be adversely affected.
Moreover, by their nature, standby letters of credit may be drawn upon by the beneficiaries thereof, which could affect our
financial ratios and ability to make additional borrowings. The occurrence of any of these events could have a material adverse
effect on our liquidity, financial position or results of operations.
13
Additional tax exposure and tax law changes could have a material effect on our financial results.
We are subject to income taxes in the United States and certain foreign jurisdictions. The determination of the Company’s
provision for income taxes and other tax liabilities requires judgment and is based on legislative and regulatory structures that
exist in the jurisdictions in which we operate, and we are periodically under audit by various tax authorities. We regularly
assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes.
We are currently under audit by various states for the years 2011 through 2015. Although we do not believe that any material
adjustments will result from these audits, the outcome of tax audits cannot be predicted with certainty. Any final assessment
resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets
and may require us to pay penalties and interest that could have a material adverse effect on our results of operations.
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was signed into law. One of the major provisions in this
legislation was a reduction in the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. While this rate reduction
will be favorable as it applies to earnings in 2018 and thereafter, the rate change also required a revaluation of our existing net
U.S. deferred tax assets as of December 31, 2017. The Company is still evaluating some of the other provisions of Tax Reform,
but given the rate reduction, the overall impact of the Tax Reform is expected to be beneficial. For additional information on
Tax Reform, please refer to Note 12, Income Taxes, in the Notes to Consolidated Financial Statements in this Annual Report on
Form 10-K.
The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating
results.
As of December 31, 2017, we had approximately $19.6 million in net deferred tax assets after valuation allowance. These
deferred tax assets can be used to offset taxable income in future periods and reduce income taxes payable in those future
periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and
estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning
strategies. In the event that there is insufficient positive evidence to support the valuation of these assets, we may be required to
further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in a material non-cash
charge in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of
operations.
The freezing of our defined benefit pension plan could trigger a material curtailment adjustment in favor of the USG.
Our defined benefit pension plan was frozen with respect to future benefit accruals effective December 31, 2015. U.S.
Government Cost Accounting Standard 413 ("CAS 413") requires the Company to determine the USG’s share of any resulting
pension curtailment adjustment attributable to pension expense charged to Company contracts with the USG, which could
result in an amount due to the USG if the plan is determined to be in a surplus position or an amount due to the Company if the
plan is determined to be in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability
representing our estimate of the amount due to the USG based on our pension curtailment adjustment calculation, which was
submitted to the USG for review in December 2016. The Company has maintained its accrual at $0.3 million as of December
31, 2017. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our
results of operations, financial position and cash flows.
14
Estimates of future costs for long-term contracts impact our current and future operating results and profits.
We generally recognize sales and gross margin on long-term contracts based on the percentage-of-completion method of
accounting. This method allows for revenue recognition as our work progresses on a contract and requires that we estimate
future revenues and costs over the life of a contract. Revenues are estimated based upon the negotiated contract price, with
consideration being given to exercised contract options, change orders and, in some cases, projected customer requirements.
Contract costs may be incurred over a period of several years, and the estimation of these costs requires significant judgment
based upon the acquired knowledge and experience of program managers, engineers and financial professionals.
Estimated costs are based primarily on anticipated purchase contract terms, historical performance trends, business base and
other economic projections. The complexity of certain programs as well as technical risks and the availability of materials and
labor resources could affect our ability to accurately estimate future contract costs. Additional factors that could affect
recognition of revenue and gross margin under the percentage-of-completion method include:
• Accounting for initial program costs;
• The effect of nonrecurring work;
• Delayed contract start-up or changes to production schedules;
• Transition of work to or from the customer or other vendors;
• Claims or unapproved change orders;
•
• Delayed completion of certain programs for which inventory has been built up;
• Our ability to estimate or control scrap level;
• Accrual of contract losses; and
• Changes in our overhead rates.
Product warranty issues;
Because of the significance of the judgments and estimation processes, it is likely that materially different sales and profit
amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in
underlying assumptions, circumstances or estimates may adversely affect current and future financial performance. While we
perform quarterly reviews of our long-term contracts to address and lessen the effects of these risks, there can be no assurance
that we will not make material adjustments to underlying assumptions or estimates relating to one or more long-term contracts
that have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may lose money or generate lower than expected profits on our fixed-price contracts.
Our customers set demanding specifications for product performance, reliability and cost. Most of our government contracts
and subcontracts provide for a predetermined, fixed price for the products we make regardless of the costs we incur. Therefore,
we must absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these
contracts and in projecting the ultimate level of sales that we may achieve. Our failure to anticipate technical problems,
estimate costs accurately, integrate technical processes effectively or control costs during performance of a fixed-price contract
may reduce the profitability of a fixed-price contract or cause a loss. While we believe that we have recorded adequate
provisions in our financial statements for losses on our fixed-price contracts as required under GAAP, there can be no assurance
that our contract loss provisions will be adequate to cover all actual future losses.
15
The U.S. Navy contract award for the FMU-139 D/B bomb fuze could jeopardize the continued viability and
profitability of the Company's FMU-152 A/B bomb fuze program with the U.S. Air Force ("USAF").
The Company currently provides the FMU-152 A/B bomb fuze (also referred to as the JPF) to the USAF and twenty-eight
other nations, but the U.S. Navy currently utilizes a different fuze - the FMU-139. During 2015, the U.S. Naval Air Systems
Command (“NAVAIR”) solicited proposals for a firm-fixed price production contract to implement improvements to the
performance characteristics of the FMU-139 (such improved fuze having been designated the FMU-139 D/B). The USAF has
stated that, if and when a contract is awarded and production begins, the funds associated with the FMU-152 A/B will be
redirected to the FMU-139 D/B. During the third quarter of 2015, the U.S. Navy awarded the FMU-139 D/B contract to a
competitor. In the event that the FMU-139 D/B program proceeds as planned and the USAF redirects the funds associated with
the FMU-152 A/B to the FMU-139 D/B, our business, financial condition, results of operations and cash flows may be
materially adversely impacted. The timing of the impact on our financial statements is dependent on the ability of our
competitor to complete the design and qualification phase of the program and other factors. Our competitor has publicly stated
that this program will have a 32-month qualification phase, after which production will begin. Due to the complexity of this
program, the uncertainty associated with the successful completion of each phase in accordance with the planned schedule and
the pending status of the USAF's final decision to redirect funds to the FMU-139 D/B, the timing and magnitude of the impact
on the Company's financial statements is not certain.
A failure to develop and retain national accounts at our Distribution segment could adversely impact our financial
results.
Companies continue to consolidate their purchases of industrial products through a small number of major distributors or
integrated suppliers, rather than a large number of vendors. Our Distribution segment has developed a strategy to compete
effectively for national accounts, but we face intensifying competition from our competitors, several of which are larger and
have a more extensive geographic footprint.
If we are not awarded additional national accounts in the future, or if existing national account agreements are not renewed, our
sales volume could be negatively impacted, which may result in lower gross margins and weaker operating results.
Additionally, national accounts may require an increased level of customer service, such as investments in the form of opening
new branches to meet our customers' needs. The cost and time associated with these activities could be significant, and if the
relationship is not maintained, we ultimately may not be able to generate a return on these investments.
The loss of the Distribution segment’s key suppliers with whom we have national reseller agreements and/or national
distributor agreements could adversely affect our operating results and profits.
An element of our Distribution segment’s strategy is to establish alignment with a single vendor in certain portions of its
business. As a result, we currently have distribution rights for certain product lines and depend on these distribution rights as a
source of business. Many of these distribution rights are ours pursuant to contracts that are subject to cancellation upon little or
no prior notice. Although we believe we could obtain alternate distribution rights in the event of such a cancellation, the
termination or limitation by any key supplier of its relationship with the Company could result in a temporary disruption of our
business and, in turn, could adversely affect our results of operations and financial condition.
A decline in sales at our Distribution segment could adversely impact the vendor incentives and rebates we earn from
suppliers.
Some of our suppliers offer vendor incentives and rebates that are tied to the amount of product that we purchase. These
incentives and rebates can be market or customer-account specific, or relate to a specified program period. A decline in sales
could adversely impact the vendor incentives and rebates we earn from suppliers.
16
Our information technology systems, processes and sites may suffer interruptions or failures which may affect our
ability to conduct our business.
Our information technology systems provide critical data connectivity, information and services for internal and external
users. These interactions include, but are not limited to, ordering and managing materials from suppliers, inventory
management, shipping products to customers, processing transactions, summarizing and reporting results of operations,
complying with regulatory, legal or tax requirements and other processes necessary to manage our business. Our computer
systems face the threat of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks
and other security problems and system disruptions.
Cyber-attacks are evolving and include, but are not limited to, malicious software, destructive malware, attempts to gain
unauthorized access to data, disruption or denial of service attacks and other electronic security breaches that could lead to
disruptions in critical systems, unauthorized release of confidential, personal or otherwise protected information and corruption
of data, networks or systems. We provide products and services to customers who also face cyber threats. Our products and
services may be subject to cyber threats and we may not be able to detect or deter such threats, which could result in losses that
could adversely affect our customers and our company. Additionally, we could be impacted by cyber threats in products that we
use in our partners' and customers' systems that are used in connection with our business. These events, if not prevented or
mitigated, could damage our reputation, require remedial action and lead to loss of business, regulatory actions, potential
liability and other financial losses.
We have put in place business continuity plans and security precautions for our critical systems, including a back-up data
center. However, if our information technology systems are damaged or cease to function properly due to any number of
causes, such as catastrophic events, power outages and security breaches resulting in unauthorized access or cyber-attacks, and
our business continuity plans and security precautions do not function effectively on a timely basis, we may suffer interruptions
in our operations or the misappropriation of proprietary information, which may adversely impact our business, financial
condition, results of operations and cash flows.
Our implementation of enterprise resource planning (“ERP”) systems may adversely affect our business and results of
operations or the effectiveness of internal controls over financial reporting.
We are currently implementing new ERP systems within our Aerospace and Distribution segments. ERP implementations are
complex and time-consuming projects that involve substantial expenditures on system software and implementation activities
that take several years. If we do not effectively implement the ERP systems or if the systems do not operate as intended, it
could adversely affect our financial reporting systems and our ability to produce financial reports, the effectiveness of internal
controls over financial reporting, and our business, financial condition, results of operations and cash flows.
A failure to maintain effective internal controls could adversely affect our ability to accurately report our financial
results or prevent fraud.
Our ability to provide assurance with respect to our financial reports and to effectively prevent fraud depends on effective
internal control. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements; therefore, even effective controls can only provide reasonable assurance with respect to the preparation and fair
presentation of financial statements. If our internal controls were to be compromised, our financial statements could become
materially misleading, which could adversely affect the trading price of our common stock. Any material weakness could
adversely impact investor confidence in the accuracy of our financial statements, affecting our ability to obtain additional
financing. This would likely have an adverse effect on our business, financial condition and the market value of our stock.
Additionally, we would be required to incur costs to make the necessary improvements to our internal control systems.
Although management has assessed our internal control over financial reporting as effective based on criteria set forth by the
Committee of Sponsoring Organizations - Integrated Framework, we can give no assurance that material weaknesses will not
occur in the future nor that existing controls will continue to be adequate to prevent or identify irregularities or ensure fair
presentation of our financial statements in the future.
17
We may make acquisitions or investments in new businesses, products or technologies that involve additional risks,
which could disrupt our business or harm our financial condition or results of operations.
As part of our business strategy, we have made, and expect to continue to make, acquisitions of businesses or investments in
companies that offer complementary products, services and technologies. Such acquisitions or investments involve a number of
risks, including:
• Assimilating operations and products may be unexpectedly difficult;
• Management's attention may be diverted from other business concerns;
• We may enter markets in which we have limited or no direct experience;
• We may lose key employees, customers or vendors of an acquired business;
• We may not be able to achieve the synergies or cost savings we anticipated;
• We may not realize the assigned value of the acquired assets;
• We may experience quality control failures or encounter other customer relationship issues; and
• We may become subject to preexisting liabilities and obligations of the acquired businesses.
These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows. In
addition, the consideration paid for any future acquisitions could include our stock or require that we incur additional debt and
contingent liabilities. As a result, future acquisitions could cause dilution of existing equity interests and earnings per share.
Certain of our operations are conducted through joint ventures, which entail special risks.
The Company has a 49% equity interest in Kineco-Kaman Composites - India Private Limited, a composites manufacturing
joint venture located in Goa, India. The Company relies significantly on the services and skills of its joint venture partner to
manage and conduct the local business operations of the joint venture and ensure compliance with all applicable laws and
regulations. If our joint venture partner fails to perform these functions adequately, it may adversely affect our business,
financial condition, results of operations and cash flows. Moreover, if our joint venture partner fails to honor its financial
obligations to commit capital, equity or credit support to the joint venture as a result of financial or other difficulties or for any
other reason, the joint venture may be unable to perform contracted services or deliver contracted products unless we provide
the necessary capital, equity or credit support.
We may be unable to realize expected benefits from our sales initiatives and cost reduction and restructuring efforts and
our profitability may be hurt or business otherwise might be adversely affected.
In both of our segments, we have a number of initiatives to grow sales and win new programs. Additionally, in order to operate
more efficiently and control costs, from time to time, we announce restructuring plans, which include workforce reductions as
well as facility consolidations and other cost reduction initiatives. These plans are intended to generate operating expense
savings through direct cost and indirect overhead expense reductions, as well as other savings. We may undertake further sales
growth initiatives workforce reductions or restructuring actions in the future. These types of sales growth initiatives and cost
reduction and restructuring activities are complex. If we do not successfully manage our current initiatives and restructuring
activities or any other similar activities that we may undertake in the future, expected efficiencies and benefits might be delayed
or not realized, and our operations and business could be disrupted. Risks associated with these initiatives, actions and other
workforce management issues include political responses to such actions, unforeseen delays in the implementation of
anticipated workforce reductions, additional unexpected costs, adverse effects on employee morale and the failure to meet
operational targets, whether due to the loss of employees, work stoppages or otherwise, any of which may impair our ability to
achieve anticipated sales or cost reductions and could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
18
Our financial results of operations could be adversely affected by impairment of our goodwill or other intangible assets.
When we acquire a business, we record goodwill equal to the excess of the amount we pay for the business, including liabilities
assumed, over the fair value of the tangible and identifiable intangible assets of the business we acquire. Goodwill and other
intangible assets that have indefinite useful lives must be evaluated at least annually for impairment. The specific guidance for
testing goodwill and other non-amortized intangible assets for impairment requires management to make certain estimates and
assumptions when allocating goodwill to reporting units and determining the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of
capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value
is generally determined using a combination of the discounted cash flow, market multiple and market capitalization valuation
approaches. Absent any impairment indicators, we generally perform our evaluations annually in the fourth quarter, using
available forecast information. If at any time we determine an impairment has occurred, we are required to reflect the reduction
in value as an expense within operating income, resulting in a reduction of earnings and a corresponding reduction in our net
asset value in the period such impairment is identified.
We rely on the experience and expertise of our skilled employees, and must continue to attract and retain qualified
technical, marketing and managerial personnel in order to succeed.
Our future success will depend largely upon our ability to attract and retain highly skilled technical, operational and financial
managers and marketing personnel. There is significant competition for such personnel in the aerospace and distribution
industries. We try to ensure that we offer competitive compensation and benefits as well as opportunities for continued
development, and we continually strive to recruit and train qualified personnel and retain key employees. There can be no
assurance, however, that we will continue to be successful in attracting and retaining the personnel we require to develop new
and enhanced products and to continue to grow and operate profitably.
We are subject to litigation, tax, environmental and other legal compliance risks that could adversely affect our
operating results.
We are subject to a variety of litigation, tax and legal compliance risks. These risks include, among other things, possible
liability relating to contract-related claims, government contracts, product liability matters, personal injuries, intellectual
property rights, taxes, environmental matters and compliance with U.S. and foreign export laws, competition laws, laws
governing improper business practices and data privacy laws, including the EU-wide General Data Protection Regulation (the
"GDPR"), which will take effect in May 2018. In the event that we or one of our business units engage in wrongdoing in
connection with any of these kinds of matters, we could be subject to significant fines, penalties, repayments, other damages (in
certain cases, treble damages), or suspension or debarment from government contracts. Moreover, our failure to comply with
applicable export and trade practice laws could result in civil or criminal penalties and suspension or termination of export
privileges.
As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate.
Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related
interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and
uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and
could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws
relating to greenhouse gas emissions, could lead to new or additional investment in product designs and could increase
environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such concerns, including
greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw material
costs.
Our financial results may be adversely affected by the outcome of pending legal proceedings and other contingencies that
cannot be predicted. In accordance with GAAP, if a liability is deemed probable and reasonably estimable in light of the facts
and circumstances known to us at a particular point in time, we make an estimate of material loss contingencies and establish
reserves based on our assessment. Subsequent developments in legal proceedings may affect our assessment. The accrual of a
loss contingency adversely affects our results of operations in the period in which a liability is recognized. This could also have
an adverse impact on our cash flows in the period during which damages are paid.
For a discussion of these matters, please refer to Note 15, Commitments and Contingencies, and Note 9, Environmental Costs,
in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
19
Regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions designed to improve transparency and
accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic
of the Congo ("DRC") and adjoining countries. In August 2012, the SEC promulgated disclosure and reporting requirements
for companies who use conflict minerals in their products. Complying with these disclosure and reporting requirements may
require us to incur substantial costs and expenditures to conduct due diligence to determine the sources of conflict minerals
used in our products. Moreover, these requirements may result in changes to the sourcing practices of our customers which may
require the identification and qualification of alternate sourcing for the components of products we manufacture, which could
impact the availability of, or cause increases in the price of, materials used in our products. We may face reputational
challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to
verify the origin of conflict minerals used in our products. As there may be only a limited number of suppliers offering “conflict
free” conflict minerals, there can be no assurance that we will be able to obtain necessary conflict minerals from such suppliers
in sufficient quantities or at competitive prices.
Exports of certain of our products are subject to various export control regulations and authorizations, and we may not
be successful in obtaining the necessary U.S. Government approvals and resultant export licenses for proposed sales to
certain foreign customers.
We must comply with various laws and regulations relating to the export of our products and technology, including a
requirement to obtain the necessary export approvals and/or other licenses or authorizations from the U.S. Government which
may entail a congressional notification, before we are permitted to sell certain products and technologies outside of the United
States. We can give no assurance that we will be successful in obtaining the necessary licenses or authorizations in a timely
manner or at all. Any significant delay in, or impairment of, our ability to sell products or technologies outside of the United
States could have a material adverse effect on our business, financial condition and results of operations.
Our foreign operations require us to comply with a number of United States and international laws and regulations,
violations of which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
We are required to comply with a number of United States and international laws and regulations, such as the U.S. Foreign
Corrupt Practices Act of 1977 (the "FCPA"), the U.K. Bribery Act of 2010 (the "Bribery Act"), and other similar anticorruption
laws and regulations. The FCPA generally prohibits United States companies or their agents and employees from providing
anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in their official
capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage.
Although we have internal controls, procedures and compliance programs to train our employees and agents with respect to
compliance with the FCPA and other applicable international laws and regulations, there can be no assurance that our policies,
procedures and programs will always protect us from reckless or criminal acts committed by our employees or agents.
Allegations of violations of applicable international laws and regulations, including the FCPA and the Bribery Act, may result
in internal, independent or government investigations. Violations of the FCPA and other international laws and regulations may
lead to severe criminal or civil sanctions and could result in liabilities that have a material adverse effect on our business,
financial condition, results of operations and cash flows.
20
Economic conditions and regulatory changes leading up to and following the United Kingdom’s ("UK") likely exit from
the European Union ("EU") could have a material adverse effect on our business, financial condition and results of
operations.
We have business operations in both the UK and the broader EU. In June 2016, a majority of voters in the UK elected to
withdraw from the EU in a national referendum, and in March 2017, the UK gave notice to the EU that it was formally
initiating the withdrawal process. The terms of withdrawal and the future relationship between the UK and the EU are currently
subject to negotiation, creating significant uncertainty about the future terms of trade and the ongoing relationship between the
UK and the EU during any transition period or more permanently. In addition, the UK referendum and withdrawal process have
given rise to calls for the governments of other EU member states to consider withdrawal.
These developments, or the perception that any of them could occur, may have a material adverse effect on global economic
conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the
ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit
ratings may be especially subject to increased market volatility. Lack of clarity about future UK laws and regulations as the UK
determines which EU laws to replace or replicate in the course of its withdrawal, including financial laws and regulations, tax
and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and
regulations, immigration laws and employment laws, could decrease foreign direct investment in the UK, increase costs,
depress economic activity and restrict our access to capital. If the UK and the EU are unable to negotiate acceptable withdrawal
terms or if other EU member states pursue withdrawal, barrier-free access between the UK and other EU member states or
among the European economic area overall could be diminished or eliminated. Any of these factors could have a direct or
indirect impact on our business in the UK and EU, our customers and suppliers in the UK and EU and our business outside the
UK and EU. Any of these factors could have a material adverse effect on our business, financial condition and results of
operations and reduce the price of our common stock.
Our foreign operations present additional risks and uncertainties which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Our foreign business operations create additional risks and uncertainties, including the following:
• Longer payment cycles;
• Difficulties in accounts receivable collection, including complexities in documenting letters of credit;
• Changes in regulatory requirements;
• Export restrictions, tariffs and other trade barriers;
• Ability to meet offset requirements;
• Difficulties in staffing and managing foreign operations;
•
•
•
• Cultural and legal differences impacting the conduct of business.
Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world;
Political or economic instability in the markets we serve;
Potentially adverse tax consequences; and
Any one or more of these factors could have a material adverse effect on our domestic or international operations, and,
consequently, on our business, financial condition, results of operations and cash flows.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to risks that are unique to the products and services we provide. While we believe that we maintain adequate
insurance for certain risks, insurance cannot be obtained to protect against all risks and liabilities. It is therefore possible that
our insurance coverage may not cover all claims or liabilities, and we may be forced to bear substantial unanticipated costs.
Business disruptions could seriously affect our sales and financial condition or increase our costs and expenses.
Our business may be impacted by disruptions including, but not limited to, threats to physical security, information technology
attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises. Any of these
disruptions could affect our internal operations or services provided to customers, and could impact our sales, increase our
expenses or adversely affect our reputation or our stock price. We have developed and are implementing business continuity
plans for each of our businesses, in order to mitigate the effects disruptions may have on our financial results.
21
Our business could be impacted as a result of actions by activist shareholders or others.
We may be subject, from time to time, to legal and business challenges in the operation of our company due to actions
instituted by activist shareholders or others. Responding to such actions could be costly and time-consuming, may not align
with our business strategies and could divert the attention of our Board of Directors and senior management from the pursuit of
our business strategies. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the
perception of a change in the direction of the business or other instability and may make it more difficult to attract and retain
qualified personnel and business partners and may affect our relationships with vendors, customers and other third parties.
Our revenue, cash flows and quarterly results may fluctuate, which could adversely affect our stock price.
We may in the future experience significant fluctuations in our quarterly operating results attributable to a variety of factors.
Such factors include but are not limited to:
Introduction, enhancement or announcement of products by us or our competitors;
Pricing pressures from customers;
Size, timing and shipment terms of significant orders;
• Changes in demand for our products;
•
• Market acceptance of our new products;
• The growth rates of certain market segments in which we compete;
•
• Difficulties with our technical programs;
• Budgeting cycles of customers;
•
• Mix of distribution channels;
• Mix of products and services sold;
• Mix of domestic and international revenues;
•
Fluctuations in currency exchange rates;
• Changes in the level of operating expenses;
• Changes in our sales incentive plans;
• Changes in tax laws in the jurisdictions in which we conduct business;
•
Inventory obsolescence;
• Accrual of contract losses;
•
• Health care reform;
• Completion or announcement of acquisitions; and
• General economic conditions in regions in which we conduct business.
Fluctuations in oil and utility costs;
Most of our expenses are relatively fixed in the short-term, including costs of personnel and facilities, and are not easily
reduced. Thus, an unexpected reduction in our revenue, or failure to achieve an anticipated rate of growth, could have a
material adverse effect on our profitability. If our operating results do not meet the expectations of investors, our stock price
may decline.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements also may be included in other publicly available
documents issued by the Company and in oral statements made by our officers and representatives from time to time. These
forward-looking statements are intended to provide management's current expectations or plans for our future operating and
financial performance, based on assumptions currently believed to be valid. They can be identified by the use of words such as
"anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may,"
"should," "would," "could," "will" and other words of similar meaning in connection with a discussion of future operating or
financial performance. Examples of forward looking statements include, among others, statements relating to future sales,
earnings, cash flows, results of operations, uses of cash and other measures of financial performance.
Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and other factors that
may cause the Company's actual results and financial condition to differ materially from those expressed or implied in the
forward-looking statements. Such risks, uncertainties and other factors include, among others: (i) changes in domestic and
foreign economic and competitive conditions in markets served by the Company, particularly the defense, commercial aviation
and industrial production markets; (ii) changes in government and customer priorities and requirements (including cost-cutting
initiatives, government and customer shut-downs, the potential deferral of awards, terminations or reductions of expenditures
22
to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional actions or
automatic sequestration); (iii) changes in geopolitical conditions in countries where the Company does or intends to do
business; (iv) the successful conclusion of competitions for government programs (including new, follow-on and successor
programs) and thereafter successful contract negotiations with government authorities (both foreign and domestic) for the
terms and conditions of the programs; (v) the timely receipt of any necessary export approvals and/or other licenses or
authorizations from the U.S. Government; (vi) timely satisfaction or fulfillment of material contractual conditions precedents in
customer purchase orders, contracts, or similar arrangements; (vii) the existence of standard government contract provisions
permitting renegotiation of terms and termination for the convenience of the government; (viii) the successful resolution of
government inquiries or investigations relating to our businesses and programs; (ix) risks and uncertainties associated with the
successful implementation and ramp up of significant new programs, including the ability to manufacture the products to the
detailed specifications required and recover start-up costs and other investments in the programs; (x) potential difficulties
associated with variable acceptance test results, given sensitive production materials and extreme test parameters; (xi) the
receipt and successful execution of production orders under the Company's existing U.S. government JPF contract, including
the exercise of all contract options and receipt of orders from allied militaries, but excluding any next generation
programmable fuze programs, as all have been assumed in connection with goodwill impairment evaluations; (xii) the
continued support of the existing K-MAX® helicopter fleet, including sale of existing K-MAX® spare parts inventory and the
receipt of orders for new aircraft sufficient to recover our investment in the restart of the K-MAX® production line; (xiii) the
accuracy of current cost estimates associated with environmental remediation activities; (xiv) the profitable integration of
acquired businesses into the Company's operations; (xv) the ability to implement our ERP systems in a cost-effective and
efficient manner, limiting disruption to our business, and allowing us to capture their planned benefits while maintaining an
adequate internal control environment; (xvi) changes in supplier sales or vendor incentive policies; (xvii) the effects of price
increases or decreases; (xviii) the effects of pension regulations, pension plan assumptions, pension plan asset performance,
future contributions and the pension freeze, including the ultimate determination of the U.S. Government's share of any pension
curtailment adjustment calculated in accordance with CAS 413; (xix) future levels of indebtedness and capital expenditures;
(xx) the continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs
for such items; (xxi) the effects of currency exchange rates and foreign competition on future operations; (xxii) changes in laws
and regulations, taxes, interest rates, inflation rates and general business conditions; (xxiii) the effects, if any, of the UK's exit
from the EU; (xxiv) future repurchases and/or issuances of common stock; (xxv) the occurrence of unanticipated restructuring
costs or the failure to realize anticipated savings or benefits from past or future expense reduction actions; and (xxvi) other
risks and uncertainties set forth herein.
Any forward-looking information provided in this report should be considered with these factors in mind. We assume no
obligation to update any forward-looking statements contained in this report.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
23
ITEM 2.
PROPERTIES
Our facilities are generally suitable for, and adequate to serve, their intended uses. At December 31, 2017, we occupied major
facilities at the following principal locations:
Segment
Location
Aerospace..........
Jacksonville, Florida .........................................
Property Type (1)
Leased - Manufacturing & Office
Chihuahua, Mexico ...........................................
Leased - Manufacturing & Office
Rimpar, Germany..............................................
Owned - Manufacturing & Office
Prachatice, Czech Republic...............................
Owned - Assembly & Office
Wichita, Kansas.................................................
Leased - Manufacturing & Office
Darwen, Lancashire, United Kingdom .............
Leased - Manufacturing & Office
Hyde, Greater Manchester, United Kingdom....
Leased - Manufacturing & Office
Burnley, Lancashire, United Kingdom..............
Leased - Manufacturing & Office
Orlando, Florida ................................................
Owned - Manufacturing & Office
Everett, Washington ..........................................
Leased - Office
Höchstadt, Germany..........................................
Owned - Manufacturing & Office
Middletown, Connecticut..................................
Owned - Manufacturing & Office
Bloomfield, Connecticut ...................................
Owned - Manufacturing, Office & Service Center
Bennington, Vermont ........................................
Owned - Manufacturing & Office
Gilbert, Arizona.................................................
Leased - Office & Service Center
Distribution .......
Bloomfield, Connecticut ...................................
Ontario, California ............................................
Owned - Office
Leased - Distribution Center & Office
Albany, New York.............................................
Leased - Distribution Center & Office
Savannah, Georgia ............................................
Leased - Distribution Center & Office
Salt Lake City, Utah ..........................................
Leased - Distribution Center & Office
Louisville, Kentucky .........................................
Leased - Distribution Center & Office
Gurabo, Puerto Rico..........................................
Leased - Distribution Center & Office
Bolingbrook, Illinois .........................................
Leased - Office & Branch
Rochester, New York.........................................
Leased - Office & Branch
Akron, Ohio ......................................................
Leased - Office
Teterboro, New Jersey.......................................
Leased - Office & Branch
Plano, Texas ......................................................
Leased - Office & Warehouse
Franklin, Massachusetts ....................................
Leased - Office & Warehouse
Corporate...........
Bloomfield, Connecticut ...................................
Owned - Office & Information Technology Back-
Up Data Center
Distribution (2) ......................................................................................................................................................
Aerospace.............................................................................................................................................................
Corporate (3) .........................................................................................................................................................
Total ...................................................................................................................................................................
Square Feet
2,360,886
2,281,670
103,041
4,745,597
(1) Owned facilities are unencumbered.
(2) The Distribution segment also has approximately 220 branches located across the United States and in Puerto Rico,
generally operating in leased facilities.
(3) We occupy a 40,000 square foot corporate headquarters building, 38,000 square foot mixed use building and 8,000
square foot data center in Bloomfield, Connecticut.
24
ITEM 3.
LEGAL PROCEEDINGS
General
From time to time, as a normal incident of the nature and kinds of businesses in which the Company and its subsidiaries are,
and were, engaged, various claims or charges are asserted and legal proceedings are commenced by or against the Company
and/or one or more of its subsidiaries. Claimed amounts may be substantial but may not bear any reasonable relationship to the
merits of the claim or the extent of any real risk of court or arbitral awards. We record accruals related to those matters for
which we consider a loss to be both probable and reasonably estimable. Gain contingencies, if any, are not recognized until
they are realized. Legal costs are generally expensed when incurred.
We evaluate, on a quarterly basis, developments in legal proceedings that could affect the amount of any accrual and
developments that would make a loss contingency both probable and reasonably estimable. Our loss contingencies are subject
to substantial uncertainties, however, including for each such contingency the following, among other factors: (i) the procedural
status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions;
(iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the
proceedings involve a large number of parties and/or claims in multiple jurisdictions or jurisdictions in which the relevant laws
are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status
of settlement discussions, if any, and the settlement postures of the parties. Because of these uncertainties, management has
determined that, except as otherwise noted below, the amount of loss or range of loss that is reasonably possible in respect of
each matter described below (including any reasonably possible losses in excess of amounts already accrued), is not reasonably
estimable.
While it is not possible to predict the outcome of these matters with certainty, based upon available information, management
believes that all settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered
against us in legal proceedings and that can be reasonably estimated are accrued for at December 31, 2017. Despite this
analysis, there can be no assurance that the final outcome of these matters will not have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Except as set forth below, as of December 31, 2017, neither the Company nor any of its subsidiaries is a party, nor is any of its
or their property subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the
business of the Company and its subsidiaries. Additional information relating to certain of these matters is set forth in Note 15,
Commitments and Contingencies of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements
and Supplementary Data, of this Annual Report on Form 10-K.
Environmental Matters
The Company and its subsidiaries are subject to numerous U.S. Federal, state and international environmental laws and
regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental
issues concerning activities at our facilities or former facilities or remediation as a result of past activities (including past
activities of companies we have acquired). From time to time, we receive notices from the U.S. Environmental Protection
Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or
equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which may include sites owned by us,
sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances
attributable to us from past operations. While it is not possible to predict the outcome of these proceedings, in the opinion of
management, any payments we may be required to make as a result of all such claims in existence at December 31, 2017, will
not have a material adverse effect on our business, financial condition and results of operations or cash flows.
Asbestos Litigation
Like many other industrial companies, the Company and/or one of its subsidiaries may be named as a defendant in lawsuits
alleging personal injury as a result of exposure to asbestos integrated into certain products sold or distributed by the Company
and/or the named subsidiary. A substantial majority of these asbestos-related claims have been covered by insurance or other
forms of indemnity or have been dismissed without payment. The rest have been resolved for amounts that are not material to
the Company, either individually or in the aggregate. Based on information currently available, we do not believe that the
resolution of any currently pending asbestos-related matters will have a material adverse effect on our business, financial
condition, results of operations or cash flows.
25
ITEM 4.
MINE SAFETY DISCLOSURES
Information concerning mine safety violations required by Section 1503(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act ("Dodd-Frank Act") and Item 104 of Regulation S-K was not required for this Annual Report on
Form 10-K as there were no reportable violations during 2017.
26
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET, DIVIDEND AND SHAREHOLDER INFORMATION
Our Common Stock is traded on the New York Stock Exchange under the symbol "KAMN". As of January 26, 2018, there
were 3,145 registered holders of our Common Stock. Holders of the Company’s Common Stock are eligible to participate in
the Computershare Shareowner Services program, which offers a variety of services including dividend reinvestment. A
booklet describing the program may be obtained by contacting Computershare at (800) 522-6645 or via the web at
www.cpushareownerservices.com.
The following table sets forth the high, low and closing sale prices per share of the Company’s Common Stock and the
dividends declared for the periods indicated:
2017
First quarter ......................................................................................
Second quarter..................................................................................
Third quarter.....................................................................................
Fourth quarter ...................................................................................
2016
First quarter ......................................................................................
Second quarter..................................................................................
Third quarter.....................................................................................
Fourth quarter ...................................................................................
$
$
ISSUER PURCHASES OF EQUITY SECURITIES
Market Quotations
High
Low
Close
Dividend
Declared
$
$
53.41
52.34
56.38
60.43
44.27
43.82
45.62
50.94
$
$
46.66
45.50
47.66
54.73
37.13
40.43
41.64
40.85
$
$
48.13
49.87
55.78
58.84
42.57
42.37
43.92
48.93
0.20
0.20
0.20
0.20
0.18
0.18
0.18
0.18
The following table provides information about purchases of Common Stock by the Company during the three months ended
December 31, 2017:
Period
September 30, 2017 – October 27, 2017 ................
October 28, 2017 – November 24, 2017.................
November 25, 2017 – December 31, 2017 .............
Total
Total Number
of Shares
Purchased (a)
43,961
7,908
30,981
82,850
Average
Price Paid
per Share
55.68
$
56.06
$
58.71
$
Total Number of
Shares Purchased as
Part of a Publicly
Announced Plan (b)
43,813
7,700
30,000
81,513
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plan
(in thousands)
66,236
$
65,804
$
64,043
$
(a) During the quarter the Company purchased 1,337 shares in connection with employee tax withholding obligations as
permitted by our equity compensation plans, which are SEC Rule 16b-3 qualified compensation plans. These are not purchases
under our publicly announced program.
(b) On April 29, 2015, the Company announced that its Board of Directors approved a $100.0 million share repurchase
program ("2015 Share Repurchase Program"). This program will expire December 31, 2019.
27
PERFORMANCE GRAPH
Following is a comparison of our total shareholder return for the period 2012 – 2017 compared to the S&P 600 Small Cap
Index and the Russell 2000 Small Cap Index. The performance graph does not include a published industry or line-of-business
index or peer group of similar issuers because during the performance period the Company was conducting operations in
diverse lines of business and we do not believe a meaningful industry index or peer group can be reasonably identified.
Accordingly, as permitted by regulation, the graph includes the S&P 600 Small Cap Index and the Russell 2000 Small Cap
Index, both of which are comprised of issuers with market capitalizations generally similar to that of the Company.
Kaman Corporation ..........................
S&P Small Cap 600..........................
Russell 2000 .....................................
100.00
100.00
100.00
109.89
144.08
138.82
112.65
152.37
145.62
116.72
149.37
139.19
142.27
189.04
168.85
173.72
214.05
193.58
2012
2013
2014
2015
2016
2017
28
ITEM 6.
SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
(in thousands, except per share amounts, shareholders and employees)
OPERATIONS
Net sales from continuing operations.......................
Operating income from continuing operations.........
Earnings from continuing operations before
income taxes .............................................................
Income tax expense ..................................................
Earnings from continuing operations .......................
Earnings (loss) from discontinued operations, net
of taxes .....................................................................
Gain (loss) on disposal of discontinued operations,
net of taxes ...............................................................
Net earnings..............................................................
FINANCIAL POSITION
Current assets ...........................................................
Current liabilities......................................................
Working capital ........................................................
Property, plant and equipment, net...........................
Total assets ...............................................................
Long-term debt, excluding current portion ..............
Shareholders’ equity.................................................
PER SHARE AMOUNTS
Basic earnings per share from continuing
operations .................................................................
Basic earnings (loss) per share from discontinued
operations .................................................................
Basic earnings (loss) per share from disposal of
discontinued operations............................................
Basic earnings per share ...........................................
Diluted earnings per share from continuing
operations .................................................................
Diluted earnings (loss) per share from discontinued
operations .................................................................
Diluted earnings (loss) per share from disposal of
discontinued operations............................................
Diluted earnings per share........................................
Dividends declared ...................................................
Shareholders’ equity.................................................
Market price range – High .......................................
Market price range – Low ........................................
AVERAGE SHARES OUTSTANDING
Basic .........................................................................
Diluted......................................................................
GENERAL STATISTICS
Registered shareholders............................................
Employees ................................................................
20171
20162
20153
20144
20135
$ 1,805,909
114,175
$ 1,808,376
105,923
$ 1,775,125
104,519
$ 1,794,962
110,507
$ 1,653,921
103,346
94,378
44,552
49,826
89,704
30,850
58,854
87,989
27,551
60,438
96,502
30,722
65,780
90,654
31,588
59,066
—
—
—
(2,924)
(2,386)
$
$
—
49,826
747,869
246,299
501,570
185,452
1,455,452
391,651
635,656
$
$
—
58,854
698,553
353,886
344,667
176,521
1,426,286
296,598
565,787
$
$
—
60,438
676,035
236,689
439,346
175,586
1,439,611
434,227
543,077
$
$
(4,984)
57,872
662,256
221,724
440,532
147,825
1,199,281
269,308
517,665
$
$
420
57,100
665,205
227,956
437,249
148,508
1,138,088
262,112
511,292
$
1.80
$
2.17
$
2.22
$
2.43
$
2.21
$
$
$
$
—
—
2.17
2.10
—
—
2.10
0.72
20.87
50.94
37.13
27,107
28,072
3,261
5,265
$
$
$
$
—
—
2.22
2.17
—
—
2.17
0.72
20.09
43.47
35.09
27,177
27,868
3,402
5,258
$
$
$
$
(0.11)
(0.18)
2.14
2.37
(0.11)
(0.18)
2.08
0.64
19.08
44.60
37.43
27,053
27,777
3,532
4,797
(0.09)
0.02
2.14
2.17
(0.09)
0.02
2.10
0.64
19.04
40.35
32.16
26,744
27,143
3,642
4,743
(See Footnotes below)
$
$
$
$
$
$
$
$
—
—
1.80
1.75
—
—
1.75
0.80
22.85
60.43
45.50
27,611
28,418
3,142
5,297
29
(Footnotes to Five-Year Selected Financial Data above)
Included within certain annual results are a variety of unusual or significant items that may affect comparability. The most
significant of such items are described below.
1. Results for 2017 include $9.7 million in tax expense associated with the revaluation of the Company's existing U.S.
deferred tax assets resulting from Tax Reform, $2.7 million in expense related to restructuring activities at the
Aerospace segment and $2.8 million in separation costs associated with two senior executives. Additionally, we issued
convertible senior unsecured notes in the aggregate principal amount of $200.0 million ("2024 Notes"). The Company
used the proceeds from the issuance of the 2024 Notes, along with cash received in connection with the termination of
existing convertible note hedge transactions, to repurchase a portion of the existing convertible senior unsecured notes
due in November 2017 ("2017 Notes") at a cost of $106.7 million, purchase a capped call related to the 2024 Notes
and pay down a portion of our revolving credit facility. The remaining portion of the 2017 Notes was settled in
November 2017. The Company incurred $7.4 million of debt issuance costs in connection with the issuance of the
2024 Notes. Of the total amount, $0.7 million was recorded as an offset to additional paid-in capital and the remaining
balance of $6.7 million was recorded as a contra-debt balance and is being amortized over the term of the 2024 Notes.
2. Results for 2016 include $5.1 million of acquisition transaction and integration costs related to our 2015 acquisitions,
$2.5 million of severance costs at our Aerospace segment, of which $1.1 million is included in acquisition transaction
and integration costs, and $1.0 million of restructuring and severance costs at our Distribution segment. Additionally,
the carrying amount of the 2017 Notes was reclassified to current liabilities, as these 2017 Notes were convertible
through April 3, 2017. Upon closure of the conversion period, the Notes remained in current liabilities due to their
scheduled maturity.
3. Results for 2015 include $5.1 million in expense related to the acquisitions at both the Aerospace and Distribution
segments, $4.0 million in expense associated with the resolution of the matters related to our AH-1Z program, $3.0
million of expenses related to foreign currency transactions associated with the purchase of GRW Bearing GmbH
("GRW") and $2.4 million of expenses associated with restructuring and severance costs at our Distribution segment.
4. Results for 2014 include the sale of the Distribution segment's Mexican operations for $9.6 million on December 19,
2014. The net loss of $5.3 million resulting from the sale is included in the loss on disposal of discontinued operations
for 2014. Additionally, we incurred $2.2 million of costs associated with the sale of our Moosup facility.
5. Results for 2013 include a $2.1 million non-cash non-tax deductible charge for the impairment of goodwill related to
Vermont Composites and a gain on discontinued operations due to a $0.4 million favorable tax result versus previous
estimates and other activity related to the settlement of the closing balance sheet of the Distribution segment's
Canadian operations.
30
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide
readers of our consolidated financial statements with the perspectives of management. MD&A presents in narrative form
information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our
future results. This should allow the readers of this report to obtain a comprehensive understanding of our businesses,
strategies, current trends and future prospects. MD&A should be read in conjunction with the Consolidated Financial
Statements and related Notes included in this Form 10-K.
OVERVIEW OF BUSINESS
Kaman Corporation conducts business through two business segments:
• The Distribution segment is a leading power transmission, automation and fluid power industrial distributor with
operations throughout the United States. The segment provides electro-mechanical products, bearings, power
transmission, motion control and electrical and fluid power components, along with engineered integrated solutions
for our customers' most challenging applications, serving a broad spectrum of industrial markets including both MRO
and OEM customers.
• The Aerospace segment produces and markets proprietary aircraft bearings and components; super precision,
miniature ball bearings for the medical, industrial and aerospace markets; complex metallic and composite
aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming
solutions for missile and bomb systems for the U.S. and allied militaries. The segment also markets the design and
supply of aftermarket parts to businesses performing MRO in aerospace markets; performs helicopter subcontract
work; restores, modifies and supports our SH-2G Super Seasprite maritime helicopters; manufactures and supports
our K-MAX® manned and unmanned medium-to-heavy lift helicopters; and provides engineering design, analysis
and certification services.
Company financial performance
• Net sales remained relatively flat compared to the prior year driven by a 2.3% decline in sales at our Distribution
segment, mostly offset by a 3.3% growth in sales at our Aerospace segment.
• Net earnings decreased 15.3% compared to the prior year driven by an increase in income tax expense largely due to
a $9.7 million charge recorded for the revaluation of our U.S. deferred tax assets as a result of the Tax Cut and Jobs
Act of 2017 ("Tax Reform"). The increase in income tax expense was partially offset by a 5.2% increase in earnings
before income taxes.
• Diluted earnings per share decreased to $1.75 in 2017 compared to $2.10 in the prior year.
• Cash flows provided by operating activities were $79.9 million for 2017, a decrease of $27.8 million when compared
to the prior year. The decrease in cash flows provided by operating activities was largely driven by the timing of
accounts receivables collections for our Joint Programmable Fuze ("JPF") products.
• Total backlog increased 7.5% to $742.1 million driven by backlog in our Aerospace segment.
Management changes
• On November 9, 2017, Mr. Alphonse J. Lariviere Jr. was appointed to the position of President of the Distribution
segment, succeeding Mr. Steven J. Smidler.
• On October 1, 2017, Mr. Richard R. Barnhart was appointed to the position of President of Kaman Aerospace Group,
succeeding Mr. Gregory L. Steiner.
Recent events
• On January 31, 2018, our Aerospace segment announced it had been awarded a direct commercial sales ("DCS")
order for the procurement of the JPF with an expected total value of approximately $324.0 million. Delivery of these
fuzes is anticipated to begin in 2019 and continue through 2022.
• During 2017, our Aerospace segment was awarded Options 13 and 14 of its JPF contract with the U.S. Air Force
("USAF"). Two orders have been exercised under Option 13 with a total value of more than $102.0 million. Delivery
of these fuzes is anticipated to occur in 2018 and 2019.
• During 2017, the first four K-MAX® helicopters from the newly reopened commercial production line were accepted
by our customers. We anticipate delivery of at least six more helicopters during 2018. Due to the continued demand
and interest in the capabilities of the K-MAX®, our Aerospace segment announced that we will continue production
of the K-MAX® heavy-lift utility helicopter into 2019 at a minimum.
31
• On September 7, 2017, the Company announced a restructuring plan resulting from its ongoing effort to improve
capacity utilization and operating efficiency to better position our Aerospace segment for increased profitability and
growth. These actions are expected to result in approximately $7.0 million to $8.5 million in pre-tax restructuring and
transition charges, beginning in the third quarter of 2017 through the planned completion of restructuring activities in
the fourth quarter of 2018. The Company anticipates these actions will result in total cost savings of approximately
$4.0 million annually beginning in 2019.
• On July 17, 2017, our Aerospace segment announced it had entered into a new multi-year contract with Sikorsky to
manufacture H-60 cockpits under the Department of Defense MY IX H-60 procurement authorization. The term of
the agreement is five years, beginning in 2018 and ending in 2022.
• On June 19, 2017, our Aerospace segment announced it had entered into a Long Term Agreement with Rolls-Royce
•
to manufacture components for the production phase of the Trent 7000 engine program.
In May 2017, we issued convertible senior unsecured notes due on May 1, 2024 ("2024 Notes"), in the aggregate
principal amount of $200.0 million, with a coupon rate of 3.25%. The Company used a portion of the proceeds from
the issuance of these notes, along with cash received in connection with the termination of existing convertible note
hedge transactions, to repurchase a portion of the existing convertible senior unsecured notes due on November 15,
2017 ("2017 Notes") at a cost of $165.3 million. The remaining proceeds were used to purchase a capped call related
to the 2024 Notes, at a cost of $20.5 million, and pay down a portion of our revolving credit facility.
• On March 30, 2017, our Aerospace segment announced it had increased its stake in our Indian manufacturing joint
venture Kineco Kaman Composites India Pvt. Ltd. to 49% from 26%.
• On February 21, 2017, the Board of Directors raised the quarterly dividend from $0.18 per share to $0.20 per share,
an 11% increase to our quarterly dividend.
32
RESULTS OF OPERATIONS
Consolidated Results
Net Sales
In thousands
Distribution....................................................................................................
Aerospace ......................................................................................................
Total........................................................................................................
$ change.........................................................................................................
% change .......................................................................................................
$ 1,080,965
724,944
$ 1,805,909
(2,467)
$ 1,106,322
702,054
$ 1,808,376
33,251
$ 1,177,539
597,586
$ 1,775,125
(19,837)
(0.1)%
1.9%
(1.1)%
2017
2016
2015
The following table details the components of the above changes as a percentage of consolidated net sales:
Organic Sales:
Distribution ..........................................................................................................
Aerospace.............................................................................................................
Total Organic Sales .........................................................................................
Acquisition Sales:
Distribution ..........................................................................................................
Aerospace.............................................................................................................
Total Acquisition Sales....................................................................................
2017
2016
2015
(1.4)%
1.3 %
(0.1)%
— %
— %
— %
(4.3)%
2.3 %
(2.0)%
0.3 %
3.6 %
3.9 %
(2.0)%
(2.4)%
(4.4)%
2.9 %
0.4 %
3.3 %
% change in net sales .............................................................................................
(0.1)%
1.9 %
(1.1)%
Net sales for 2017 remained relatively flat when compared to 2016. This was a result of lower sales at our Distribution
segment, mostly offset by higher sales at our Aerospace segment. The impact of foreign currency exchange rates relative to the
U.S. dollar was not material.
The increase in net sales for 2016 as compared to 2015 was attributable to the contribution of $68.7 million in sales from our
2015 acquisitions and an increase in organic sales at our Aerospace segment. These increases were offset by a decrease in
organic sales at our Distribution segment. Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact
of $5.9 million on net sales.
See Segment Results of Operations and Financial Condition below for further discussion of segment net sales.
Gross Profit
In thousands
Gross profit ...............................................................................................................
$ change ....................................................................................................................
% change...................................................................................................................
% of net sales ............................................................................................................
$ 547,472
(1,620)
$ 549,092
31,858
$ 517,234
9,295
(0.3)%
30.3 %
6.2%
30.4%
1.8%
29.1%
2017
2016
2015
Gross profit for 2017 remained relatively flat when compared to 2016. Of the change noted above, the Distribution segment
represented 1.6% of the decrease in consolidated gross profit, mostly offset by an increase in consolidated gross profit of 1.3%
associated with higher gross profit at our Aerospace segment. The decrease in gross profit at our Distribution segment was
primarily attributable to lower sales under our bearings and power transmission and automation, control and energy product
lines. The increase in gross profit at our Aerospace segment was primarily due to higher sales and associated gross profit under
33
our commercial bearings products, the AH-1Z program and our SH-2G program with Peru. Gross profit as a percentage of sales
for 2017 remained relatively flat when compared to 2016.
Gross profit increased in 2016 as compared to 2015, primarily due to the contribution of $22.6 million of gross profit from our
2015 acquisitions and organic growth at our Aerospace segment. The increase in organic gross profit at our Aerospace segment
was primarily attributable to higher sales of our JPF and commercial bearing products, increased sales associated with our K-
MAX® program and legacy missile fuze programs and the absence of $4.0 million in expense associated with the resolution of
matters related to our AH-1Z program in 2015. These increases were partially offset by lower sales under the SH-2G(I) contract
with New Zealand, lower sales volume of our military bearing products and a decrease in gross margin on the Boeing 767/777
program attributable to cost growth. Additionally, there was a decline in organic gross profit at our Distribution segment
primarily due to decreases in sales in the mining, merchant wholesalers durable goods and machinery manufacturing industries.
These decreases were partially offset by increases in sales in the food manufacturing, chemical manufacturing and primary
metal manufacturing industries. Additionally, gross profit as a percentage of net sales increased due to management's continued
productivity and efficiency initiative to improve operating performance at the Distribution segment.
Selling, General & Administrative Expenses (S,G&A)
In thousands
S,G&A......................................................................................................................
$ change....................................................................................................................
% change ..................................................................................................................
% of net sales............................................................................................................
$ 430,892
(11,234)
$ 442,126
30,579
$ 411,547
14,898
(2.5)%
23.9 %
7.4%
24.4%
3.8%
23.2%
2017
2016
2015
S,G&A decreased for the year ended December 31, 2017, as compared to 2016. The following table details the components of
this change:
Organic S,G&A:
Distribution.........................................................................................................
Aerospace ...........................................................................................................
Corporate ............................................................................................................
Total Organic S,G&A ....................................................................................
Acquisition S,G&A:
Distribution.........................................................................................................
Aerospace ...........................................................................................................
Total Acquisition S,G&A...............................................................................
2017
2016
2015
(4.2)%
— %
1.7 %
(2.5)%
— %
— %
— %
1.1 %
2.5 %
(1.1)%
2.5 %
0.3 %
4.6 %
4.9 %
(0.2)%
0.1 %
0.2 %
0.1 %
3.2 %
0.5 %
3.7 %
% change in S,G&A..............................................................................................
(2.5)%
7.4 %
3.8 %
S,G&A expenses decreased for 2017 as compared to 2016 primarily due to lower expenses at our Distribution segment,
partially offset by an increase in corporate expenses. The decrease in expenses at our Distribution segment was primarily
related to lower expenses of $10.5 million associated with our productivity and efficiency initiatives and lower salary and
benefit expenses. These decreases were partially offset by an increase in corporate expenses, resulting from higher employee
and employee-related costs and $2.8 million in separation costs associated with senior executives, partially offset by lower
consulting expenses. S,G&A expenses at our Aerospace segment remained relatively flat when compared to 2016. This was a
result of higher salary and wage expenses, mostly offset by lower costs associated with the sale of government contract
program inventory (see segment discussion below for additional information).
S,G&A expenses increased for 2016 as compared to 2015 primarily due to $20.0 million of incremental S,G&A expenses
related to our 2015 acquisitions and higher expenses at both our Aerospace and Distribution segments. The Aerospace segment
experienced higher costs associated with the sale of government contract program inventory which included previously
capitalized general and administrative expenses. The increase in expenses at our Distribution segment was primarily due to the
34
implementation of our productivity and efficiency initiatives to improve operating performance and related incentive
compensation costs. These increases were partially offset by lower costs associated with the vehicle fleet at Distribution.
Additionally, partially offsetting the increases in our segment S,G&A expenses were lower corporate expenses primarily due to
the absence of acquisition related costs.
Restructuring Costs
In thousands
Restructuring costs ...................................................................................................
$
2,661
$
1,032
$
1,496
2017
2016
2015
During 2017, we recorded $2.7 million in costs for restructuring activities at certain businesses within our Aerospace segment
to support the ongoing effort of improving capacity utilization and operating efficiency to better position the Company for
increased profitability and growth. Such actions included workforce reductions and the consolidation of operations, which we
expect to continue through the planned completion in the fourth quarter of 2018. Additionally, included in this expense is
approximately $1.0 million of cost that primarily relates to the write-off of inventory for various small order programs that we
will no longer continue to manufacture as a result of the consolidation of operations.
During 2016, we offered a voluntary retirement program to certain employees of its Distribution segment. In addition to the
voluntary retirement program, the Distribution segment incurred $0.7 million of severance expense in 2016.
During 2015, we recorded $1.5 million in costs for restructuring activities at our Distribution segment in order to align the cost
structure of the organization to its revenue levels. Such actions included workforce reductions and the consolidation of our field
operations where the Distribution segment had multiple facilities in the same location.
Operating Income
In thousands
Operating income .....................................................................................................
$ change....................................................................................................................
% change ..................................................................................................................
% of net sales............................................................................................................
$ 114,175
8,252
$ 105,923
1,404
$ 104,519
(5,988)
7.8%
6.3%
1.3%
5.9%
(5.4)%
5.9 %
2017
2016
2015
The increase in operating income for 2017 as compared to 2016 was primarily due to higher operating income at both our
Distribution and Aerospace segments, partially offset by higher corporate expenses, as discussed above. The increase in
operating income for 2016 as compared to 2015 was due to the contribution of operating income from our 2015 acquisitions, an
increase in organic operating income at our Aerospace segment and lower corporate expenses, primarily due to the absence of
acquisition related costs. These changes were partially offset by a decrease in operating income at our Distribution segment.
See Segment Results of Operations and Financial Condition below for further discussion of segment operating income.
Interest Expense, Net
In thousands
Interest expense, net .................................................................................................
$
20,581
$
15,747
$
13,144
2017
2016
2015
Interest expense, net generally consists of interest charged on our Credit Agreement, which includes a revolving credit facility
and a term loan facility, and our convertible notes and the amortization of debt issuance costs, offset by interest income. The
increase in interest expense, net for 2017 as compared to 2016 was primarily due to higher interest expense under our
convertible notes and a higher interest rate for outstanding amounts under the Credit Agreement. At December 31, 2017, the
interest rate for outstanding amounts on both the revolving credit facility and term loan agreement was 2.84% compared to
2.19% at December 31, 2016. Additionally, contributing to the increase in interest expense, net was the write-off of
unamortized debt issuance costs and the unamortized debt discount associated with the repurchase of a portion of our 2017
Notes, for $0.3 million and $1.0 million, respectively. Partially offsetting these increases to interest expense, net were lower
average borrowings under the credit facility compared to 2016.
35
The increase in interest expense, net for 2016 as compared to 2015 was primarily due to higher average borrowings under our
revolving credit facility and a higher interest rate. At December 31, 2016, the interest rate for outstanding amounts on both the
revolving credit facility and term loan agreement was 2.19% compared to 1.67% at December 31, 2015.
Effective Income Tax Rate
Effective income tax rate..........................................................................................
47.2%
34.4%
31.3%
2017
2016
2015
The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year.
The increase in the effective rate for 2017 as compared to 2016 was primarily the result of Tax Reform, which was enacted by
the federal government during the fourth quarter of 2017. Tax Reform provides for the reduction in the applicable corporate tax
rate from 35% to 21%, effective January 1, 2018. As a result of this rate reduction, the Company's U.S. net deferred tax assets
were required to be revalued as of December 31, 2017. This resulted in a one-time charge to tax expense of $9.7 million in the
fourth quarter of 2017. In addition to this law change, increases in valuation allowances against certain net operating loss
carryforwards also contributed to the increase over the prior year. In accordance with Staff Accounting Bulletin 118 ("SAB
118") issued on December 22, 2017, the revaluation of U.S. net deferred tax assets, the U.S. income tax attributable to Tax
Reform's deemed repatriation provision and the tax consequences relating to states with current conformity to the Internal
Revenue Code are provisional amounts. Due to the enactment date and tax complexities of Tax Reform, we have not completed
our accounting relative to Tax Reform. The full year 2018 effective rate is expected to decrease to a range of 25.5% to 26.5% as
a result of Tax Reform and the finalization of our analysis of global intangible low-taxed income ("GILTI").
The increase in the effective rate for 2016 as compared to 2015 was primarily the result of discrete items recognized in 2015
related to changes in tax laws. Prior to the law changes, we had established valuation allowances against certain net operating
loss carryforwards. Some of these allowances were no longer deemed necessary as the changes to the tax laws made it more
likely than not that these benefits will be realized.
Other Matters
Information regarding our various environmental remediation activities and associated accruals can be found in Note 15,
Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in this Form 10-K.
SEGMENT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Distribution Segment
Our Strategy
The Distribution segment's strategy is to offer a comprehensive portfolio of products and services, along with engineered
solutions, to serve the mechanical, automation and fluid power markets driven by a highly trained technical sales and service
organization while investing in technology to drive increased productivity and improved operating margins.
Results of Operations
The following table presents selected financial data for our Distribution segment:
In thousands
Net sales.............................................................................................................
$ change.............................................................................................................
% change ...........................................................................................................
$ 1,080,965
(25,357)
$ 1,106,322
(71,217)
$ 1,177,539
15,547
(2.3)%
(6.0)%
1.3 %
2017
2016
2015
Operating income ..............................................................................................
$ change.............................................................................................................
% change ...........................................................................................................
% of net sales.....................................................................................................
$
52,482
10,623
$
25.4 %
4.9 %
$
41,859
(7,582)
(15.3)%
3.8 %
49,441
(7,324)
(12.9)%
4.2 %
36
Net sales
2017 versus 2016
The decrease in net sales for 2017 as compared to 2016 was driven by decreases in sales associated with our bearings and
power transmission and automation, control and energy product lines of $12.9 million and $12.4 million, respectively. Sales in
our fluid power product line remained relatively flat when compared to 2016. The decreases in sales were mostly attributable to
lower sales volume to our MRO customers of $37.3 million, partially offset by higher sales volume to our OEM customers.
Additionally, there was one fewer sales day in the current year as compared to 2016. Looking at the end markets we serve, sales
were lower in the food manufacturing and paper manufacturing markets. Partially offsetting these decreases were higher sales
in the fabricated metal product and mining markets.
2016 versus 2015
The decrease in net sales for 2016 as compared to 2015 was driven by lower sales volume to both our MRO customers and
OEM customers. Looking at the markets we serve, sales were lower in the mining, machinery manufacturing, merchant
wholesalers durable goods and paper manufacturing markets. Partially offsetting these decreases were higher sales in food
manufacturing and nonmetallic mineral product markets.
Organic sales per sales day is a metric management uses to evaluate performance trends in its Distribution segment and is
calculated by taking total organic sales during a specific period divided by the number of sales days in that period. See
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures, in
this Form 10-K.
Organic Sales Per Sales Day
(in thousands, except numbers of sales days)
Current period
Net sales .............................................................................................
Acquisition sales (a) ............................................................................
Organic sales......................................................................................
Sales days...........................................................................................
Organic sales per sales day for the current period .............................
Prior period
Net sales from the prior year..............................................................
Sales days in the prior year ................................................................
Organic sales per sales day from the prior year.................................
a
b
2017
2016
2015
$ 1,080,965
—
$ 1,080,965
252
4,290
$
$ 1,106,322
5,171
$ 1,101,151
253
4,352
$
$ 1,177,539
52,798
$ 1,124,741
253
4,446
$
$ 1,106,322
253
4,373
$
$ 1,177,539
253
4,654
$
$ 1,161,992
253
4,593
$
% change in organic sales per sales day ............................................ (a-b)/b
(1.9)%
(6.5)%
(3.2)%
(a) Sales contributed by an acquisition are included in organic sales beginning with the thirteenth month following the date
of acquisition. Prior period information is adjusted to reflect acquisition sales for that period as organic sales when
calculating organic sales per sales day.
Operating Income
2017 versus 2016
Operating income increased during 2017 as compared to 2016 primarily due to the benefits received from the productivity
initiatives implemented in 2016 and lower expenses of $10.5 million for the costs incurred related to the implementation of
these productivity and efficiency initiatives. The initiatives included operational process improvements and data analytics,
primarily focused on expanding operating margins. Additionally, we experienced lower incentive compensation costs. These
savings were partially offset by lower sales and associated gross profit.
37
2016 versus 2015
Operating income decreased during 2016 as compared to 2015 primarily due to lower organic sales and related gross profit and
higher S,G&A costs. The increase in S,G&A expenses at our Distribution segment mostly related to $12.6 million of
implementation expenses incurred in 2016 associated with our productivity initiatives which includes operational process
improvements and data analytics, primarily focused on expanding operating margins. These costs did not recur at the same
levels in 2017. These increases were partially offset by benefits received and the absence of costs associated with restructuring
activities undertaken in the fourth quarter of 2015 and lower costs associated with our vehicles.
Other Matters
Enterprise Resource Planning System
In 2012, we announced a decision to invest in a new ERP business system for our Distribution segment with an initial estimated
total cost of $45.0 million. Since 2012, Distribution has acquired nine businesses. To date, we have implemented the new ERP
system at four acquired entities, of which two were not included in the original project scope. Additionally, multiple upgraded
versions of the software were released and Distribution elected to install these major upgrades in order to benefit from
improved functionality, enhanced features and the new user interface it offered. Management has assessed the latest upgrade
against the current version of the ERP system used at four of our entities and additional requirements by the business. The latest
upgrade is expected to leverage the existing work completed to date and we are currently working closely with the software
vendor to revise the project plan and implementation timeline. The implementation is scheduled to resume later in 2018. As a
result of the unplanned implementations at the acquired businesses and software upgrades, the total project cost is currently
estimated between $51.0 million and $54.0 million.
For the years ended December 31, 2017, 2016 and 2015, expenses incurred totaled approximately $1.2 million, $1.4 million
and $1.0 million, respectively, and capital expenditures totaled $3.6 million, $3.7 million, and $5.1 million, respectively. Total
to date ERP system capital expenditures as of December 31, 2017 were $38.1 million. Depreciation expense for the ERP
system for the years ended December 31, 2017, 2016 and 2015, totaled $2.5 million, $2.8 million and $2.9 million,
respectively.
Aerospace Segment
Our Strategy
Our strategic goals for the Aerospace segment are built upon our objectives of differentiating our value proposition by utilizing
engineering design and process expertise to develop unique products and manufacturing processes within our global cost
structure, increasing scale in our core competencies, diversifying our customer portfolio across multiple end markets and
investing in our people, technologies and infrastructure. In order to achieve these objectives, we focus our efforts on improving
balance between commercial and defense program content and customers, leveraging our broad capabilities to expand market
positions, executing strategic acquisitions and increasing focused investments in our people, research and development,
manufacturing technologies, capital equipment and infrastructure to increase capabilities and drive continuous improvement.
Results of Operations
The following table presents selected financial data for our Aerospace segment:
In thousands
Net sales ...................................................................................................................
$ change....................................................................................................................
% change ..................................................................................................................
$ 724,944
22,890
$ 702,054
104,468
$ 597,586
(35,384)
3.3%
17.5%
(5.6)%
2017
2016
2015
Operating income .....................................................................................................
$ change....................................................................................................................
% change ..................................................................................................................
% of net sales............................................................................................................
$ 119,889
4,884
$ 115,005
4,677
$ 110,328
1,631
4.2%
16.5%
4.2%
16.4%
1.5 %
18.5 %
38
Net Sales
2017 versus 2016
Aerospace segment net sales increased due to increases in sales for both our military and commercial product programs of
$16.4 million and $6.5 million, respectively.
The increase in sales generated by our military product programs was primarily attributable to higher direct sales of our JPF to
foreign militaries, an increase in sales under the AH-1Z program and our SH-2G program with Peru and higher sales volume of
our JPF to the USG. These increases, totaling $31.9 million, were partially offset by a decrease in sales on the Boeing A-10
program and certain composite structures programs and lower sales volume of our fabricated products from foreign operations.
The increase in sales generated by our commercial product programs was primarily attributable to higher sales volume under
our commercial bearing products, higher sales associated with the K-MAX® program and an increase in sales under our
composite structure products from foreign operations. These increases, totaling $18.8 million, were partially offset by lower
sales under the Boeing 767/777 program, a decrease in sales on the Bell Helicopter composite blade program and lower
commercial tooling sales.
The impact of foreign currency exchange rates relative to the U.S. dollar was not material.
2016 versus 2015
Aerospace segment net sales increased due to the contribution of $63.5 million of sales from our 2015 acquisitions and an
increase in organic sales of $41.0 million. Organic sales increased due to increases in sales of both our commercial and military
product programs of $34.8 million and $6.2 million, respectively.
The increase in organic sales generated by our commercial programs/products was primarily attributable to higher sales
associated with our K-MAX® program and higher commercial bearing product sales to OEMs, totaling $33.9 million.
The increase in organic sales generated by our military programs/products was primarily due to increased sales of our JPF to
the USG, higher sales associated with our legacy missile fuze programs, increased sales volume on our Bell Helicopter
composite blade program and sales under the SH-2G program with Peru. These increases, totaling $50.6 million, were partially
offset by a $43.5 million decrease due to lower sales associated with our SH-2G(I) contract with New Zealand, lower sales on
the Boeing A-10 program, a decrease in military bearing product sales and lower sales under the AH-1Z program.
Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact of $5.9 million on net sales.
Operating Income
2017 versus 2016
Operating income increased for 2017 as compared to 2016. The increase was primarily attributable to higher sales and
associated gross profit on our commercial bearings products, the AH-1Z program, the SH-2G program with Peru and our
composite structure products from foreign operations. In addition, there were lower S,G&A expenses associated with the sale
of government inventory (see the table below for the expense recorded or benefit received from S,G&A expenses capitalized in
inventory for certain government contracts). These increases, totaling $19.3 million, were partially offset by lower gross profit
under our JPF program with the USG, as fuzes under Option 12 sold in 2017 were negotiated at a lower selling price than
Option 11 sold in 2016, a decrease in gross profit on certain composite structure programs and lower gross margin on the K-
MAX® program. Further offsetting some of the increases in operating income was $2.7 million in costs related to restructuring
activities.
2016 versus 2015
The increase in operating income for 2016 as compared to 2015 was primarily due to the contribution of $21.2 million of gross
profit from our 2015 acquisitions and higher organic gross profit. The increase in organic gross profit was primarily
attributable to higher sales of our JPF and commercial bearing products, increased sales under our K-MAX® program and
legacy missile fuze programs and the absence of $4.0 million in expense associated with the resolution of matters related to our
AH-1Z program in 2015. These increases, totaling $34.6 million, were partially offset by the S,G&A expenses of the businesses
39
we acquired in 2015, lower sales and associated gross profit under the SH-2G(I) contract with New Zealand, lower military
bearing products sales volume and a decrease in gross margin on the Boeing 767/777 program attributable to cost growth.
Additionally, offsetting some of the increase in operating income was higher S,G&A expenses attributable to the sale of
inventory associated with government contracts which included previously capitalized general and administrative expenses.
See the table below for the expense recorded or benefit received from S,G&A expenses capitalized in inventory for certain
government contracts.
For certain USG contracts, S,G&A expenses are capitalized in inventory until revenue is recognized, to the extent that gross
profit is available to offset the S,G&A expenses. The following table shows the expense recorded or benefit received from
S,G&A expenses capitalized in inventory for certain government contracts.
In thousands
S,G&A expensed (capitalized), net ..........................................................................
$
372
$
2,465
$
(3,267)
2017
2016
2015
Long-Term Contracts
For long-term aerospace contracts, we generally recognize sales and income based on the percentage-of-completion method of
accounting, which allows for recognition of revenue as work on a contract progresses. We recognize sales and profit based on
either (1) the cost-to-cost method, which results in costs being reported as cost of sales as incurred and sales (and profit) being
recorded based upon the ratio of costs incurred to estimated total costs to complete the contract, or (2) the units-of-delivery
method, which results in sales being recognized as deliveries are made and cost of sales being computed on the basis of the
estimated ratio of total contract cost to total contract sales.
Revenue and cost estimates for all significant long-term contracts for which revenue is recognized using the percentage-of-
completion method of accounting are reviewed and reassessed quarterly. Based upon these reviews, we record the effects of
adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total
costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at that time. For the year
ended December 31, 2017, the net increase in our operating income from changes in contract estimates totaled $5.7 million.
The increase in 2017 was primarily a result of improved performance on the AH-1Z program, JPF program with the USG and
the SH-2G program with Peru. These improvements were partially offset by cost growth on the K-MAX® and A-10 programs.
The net decrease in our operating income from changes in contract estimates totaled $0.8 million for the year ended December
31, 2016. The decrease in 2016 was primarily a result of cost growth on various programs, including the Boeing 767/777
program, the A-10 program and certain composites structures and assembly programs. This cost growth was partially offset by
improved performance on the JPF program. For the year ended December 31, 2015, the net increase in our operating income
from changes in contract estimates totaled $4.8 million, excluding $4.0 million in expense associated with the resolution of
matters related to our AH-1Z program. The increase in 2015 was primarily a result of improved performance on the JPF and
another legacy bomb fuze program.
Backlog
In thousands
Backlog...............................................................................................
$
616,090
$
581,619
$
659,350
2017
2016
2015
The backlog balance increased from 2016 to 2017, primarily due to orders under the Sikorsky BLACK HAWK helicopter
program and the JPF program with the USG. These increases were partially offset by deliveries under our JPF program to the
USG and foreign militaries and the Sikorsky BLACK HAWK helicopter program and work performed on the SH-2G program
with Peru. Excluded from backlog is approximately $324.0 million in direct commercial JPF orders received in early 2018.
The backlog balance decreased from 2015 to 2016, primarily due to deliveries under various programs. These decreases were
partially offset by orders associated with our AH-1Z helicopter program and the SH-2G program with Peru.
40
Major Programs/Product Lines
Defense Markets
A-10
The segment has contracted with Boeing to produce the wing control surfaces (inboard and outboard flaps, slats and deceleron
assemblies) for the USAF’s A-10 fleet. This contract has a potential value of over $110.0 million; however, annual quantities
will vary, as they are dependent upon the orders Boeing receives from the USAF. Initial deliveries under this program began in
2010 and full rate production began in late 2012. Through December 31, 2017, 170 shipsets have been delivered over the life of
the program, and approximately 3 shipsets remain in backlog. In 2017, the USAF confirmed that the A-10 fleet would continue
indefinitely due to its unique close-air support functions, with support from both Congress and the White House. The
government budget released in May 2017 outlined the plan to maintain the fleet and the defense bill signed in December 2017
authorized wing replacements. Although Congress must authorize the spending requirement, lawmakers have pushed for
approval as the grounding of these aircraft would result in a significant capability gap for U.S. service members. We have not
received any additional orders beyond 173 shipsets, and as such, we expect a break in production as we complete the units we
currently have on order and wait for follow-on orders from our customer. Final production and deliveries of existing orders
under this contract are anticipated to be completed during 2018. We have not received any indication from our customer that
this program will be terminated. Tooling and nonrecurring costs on this program are being amortized over 242 shipsets, the
number of shipsets expected to be delivered under this program. At December 31, 2017 and 2016, our program backlog was
$1.2 million and $5.3 million, respectively, and total program inventory was $8.7 million and $12.8 million, respectively. The
current total program inventory includes nonrecurring costs of $7.0 million and materials to be utilized on future shipset orders
of $0.5 million, which may not be recoverable in the event of an extended break in production or program termination.
Bearings
Our bearings products are included on numerous military platforms manufactured in North America, South America, Asia and
Europe. These products are used as original equipment and/or specified as replacement parts by the manufacturers. The most
significant portion of our military bearings sales is derived from U.S. military platforms, such as the AH-64 helicopter, Virginia
Class submarine and Joint Strike Fighter aircraft, and sales in Europe for the Typhoon program. These products are primarily
proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines and landing gear, and helicopter
driveline couplings.
BLACK HAWK
The Sikorsky BLACK HAWK helicopter cockpit program involves the manufacture of cockpits, including the installation of all
wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines and the composite structure that
holds the windscreen for most models of the BLACK HAWK helicopter. We delivered 77 cockpits in 2017 as compared to the
74 cockpits delivered in 2016. In July 2017, we announced that our Aerospace segment had entered into a new multi-year
contract with Sikorsky to manufacture H-60 cockpits under the Department of Defense MY IX H-60 procurement
authorization. The term of the agreement is five years, beginning in 2018 and ending in 2022. Included in backlog at
December 31, 2017 and 2016, was $126.3 million and $45.6 million, respectively, for orders on this program. We anticipate
cockpit deliveries to total 57 in 2018.
Combat Rescue Helicopter
The Sikorsky Combat Rescue Helicopter program involves the manufacture of cockpits, including the installation of hydraulic
assemblies, seat tracks, pneumatic lines and composite structures that hold the windscreen for most models of the H-60
helicopter and the fit of control pedals. During 2017, the Company was awarded a contract to provide developmental expertise
and manufacture for the newly designed HH-60W Combat Rescue Helicopter, an advanced variant of the UH-60M BLACK
HAWK helicopter. The initial contract has a total value of $8.7 million over 10 aircraft, with an expected follow-on contract
with increased work scope for an additional 102 aircraft valued at approximately $62.2 million. As of December 31, 2017, our
backlog for this program was $6.2 million.
AH-1Z
The segment manufactures sheet metal details and subassemblies for the increased capability AH-1Z attack helicopter, which is
produced by Bell Helicopter for the U.S. Marine Corps. We are currently on contract through Lot 14. As of December 31, 2017
and 2016, our backlog for this program was $49.1 million and $45.4 million, respectively.
41
SH-2G Peru
During 2016, we were awarded a contract for $41.0 million with General Dynamics Mission Systems—Canada to commence
work on the implementation phase of the previously announced Peruvian Navy's SH-2G Super Seasprite aircraft program. This
contract is for the remanufacture and upgrade of four Kaman SH-2G Super Seasprite aircraft and support for the operation of a
fifth aircraft for the Peruvian Navy. The total expected value to Kaman for the combined program, including this contract and
previously issued contracts, now totals $50.5 million. Total backlog at December 31, 2017 and 2016, was $17.5 million and
$32.4 million, respectively.
FMU-152 A/B – Joint Programmable Fuze
We manufacture the JPF, an electro-mechanical bomb safe and arming device, which allows the settings of a weapon to be
programmed in flight. We occasionally experience lot acceptance test failures due to the complexity of the product and the
extreme parameters of the acceptance test. Given the maturity of the product, we now generally experience isolated failures,
rather than systemic ones. As a result, identifying a root cause can take longer and result in inconsistent delivery quantities
from quarter to quarter.
Sales of these fuzes can be direct to the USG, Foreign Military Sales ("FMS") through the USG and DCS to foreign militaries
that, although not funded by the USG, require proper regulatory approvals from the USG.
A total of 13,131 fuzes were delivered to our customers during the fourth quarter of 2017, which consisted of 6,269 fuzes
delivered to the USG and 6,862 fuzes delivered as direct commercial sales. A total of 35,969 fuzes were delivered in 2017. We
expect to deliver 34,000 to 38,000 fuzes in 2018, primarily consisting of orders from the USG in order to meet the USG's
current demand.
The Company currently provides the FMU-152 A/B to the USAF and twenty-eight other nations, but the U.S. Navy currently
utilizes a different fuze - the FMU-139. In 2015, NAVAIR solicited proposals for a firm fixed price production contract to
implement improvements to the performance characteristics of the FMU-139 (such improved fuze having been designated the
FMU-139 D/B), and the USAF has stated that, if and when a contract is awarded and production begins, the funds associated
with the FMU-152 A/B will be redirected to the FMU-139 D/B. During the third quarter of 2015, the U.S. Navy announced that
a competitor was awarded the contract for the FMU-139 D/B. In the event the FMU-139 D/B program proceeds as planned and
the USAF redirects the funds associated with the FMU-152 A/B to the FMU-139 D/B, our business, financial condition, results
of operations and cash flows may be materially adversely impacted. The timing of the impact on our financial statements is
dependent on the ability of our competitor to complete the design and qualification phase of the program and other factors. Our
competitor has publicly stated that this program is expected to have a 32-month qualification phase, preceding production. Due
to the complexity of this program, the uncertainty associated with the successful completion of each phase in accordance with
the planned schedule and the pending status of the USAF's final decision to redirect funds to the FMU-139 D/B, the timing and
magnitude of the impact on the Company's financial statements is not certain; however, the Company continues to see strong
demand for the FMU-152 A/B. In 2017, we were awarded Options 13 and 14 with the USG. The USAF has exercised two
orders under Option 13, which have a total value of more than $102.0 million. Additionally, the USAF issued a Notice of
Contract Action announcing its intent to award us Options 15 and 16; therefore, the earliest the Company may see an impact on
its financial statements is 2022.
In addition, the Company continues to see strong demand for DCS fuzes. During the first quarter of 2018, we were awarded a
DCS contract totaling approximately $324.0 million. Delivery of these units is anticipated over a four-year period beginning in
2019 through 2022.
Total JPF backlog at December 31, 2017 and December 31, 2016, was $128.2 million and $175.0 million, respectively. This
backlog excludes the $324.0 million DCS contract awarded in January 2018.
42
Commercial Markets
K-MAX®
During 2015, we announced that our Aerospace segment was resuming production of commercial K-MAX® aircraft. The
aircraft are being manufactured at our Jacksonville, Florida and Bloomfield, Connecticut facilities. In the second half of 2017,
the first four aircraft from the newly reopened commercial product line were accepted by our customers. Delivery of at least six
aircraft is anticipated during 2018. As of December 31, 2017 and 2016, our backlog for this program was $4.1 million and
$13.7 million, respectively. During the second quarter of 2017, we announced that we will continue production of the
commercial K-MAX® aircraft into 2019 at a minimum due to continued interest in the capabilities of the K-MAX®.
777 / 767
In 2015, we signed a multi-year follow-on contract with Boeing for the production of fixed trailing edge ("FTE") assemblies for
the Boeing 777 and 767 commercial aircraft. To date, Kaman has provided more than 1,000 FTE kits and assemblies for each
of the 777 and 767 programs since 1995 and 1986, respectively. During 2017, on average, we delivered six shipsets per month
on the Boeing 777 platform and two shipsets per month on the Boeing 767 platform, which includes one shipset per month
associated with a military tanker derivative of the 767. For 2018, we estimate deliveries on the 777 program to be three shipsets
per month and on the 767 program to be two shipsets per month which includes one shipset per month associated with a
military tanker derivative of the 767. The total contract value is estimated to be in excess of $75 million; however, annual
quantities will vary, as they are dependent upon the orders Boeing receives from its customers. As of December 31, 2017 and
2016, our backlog for these programs was $14.2 million and $20.4 million, respectively.
Airbus
Our U.K. Composites operations provide composite components for many Airbus platforms. The most significant of these are
the A320, A330 and A350. Orders for all of these platforms are dependent on the customer’s build rate.
Bearings
Our bearings products are included on commercial airliners and regional/business jets manufactured in North and South
America, Europe and Asia and are used as original equipment and/or specified as replacement parts by airlines and aircraft
manufacturers. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls,
turbine engines, landing gear and helicopter driveline couplings. The most significant portion of our commercial sales is
derived from Boeing and Airbus platforms, such as the Boeing 737, 747, 777 and 787 and the Airbus A320, A330, A350 and
A380.
Additionally, our bearings offerings include super precision miniature ball bearings used primarily in aerospace applications,
dental products, surgical power tools, analytical devices and various industrial applications.
Bell Helicopter
In 2014, we were awarded an extension to our current contract with Bell Helicopter to manufacture skin and skin-to-core
components for several of Bell’s commercial helicopter models. We are currently in discussions with Bell Helicopter for a five-
year follow on contract. At December 31, 2017 and 2016, $3.9 million and $8.9 million, respectively, was included in backlog
for orders under this program. Annual quantities for this program will vary, as they are dependent upon the orders Bell receives
from its customers.
43
Other Matters
Learjet 85
In 2010, our U.K. Composites operation was awarded a contract to manufacture composite passenger entry and over-wing exit
doors for the Learjet 85, a mid-sized business jet built primarily from composites and featuring advances in aerodynamics,
structures and efficiency; however, in October 2015, Bombardier Inc. announced the cancellation of its Learjet 85 business
aircraft program. At December 31, 2017, we had total accounts receivable and inventory related to the program of $3.2 million.
During 2016, we filed suit against our customer to recover this amount. Although we expect to recover the full amount of our
claim, there can be no assurance that we will prevail in the litigation.
For a discussion of other matters related to our Aerospace segment see Note 15, Commitments and Contingencies, in the Notes
to Consolidated Financial Statements included in this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Discussion and Analysis of Cash Flows
We assess liquidity in terms of our ability to generate cash to fund working capital requirements and investing and financing
activities. Significant factors affecting liquidity include: cash flows generated from or used by operating activities, capital
expenditures, investments in our business segments and their programs, acquisitions, divestitures, dividends, availability of
future credit, adequacy of available bank lines of credit and factors that might otherwise affect the Company's business and
operations generally, as described under the heading “Risk Factors” and “Forward-Looking Statements” in Item 1A of Part I of
this Form 10-K.
We continue to rely upon bank financing as an important source of liquidity for our business activities including acquisitions.
We believe this, when combined with cash generated from operating activities, will be sufficient to support our anticipated cash
requirements for the foreseeable future. However, we may decide to raise additional debt or equity capital to support other
business activities including potential future acquisitions.
In addition to our working capital requirements, one or more of the following items could have an impact on our liquidity
during the next 12 months:
•
•
•
•
•
•
•
•
•
the matters described in Note 15, Commitments and Contingencies, in the Notes to Consolidated Financial Statements,
including the cost of existing environmental remediation matters and deposits required to be made to the
environmental escrow for the Moosup facility sold in 2014 discussed in Note 9, Environmental Costs;
contributions to our qualified pension plan and Supplemental Employees’ Retirement Plan (“SERP”);
deferred compensation payments to former directors and officers;
interest payments on outstanding debt;
operating lease payments;
repurchase of common stock under the 2015 Share Repurchase Program;
payment of dividends;
costs associated with the start-up of new aerospace programs; and
the extension of payment terms by our customers and delays in letter of credit funding.
In addition to the items listed above, we anticipate receiving approximately $95.0 million in 2018 as an advance payment under
a JPF DCS contract.
We regularly monitor credit market conditions to identify potential issues that may adversely affect, or provide opportunities
for, the securing and/or pricing of additional financing, if any, that may be necessary to continue with our growth strategy and
finance working capital requirements.
Management regularly monitors its pension plan asset performance and the assumptions used in the determination of our
benefit obligation, comparing them to actual experience. We continue to believe the assumptions selected are valid due to the
long-term nature of our benefit obligation.
Effective December 31, 2015, the qualified pension plan was frozen with respect to future benefit accruals. Under CAS 413 we
must calculate the USG’s share of any pension curtailment adjustment resulting from the freeze. Such adjustments can result in
an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are
44
in a deficit position. During the fourth quarter of 2016, we accrued a $0.3 million liability representing our estimate of the
amount due to the USG based on our pension curtailment adjustment calculation which was submitted to the USG for review in
December 2016. The Company has maintained its accrual at $0.3 million as of December 31, 2017. There can be no assurance
that the ultimate resolution of this matter will not have a material adverse effect on our results of operations, financial position
and cash flows.
A summary of our consolidated cash flows is as follows:
(in thousands)
Total cash provided by (used in):
Operating activities ................................................
Investing activities..................................................
Financing activities ................................................
Free Cash Flow(a) :
Net cash provided by operating activities ..............
Expenditures for property, plant and equipment ....
Free cash flow...........................................................
$
$
$
2017
2016
2015
17 vs. 16
16 vs.15
$
79,885
(31,835)
(54,736)
$
107,707
(37,583)
(43,959)
109,584
(232,608)
127,588
$
(27,822) $
5,748
(10,777)
(1,877)
195,025
(171,547)
79,885
(27,631)
52,254
$
$
107,707
(29,777)
77,930
$
$
109,584
(29,932)
79,652
$
$
(27,822) $
2,146
(25,676) $
(1,877)
155
(1,722)
(a) Free Cash Flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less expenditures for
property plant and equipment, both of which are presented in our Consolidated Statements of Cash Flows. See Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures, in this Form 10-K.
2017 vs. 2016
Net cash provided by operating activities decreased $27.8 million in 2017 compared to 2016, due to higher accounts receivable
under our JPF program resulting from the timing of collections, partially offset by lower inventory related to our K-MAX®,
JPF and legacy fuze programs and the timing of accounts payable cash disbursements.
Net cash used in investing activities decreased $5.7 million in 2017 compared to 2016 primarily due to a lower earnout
payment associated with a previous acquisition in the current period.
Net cash used in financing activities increased in 2017 by $10.8 million compared to 2016, primarily due to the cost to
repurchase a portion of the 2017 Notes, higher repayments under our revolving credit facility, the purchase of capped call
transactions related to our 2024 Notes and higher debt issuance costs associated with the issuance of our 2024 Notes. These
changes were partially offset by $200.0 million in proceeds received from the issuance of our 2024 Notes and $58.6 million in
proceeds received related to the unwind of a portion of the convertible note hedge transactions related to the 2017 Notes.
2016 vs. 2015
Net cash provided by operating activities decreased $1.9 million in 2016 compared to 2015, due to growth in inventory
primarily attributable to the timing of deliveries on our JPF program and the build-up of inventory associated with the
production of the K-MAX®, partially offset by higher depreciation and amortization expense, which is an adjustment to
reconcile earnings to cash flows provided by operations. Depreciation and amortization expense increased as compared to the
prior year due to the intangible and fixed assets acquired in 2015.
Net cash used in investing activities decreased $195.0 million primarily due to a decrease in cash used for acquisitions.
Net cash used in financing activities for 2016 was $44.0 million, compared to net cash provided by financing activities for 2015
of $127.6 million. This change is due to a $179.4 million net decrease in borrowings under our revolving credit facility and
Term Loan facility. Borrowings under our revolving credit facility were higher in 2015 due to the acquisitions completed
during the year. These decreases were partially offset by the change in repayments under the Term Loan facility. In 2016, we
had repayments of $5.0 million, compared to $83.8 million of repayments in the prior year. The higher repayments in 2015
were a result of the completion of the amended and restated Credit Agreement in May 2015.
45
Financing Arrangements
Convertible Notes
During May, 2017, we issued $200.0 million aggregate principal amount of convertible senior unsecured notes due May 2024
(the "2024 Notes") pursuant to an indenture (the "Indenture"), dated May 12, 2017, between the Company and U.S. Bank
National Association, as trustee. In connection therewith, we entered into certain capped call transactions that cover,
collectively, the number of shares of the Company's common stock underlying the 2024 Notes. In a separate transaction, we
repurchased $103.5 million aggregate principal amount of our existing convertible senior unsecured notes due November 15,
2017 (the "2017 Notes"). In connection with the repurchase of the 2017 Notes, we settled a portion of the associated
outstanding bond hedge transactions and warrant transactions that we entered into in 2010 in connection with their issuance.
The remaining portion of the 2017 Notes were convertible at the option of the noteholders until the close of business on the
second Scheduled Trading Day (as defined in the 2017 Notes indenture) immediately preceding the maturity date. On
November 10, 2017 and November 13, 2017, we received conversion notices from bondholders, totaling the remaining $11.5
million principal amount outstanding under the 2017 Notes. We also settled the remaining portion of the bond hedge.
The existing warrant transactions associated with the 2017 Notes remain outstanding, with scheduled expiration dates between
February 13, 2018 and June 21, 2018, unless earlier settled, which will result in a reduction in additional paid-in-capital. We
anticipate settling the outstanding warrants with approximately 90,000 shares of the Company's common stock. Refer to Note
10, Debt, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary
Data, of this Form 10-K for further information about the 2024 Notes and 2017 Notes. See below for additional discussion on
the issuance of the 2024 Notes and the related transactions.
2024 Notes
On May 12, 2017, we issued $175.0 million in principal amount of 2024 Notes, in a private placement offering. On May 24,
2017, we issued an additional 25.0 million in principal amount of 2024 Notes pursuant to the initial purchasers' exercise of their
overallotment option, resulting in the issuance of an aggregate $200.0 million principal amount of 2024 Notes. The 2024 Notes
bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 1 and November 1 of each
year, beginning on November 1, 2017. The 2024 Notes will mature on May 1, 2024, unless earlier repurchased by the Company
or converted. We will settle any conversions of the 2024 Notes in cash, shares of the Company's common stock or a
combination of cash and shares of common stock, at the Company's election.
The following table illustrates the conversion rate at the date of issuance of the 2024 Notes:
2024 Notes
Conversion Rate per $1,000 principal amount (1) ...................................................................................
Conversion Price (2).................................................................................................................................
Contingent Conversion Price (3)..............................................................................................................
Aggregate shares to be issued upon conversion (4) .................................................................................
(1) Represents the number of shares of Common Stock hypothetically issuable per each $1,000 principal amount of 2024 Notes, subject to
15.3227
65.2626
84.84
3,064,540
$
$
adjustments upon the occurrence of certain specified events in accordance with the terms of the Indenture.
(2) Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option
within the 2024 Notes. If the Company's share price exceeds the conversion price at conversion, the noteholders would be entitled to
receive additional consideration either in cash, shares or a combination thereof, the form of which is at the sole discretion of the Company.
(3) Prior to November 1, 2023, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after
July 1, 2017, and only during any such fiscal quarter, if the last reported sale price of the Company's common stock was greater than or
equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding fiscal quarter, (2) during the five consecutive business day
period following any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount
of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the
Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of specified corporate events. On or
after November 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders
may convert their notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change (as
defined in the Indenture), holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a
repurchase price equal to 100% of the principal amount to be repurchased, plus any accrued and unpaid interest. As of December 31, 2017,
none of the conditions permitting the holders of the 2024 Notes to convert had been met. Therefore, the 2024 Notes are classified as long-
term debt.
46
(4) This represents the number of shares hypothetically issuable upon conversion of 100% of the outstanding aggregate principal amount of the
2024 Notes at each date; however, the terms of the 2024 Notes state that the Company may pay or deliver, as the case may be, cash, shares
of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The Company currently
intends to settle the aggregate principal amount in cash. Amounts due in excess of the principal, if any, also may be settled in cash, shares of
the Company's common stock or a combination of cash and shares of common stock, at the Company's election.
In connection with the 2024 Notes offering, the Company entered into capped call transactions with certain of the initial
purchasers or their respective affiliates. These transactions are intended to reduce the potential dilution to the Company's
shareholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon any
future conversion of the notes in the event that the market price per share of the Company's common stock is greater than the
strike price of the capped call transactions, with such reduction and/or offset subject to a cap based on the cap price of the
capped call transactions. Under the terms of the capped call transactions, the strike price ($65.2626) and the cap price
($88.7570) are each subject to adjustment in certain circumstances. In connection with establishing their initial hedges of the
capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with
respect to the Company’s common stock concurrently with or shortly after the pricing of the notes. The capped call
transactions, which cost an aggregate $20.5 million, were recorded as a reduction of additional paid-in capital.
The note payable principal balance for the 2024 Notes at the date of issuance of $200.0 million was bifurcated into the debt
component of $179.5 million and the equity component of $20.5 million. The difference between the note payable principal
balance and the fair value of the debt component representing the debt discount is being accreted to interest expense over the
term of the 2024 Notes. The fair value of the debt component was recognized using a 5.0% discount rate, representing the
Company's borrowing rate at the date of issuance for a similar debt instrument without a conversion feature with an expected
life of seven years.
The Company incurred $7.4 million of debt issuance costs in connection with the sale of the 2024 Notes, which was allocated
between the debt and equity components of the instrument. Of the total amount, $0.7 million was recorded as an offset to
additional paid-in capital. The balance, $6.7 million, was recorded as a contra-debt balance and is being amortized over the
term of the 2024 Notes. Total amortization expense for the year ended December 31, 2017 was $0.5 million.
The following table illustrates the dilutive effect of securities issued under the 2024 Notes at various theoretical average share
prices for our stock as of December 31, 2017:
Dilutive Shares associated with:
Convertible Debt.......................................................
—
207,399
397,876
564,542
707,164
Theoretical Average Share Price of Kaman Stock
$65.26
$70.00
$75.00
$80.00
$84.84
2017 Notes
In November 2010, the Company issued convertible senior unsecured notes due on November 15, 2017, in the aggregate
principal amount of $115.0 million in a private placement offering. These notes bore 3.25% interest per annum on the principal
amount, payable semiannually in arrears on May 15 and November 15 of each year, beginning in 2011. In May 2017, the
Company used a portion of the net proceeds from the issuance of the 2024 Notes, along with cash received from the
counterparties in connection with the termination of the existing convertible note hedge transactions referred to below, to
repurchase $103.5 million principal amount of the 2017 Notes from a limited number of holders in an arm's length transaction.
This repurchase represented approximately 90% of the aggregate principal amount of 2017 Notes. The repurchases were
accounted for as an extinguishment of the outstanding instrument. Of the total aggregate cost of $165.3 million, $60.0 million
was allocated to the equity component of the 2017 Notes and was recorded as a reduction to additional paid-in capital. The
remainder of the cost was attributed to the outstanding principal repurchased and accrued interest.
The repayment of a portion of the 2017 Notes was not contingent upon the issuance of the 2024 Notes. As such, the repurchase
of the 2017 Notes was accounted for as a debt extinguishment.
In connection with the 2017 Notes, the Company had entered into convertible note hedge transactions and warrant transactions
("existing call spread transactions") with certain financial institutions. These transactions were accounted for as equity
instruments at the time of issuance in 2010. With the intention of repurchasing the 2017 Notes, the Company entered into
agreements with these financial institutions to terminate a portion of the existing call spread transactions concurrently with the
offering. In connection with these transactions, the Company received $58.6 million in payments related to the unwind of 90%
47
of the convertible note hedge transactions and made deliveries of 624,044 shares of the Company's common stock in
connection with the partial unwind of the warrant transactions. The Company used a portion of the proceeds from the bond
hedge settlement to repurchase the 2017 Notes as described above and to make a payment to the revolving credit facility. The
cash proceeds received were recorded as an increase of additional paid-in-capital which was partially offset by the delivery of
shares.
The remaining portion of the 2017 Notes and bond hedge were settled in November 2017.
Credit Agreement
The Company has a $700.0 million Credit Agreement (the "Credit Agreement"), as amended, with JPMorgan Chase Bank N.A.,
as Administrative Agent, Bank of America, N.A. and Citizens Bank, N.A. as Co-Syndication Agents and SunTrust Bank,
KeyBank N.A., TD Bank, N.A., BB&T and Fifth Third Bank, as Co-Documentation Agents. The Credit Agreement matures on
May 6, 2020 and has revolving commitments of $600.0 million and a Term Loan commitment of $100.0 million. Capitalized
terms used but not defined within this discussion of the Credit Agreement have the meanings ascribed thereto in the Credit
Agreement.
The Term Loan commitment requires quarterly payments of principal (which commenced on June 30, 2015) at the rate of $1.25
million, increasing to $1.875 million on June 30, 2017, and then to $2.5 million on June 30, 2019, with $65.0 million payable
in the final quarter of the facility's term. The facility includes an accordion feature that allows the Company to increase the
aggregate amount available up to $900.0 million with additional commitments from the Lenders.
Interest rates on amounts outstanding under the Credit Agreement are variable. At December 31, 2017 and 2016, the interest
rates for the outstanding amounts on the Credit Agreement were 2.84% and 2.19%, respectively. In addition, we are required to
pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.175% to 0.300%
per annum, based on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 1.25%
to 2.00%, based on the Consolidated Senior Secured Leverage Ratio.
The financial covenants associated with the Credit Agreement include a requirement that (i) the Consolidated Senior Secured
Leverage Ratio cannot be greater than 3.50 to 1.00, with an election to increase the maximum to 3.75 to 1.00 for four
consecutive quarters, in connection with a Permitted Acquisition with consideration in excess of $125.0 million; (ii) the
Consolidated Total Leverage Ratio cannot be greater than 4.00 to 1.00, with an election to increase the maximum to 4.25 to
1.00 for four consecutive quarters, in connection with a Permitted Acquisition with consideration in excess of $125.0 million;
(iii) the Consolidated Interest Coverage Ratio cannot be less than 4.00 to 1.00; and (iv) Liquidity: (a) as of the last day of the
fiscal quarter of the Company ending two full fiscal quarters prior to the stated maturity of the 2017 Convertible Notes, cannot
be less than an amount equal to 50% of the outstanding principal amount of the 2017 Convertible Notes, and (b) as of the last
day of each fiscal quarter of the Company ending thereafter, cannot be less than an amount equal to the outstanding principal
amount of the 2017 Convertible Notes as of such day. The Company was in compliance with those financial covenants as of
and for the quarter ended December 31, 2017, and management does not anticipate noncompliance in the foreseeable future.
Total average bank borrowings under our revolving credit facility and term loan facility during the year ended December 31,
2017, were $256.5 million compared to $315.6 million for the year ended December 31, 2016. As of December 31, 2017 and
2016, there was $453.3 million and $381.7 million available for borrowing, respectively, net of letters of credit. However,
based on EBITDA levels at December 31, 2017 and 2016, amounts available for borrowings were limited to $246.0 million and
$209.5 million, respectively. Letters of credit are generally considered borrowings for purposes of calculating available
borrowings. As of December 31, 2017, $6.7 million letters of credit were outstanding, of which, $6.5 million were under the
revolving credit facility. As of December 31, 2016, $5.9 million in letters of credit were outstanding.
Subsequent to year-end, we entered into a JPF DCS contract that required us to issue approximately $146.0 million in letters of
credit in order to secure an advance payment from our customer and to provide assurance that we will perform and deliver in
accordance with the terms of the contract. The customer is required to pay an advance payment on this contract totaling
approximately $95.0 million, which we expect to receive in 2018.
48
Interest Rate Swaps
During 2015, we entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate Term
Loan interest payments due in 2016 and 2017. Additionally, we entered into interest rate swap agreements to effectively convert
$83.8 million of our variable rate revolving credit facility debt to a fixed interest rate. These interest rate swap agreements were
designated as cash flow hedges and intended to manage interest rate risk associated with our variable-rate borrowings and
minimize the impact on our earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. The
activity related to these contracts was not material to the Company's Consolidated Financial Statements for the year ended
December 31, 2017. Interest expense associated with these interest rate swap agreements for the year ended December 31,
2016, was $0.9 million. As of December 31, 2017, these interest rate swap agreements had all matured and were not
outstanding.
Other Sources/Uses of Capital
Pension
We contributed $10.0 million to the qualified pension plan during each of 2017 and 2016. In 2018, we have contributed $10.0
million to the qualified pension plan (as of the date of this filing). Currently, we do not anticipate making any further
contributions this year; however, given Tax Reform we are evaluating our options. We paid $3.1 million and $0.5 million in
SERP benefits during 2017 and 2016, respectively. We expect to pay $0.9 million in SERP benefits in 2018.
Acquisitions
The following table illustrates the cash paid for acquisitions:
For the year ended December 31,
2017
2016
2015
In thousands
Cash paid for acquisitions completed during the year ...................... $
Cash paid for holdback payments during the year ............................
Earn-out and other payments during the year ...................................
Total cash paid for acquisitions ...................................................... $
— $
— $
196,395
—
1,365
1,365
$
1,014
5,617
6,631
3,404
1,453
$
201,252
No acquisitions were completed in 2017 or 2016. Total consideration for acquisitions completed in 2015 was $197.1 million. We
anticipate that we will continue to identify and evaluate potential acquisition candidates, the purchase of which may require the
use of additional capital.
Stock Repurchase Plans
On April 29, 2015, we announced that our Board of Directors approved a share repurchase program ("2015 Share Repurchase
Program") authorizing the repurchase of up to $100.0 million of the common stock, par value $1.00 per share, of the Company.
We currently intend to repurchase shares to offset the annual issuance of shares under our employee stock plans, but the timing
and actual number of shares repurchased will depend on a variety of factors including stock price, market conditions, corporate
and regulatory requirements, capital availability and other factors, including acquisition opportunities. As of December 31,
2017, we had repurchased 803,513 shares under the 2015 Share Repurchase Program and approximately $64.0 million
remained available for repurchases under this authorization.
49
NON-GAAP FINANCIAL MEASURES
Management believes that the non-GAAP measures used in this Annual Report on Form 10-K provide investors with important
perspectives into our ongoing business performance. We do not intend for the information to be considered in isolation or as a
substitute for the related GAAP measures. Other companies may define the measures differently. We define the non-GAAP
measures used in this report and other disclosures as follows:
Organic Sales
Organic Sales is defined as "Net Sales" less sales derived from acquisitions completed during the preceding twelve months. We
believe that this measure provides management and investors with a more complete understanding of underlying operating
results and trends of established, ongoing operations by excluding the effect of acquisitions, which can obscure underlying
trends. We also believe that presenting Organic Sales separately for our segments provides management and investors with
useful information about the trends impacting our segments and enables a more direct comparison to other businesses and
companies in similar industries. Management recognizes that the term "Organic Sales" may be interpreted differently by other
companies and under different circumstances.
Organic Sales (in thousands)
Distribution
Net sales ...................................................................................................................
Less: Acquisition Sales ..........................................................................................
Organic Sales .........................................................................................................
Aerospace
Net sales ...................................................................................................................
Less: Acquisition Sales ..........................................................................................
Organic Sales .........................................................................................................
Consolidated
Net sales ...................................................................................................................
Less: Acquisition Sales ..........................................................................................
Organic Sales .........................................................................................................
2017
2016
2015
$1,080,965
$1,106,322
$1,177,539
—
5,171
52,798
$1,080,965
$1,101,151
$1,124,741
$ 724,944
$ 702,054
$ 597,586
—
63,483
7,297
$ 724,944
$ 638,571
$ 590,289
$1,805,909
$1,808,376
$1,775,125
—
68,654
60,095
$1,805,909
$1,739,722
$1,715,030
Organic Sales per Sales Day
Organic sales per sales day is defined as GAAP “Net sales of the Distribution segment,” less sales derived from acquisitions
completed during the preceding twelve months, divided by the number of sales days in a given period. Sales days ("Sales
Days") are the days that the Distribution segment’s branch locations were open for business and exclude weekends and
holidays. Management believes Organic Sales per Sales Day provides an important perspective on how net sales may be
impacted by the number of days the segment is open for business and provides a basis for comparing periods in which the
number of sales days differs. For the Organic Sales per Sales Day for 2017, 2016 and 2015, please refer to Results of
Operations - Segment Results of Operations and Financial Condition - Distribution Segment in the Management's Discussion
and Analysis of Financial Condition and Results of Operation in this Annual Report on Form 10-K.
Free Cash Flow
Free cash flow is defined as GAAP “Net cash provided by (used in) operating activities” in a period less “Expenditures for
property, plant & equipment” in the same period. Management believes Free Cash Flow provides an important perspective on
our ability to generate cash from our business operations and, as such, that it is an important financial measure for use in
evaluating the Company's financial performance. Free Cash Flow should not be viewed as representing the residual cash flow
available for discretionary expenditures such as dividends to shareholders or acquisitions, as it may exclude certain mandatory
expenditures such as repayment of maturing debt and other contractual obligations. Management uses Free Cash Flow
internally to assess overall liquidity.
50
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
The following table summarizes certain of the Company’s contractual obligations as of December 31, 2017:
Contractual Obligations
Long-term debt (including convertible notes).....
Interest payments on debt (a) ................................
Operating leases...................................................
Capital leases .......................................................
Purchase obligations (b)........................................
Other long-term obligations (c).............................
Planned funding of pension and SERP (d)............
Total .....................................................................
Payments due by period (in millions)
Total
Within 1 year
1-3 years
3-5 years
More than 5
years
$
424.5
$
7.5
$
217.0
$
— $
200.0
81.1
97.8
6.1
182.4
51.2
17.9
15.6
25.8
1.1
146.5
16.2
10.9
26.9
37.5
2.7
33.9
14.0
1.0
25.5
19.2
2.0
2.0
5.4
3.0
13.1
15.3
0.3
—
15.6
3.0
$
861.0
$
223.6
$
333.0
$
57.1
$
247.3
Note: For more information refer to Note 10, Debt; Note 15, Commitments and Contingencies; Note 14, Other Long-Term
Liabilities; Note 13, Pension Plans, and Note 12, Income Taxes in the Notes to Consolidated Financial Statements included in
this Form 10-K.
(a) Interest payments on debt are calculated based on the applicable rate and payment dates for each instrument. For variable-
rate instruments, interest rates and payment dates are based on management’s estimate of the most likely scenarios for each
relevant debt instrument.
(b) This category includes purchase commitments to suppliers for materials and supplies as part of the ordinary course of
business, consulting arrangements and support services. Only obligations of at least $50,000 are included.
(c) This category includes obligations under the Company's long-term incentive plan, deferred compensation plan,
environmental liabilities, acquisition holdbacks and unrecognized tax benefits.
(d) This category includes planned funding of the Company’s SERP and qualified pension plan. Projected funding for the
qualified pension plan beyond one year has not been included as there are several significant factors, such as the future
market value of plan assets and projected investment return rates, which could cause actual funding requirements to differ
materially from projected funding.
Off-Balance Sheet Arrangements
The obligation to pay earn-out amounts depends upon the attainment of specific milestones by an aerospace operating unit
acquired in 2002. Through December 31, 2017, the Company has recorded additional goodwill of $25.0 million related to the
contingency payments to the former owners of the Aerospace Orlando operations. The final contingency payment of $1.4
million occurred in the second quarter of 2017.
As of December 31, 2017, we had no significant off-balance sheet arrangements other than purchase obligations, operating
leases and $6.7 million of outstanding standby letters of credit, of which, $6.5 million were under the revolving credit facility.
51
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are outlined in Note 1, Summary of Significant Accounting Policies, to the Consolidated
Financial Statements included in this Form 10-K. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures based upon
historical experience, current trends and other factors that management believes to be relevant. We are also responsible for
evaluating the propriety of our estimates, judgments and accounting methods as new events occur. Actual results could differ
from those estimates. Management periodically reviews the Company’s critical accounting policies, estimates and judgments
with the Audit Committee of our Board of Directors. The most significant areas currently involving management judgments
and estimates are described below.
Long-Term Contracts
Methodology
For long-term aerospace contracts, we generally recognize sales and income based on the percentage-of-completion method of
accounting, which allows for recognition of revenue as work on a contract progresses. We recognize sales and profit based
upon either (1) the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to
estimated total costs to complete the contract, or (2) the units-of-delivery method, in which sales are recognized as deliveries
are made and cost of sales is computed on the basis of the estimated ratio of total contract cost to total contract sales.
Management performs detailed quarterly reviews of all of our significant long-term contracts. Based upon these reviews, we
record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a
particular contract total costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at
that time.
Judgment and Uncertainties
The percentage-of-completion method requires that we estimate future revenues and costs over the life of a contract. Revenues
are estimated based upon the original contract price, with consideration being given to exercised contract options, change
orders and, in some cases, projected customer requirements. Contract costs may be incurred over a period of several years, and
the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program
managers, engineers and financial professionals. Estimated costs are based primarily on anticipated purchase contract terms,
historical performance trends, business base and other economic projections. The complexity of certain programs as well as
technical risks and uncertainty as to the future availability of materials and labor resources could affect the Company’s ability
to accurately estimate future contract costs.
The Company utilizes units-of-delivery to measure percentage of completion for fixed price programs involving the repetitive
production and delivery of parts, components or shipsets over an extended period of time. For other programs, the Company
utilizes cost-to-cost when measuring percentage of completion. The following table illustrates the amount of revenue
recognized under the percentage-of-completion method.
2017
2016
2015
In thousands
Revenue recognized under percentage of completion method
Units-of-delivery ...............................................................................
Cost-to-cost........................................................................................
Total revenue recognized under percentage of completion method.......
$
$
317,906
55,119
373,025
$
$
307,294
47,085
354,379
$
$
270,525
52,734
323,259
% of consolidated net sales - Units-of-delivery .....................................
% of consolidated net sales - Cost-to-cost .............................................
% of consolidated net sales - Percentage-of-completion method ..........
17.6%
3.1%
20.7%
17.0%
2.6%
19.6%
15.2%
3.0%
18.2%
52
Effect if Actual Results Differ From Assumptions
While we do not believe there is a reasonable likelihood there will be a material change in estimates or assumptions used to
calculate our long-term revenues and costs, estimating the percentage of work complete on certain programs is a complex task.
As a result, changes to these estimates could have a significant impact on our results of operations. These programs include the
Sikorsky BLACK HAWK program, the JPF program, the K-MAX® program, the Boeing A-10 program, the AH-1Z program,
our other Bell Helicopter programs and several other programs. Estimating the ultimate total cost of these programs is
challenging due to the complexity of the programs, unanticipated increases in production requirements, the nature of the
materials needed to complete these programs, change orders related to the programs and the need to manage our customers’
expectations. These programs are an important element in our continuing strategy to increase operating efficiencies and
profitability as well as broaden our business base. Management continues to monitor and update program cost estimates
quarterly for these contracts. A significant change in an estimate on one or more of these programs could have a material effect
on our financial position and results of operations. The net increase in our operating income from changes in contract estimates
totaled $5.7 million for the year ended December 31, 2017. The net decrease in our operating income from changes in contract
estimates totaled $0.8 million for the year ended December 31, 2016. The net increase in our operating income from changes in
contract estimates totaled $4.8 million, excluding the $4.0 million in expense associated with the resolution of the matters
related to our AH-1Z program for the year ended December 31, 2015.
Allowance for Doubtful Accounts
Methodology
The allowance for doubtful accounts represents management’s best estimate of probable losses inherent in the receivable
balance. These estimates are based on known past due amounts and historical write-off experience, as well as trends and factors
impacting the credit risk associated with specific customers. In an effort to identify adverse trends for trade receivables, we
perform ongoing reviews of account balances and the aging of receivables. Amounts are considered past due when payment has
not been received within a pre-determined time frame based upon the credit terms extended. For our government and
commercial contracts, we evaluate, on an ongoing basis, the amount of recoverable costs. The recoverability of costs is
evaluated on a contract-by-contract basis based upon historical trends of payments, program viability and the customer’s credit-
worthiness.
Judgment and Uncertainties
Write-offs are charged against the allowance for doubtful accounts only after we have exhausted all collection efforts. Actual
write-offs and adjustments could differ from the allowance estimates due to unanticipated changes in the business environment
as well as factors and risks associated with specific customers.
Effect if Actual Results Differ From Assumptions
As of December 31, 2017 and 2016, our allowance for doubtful accounts was $4.1 million. Receivables written off, net of
recoveries, in 2017 and 2016 were $1.2 million and $2.1 million, respectively.
Currently we do not believe that we have a significant amount of risk relative to the allowance for doubtful accounts. A 10%
change in the allowance would have a $0.4 million effect on pre-tax earnings.
Inventory Valuation
Methodology
We have five types of inventory (a) merchandise for resale, (b) raw materials, (c) contracts in process, (d) other work in process
and (e) finished goods. Merchandise for resale and raw materials are stated at the lower of the cost of the inventory or its fair
market value. Contracts in process, other work in process and finished goods are valued at production cost comprised of
material, labor and overhead, including general and administrative expenses on certain government contracts. Contracts in
process, other work in process and finished goods are reported at the lower of cost or net realizable value. Raw material
includes certain general stock materials but primarily relates to purchases that were made in anticipation of specific programs
that have not been started as of the balance sheet date.
Judgment and Uncertainties
The process for evaluating inventory obsolescence or market value often requires the Company to make subjective judgments
and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of
53
business. We adjust our inventory by the difference between the estimated market value and the actual cost of our inventory to
arrive at net realizable value. Changes in estimates of future sales volume may necessitate future write-downs of inventory
value. At December 31, 2017, $25.5 million of K-MAX® inventory, including inventory associated with the new build aircraft,
was included in contracts and other work in process and finished goods. We believe it is stated at net realizable value, although
lack of demand for spare parts in the future could result in additional write-downs of the inventory value. Overall, management
believes that our inventory is appropriately valued and not subject to further obsolescence in the near term.
Management believes $3.3 million of the SH-2G(I) inventory will be sold after December 31, 2018. This balance represents
spares requirements and inventory to be used in SH-2G programs.
Effect if Actual Results Differ From Assumptions
Inventory valuation at our Distribution segment generally requires less subjective management judgment than the valuation of
certain inventory in the Aerospace segment. Management reviews the K-MAX® inventory balance on an annual basis to
determine whether any additional write-downs are necessary. We believe this inventory is stated at net realizable value,
although lack of demand for spare parts in the future could result in additional write-downs of the inventory value. Overall,
management believes that our inventory is appropriately valued and not subject to further obsolescence in the near term. If such
a write-down were to occur, this could have a significant impact on our operating results. A 10% write-down of the
December 31, 2017 K-MAX® inventory balance would have affected pre-tax earnings by approximately $2.6 million in 2017.
The balance of SH-2G(I) inventory projected to be sold after December 31, 2018, represents spares requirements and inventory
to be used to support the SH-2G programs in future periods and as such is appropriately valued as of December 31, 2017.
Goodwill and Other Intangible Assets
Methodology
Goodwill and certain intangible assets that have indefinite lives are evaluated at least annually for impairment. The annual
evaluation is generally performed during the fourth quarter, using forecast information. All intangible assets are also reviewed
for possible impairment whenever changes in conditions indicate that their carrying value may not be recoverable. For
reporting units that qualify for a qualitative assessment, management will perform the two-step impairment test after a period of
three years has elapsed since the test was last performed.
In accordance with generally accepted accounting principles, we test goodwill for impairment at the reporting unit level and
other long-lived intangible assets (excluding goodwill) for impairment at the lowest level for which identifiable cash flows are
available. The identification and measurement of goodwill impairment involves the estimation of fair value of the reporting unit
as compared to its carrying value. The identification and measurement of other long-lived intangible asset impairment involves
the estimation of future cash flows of the business unit as compared to its carrying value. In the Distribution segment, goodwill
is tested at the segment level as no components represent reporting units. In the Aerospace segment, goodwill is tested one level
below the segment level, and components are not aggregated for purposes of goodwill testing.
The carrying value of goodwill as of December 31, 2017, was $149.2 million and $202.5 million for the Distribution and
Aerospace segments, respectively. The specific Aerospace reporting units contributing to the total goodwill balance were as
follows: Precision Products Orlando facility ("KPP-Orlando"), $41.4 million; Specialty Bearings and Engineered Products,
$109.2 million; and Aerosystems, $51.9 million. During 2017, it was determined that the two-step impairment test would be
performed for the following reporting units: Distribution and Aerosystems. See Note 8, Goodwill and Other Intangible Assets,
Net, in the Notes to Consolidated Financial Statements for additional information regarding these assets.
The carrying value of other intangible assets as of December 31, 2017, was $38.9 million and $78.2 million for the Distribution
and Aerospace segments, respectively. During the fourth quarter of 2017, we evaluated certain long-lived intangible assets
associated with our U.K. and our Engineering Services facilities. These intangible assets totaled $11.3 million and $1.2 million,
respectively at December 31, 2017. See Note 8, Goodwill and Other Intangible Assets, Net, in the Notes to Consolidated
Financial Statements for additional information regarding these assets.
Judgment and Uncertainties
In years that management performs a qualitative assessment we consider the following qualitative factors: general economic
conditions in the markets served by the reporting units carrying goodwill, relevant industry-specific performance statistics,
changes in the carrying value of the individual reporting units and assumptions used in the most recent fair value calculation,
including forecasted results of operations, the weighted average cost of capital and recent transaction multiples.
54
For Step 1 of the two-step impairment test, management estimated the fair value of the reporting units using an income
methodology based on management's estimates of forecasted cash flows, with those cash flows discounted to present value
using rates commensurate with the risks associated with those cash flows. In addition, management used a market-based
valuation method involving analysis of market multiples of revenues and earnings before interest, taxes, depreciation and
amortization (“EBITDA”) for (i) a group of comparable public companies and (ii) recent transactions, if any, involving
comparable companies. In estimating the fair value of the reporting units, a weighting of 80% to the income approach and 20%
to the market-based valuation method was selected, consistent with the prior year. A higher weighting was applied to the
estimate derived from the income approach as it is based on management's assumptions specific for the reporting units, which
are the outcome of an internal planning process. While the guideline companies in the market based valuation method have
comparability to the reporting units, they may not fully reflect the market share, product portfolio and operations of the
reporting units.
In performing our step one test for the reporting units, we assumed terminal growth rates ranging from 2.5% - 3.0%. The
discount rate utilized to reflect the risk and uncertainty in the financial markets and specifically in our internally developed
earnings projections ranged from 10.0% - 14.0% for these reporting units. Changes in these estimates and assumptions could
materially affect the results of our tests for goodwill impairment.
Under Step 2, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of
the reporting unit goodwill. The results of the Step 1 tests indicated that the Company did not need to proceed to Step 2 for
either of the reporting units tested.
Effect if Actual Results Differ From Assumptions
We performed the Step 1 test for the Distribution and Aerosystems reporting units. Distribution's fair value exceeded the
carrying value in excess of 68% and Aerosystems' fair value exceeded the carrying value by approximately 25%. A one
percentage point decrease in our terminal growth rate or an increase of one percentage point in our discount rate would not
result in a fair value calculation less than the carrying value for these reporting units.
We performed the intangible asset impairment test for our U.K. and Engineering Services businesses. The fair values exceeded
the carrying value, indicating there was no impairment of long-lived intangible assets held by either business.
As with all assumptions, there is an inherent level of uncertainty and actual results, to the extent they differ from those
assumptions, could have a material impact on fair value. For example, multiples for similar type reporting units could
deteriorate due to changes in technology or a downturn in economic conditions. A reduction in customer demand would impact
our assumed growth rate resulting in a reduced fair value. Potential events or circumstances could have a negative effect on the
estimated fair value. The loss of a major customer or program could have a significant impact on the future cash flows of the
reporting unit(s). Advances in technology by our competitors could result in our products becoming obsolete.
We do not currently believe there to be a reasonable likelihood that actual results will vary materially from estimates and
assumptions used to test goodwill and other intangible assets for impairment losses. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Long-Term Incentive Programs
Methodology
The Company maintains a Management Incentive Plan, which provides for cash and share-based payment awards, including
non-statutory stock options, restricted stock, stock appreciation rights and long-term incentive program ("LTIP") awards. We
determine the fair value of our non-qualified stock option awards at the date of grant using a Black-Scholes model. We
determine the fair value of our restricted share awards at the date of grant using an average of the high and low market price of
our stock.
LTIP awards provide certain senior executives an opportunity to receive award payments, generally in cash. For each
performance cycle, the Company’s financial results are compared to the Russell 2000 indices for the same periods based upon
the following: (a) average return on total capital, (b) earnings per share growth and (c) total return to shareholders. No awards
will be payable if the Company’s performance is below the 25th percentile of the designated indices. The maximum award is
payable if performance reaches the 75th percentile of the designated indices. Awards will be paid out at 100% at the 50th
55
percentile. Awards for performance between the 25th and 75th percentiles are determined by straight-line interpolation between
0% and 200%.
In order to estimate the liability associated with LTIP awards, management must make assumptions as to how our current
performance compares to current Russell 2000 data based upon the Russell 2000’s historical results. This analysis is performed
on a quarterly basis. When sufficient Russell 2000 data for a year is available, which typically will not be until May or June of
the following year, management will adjust the liability to reflect its best estimate of the total award. Actual results could differ
significantly from management’s estimates. The total estimated liability as of December 31, 2017, was $18.8 million.
Judgment and Uncertainties
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply
judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of
our stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors.
Changes in these assumptions can materially affect the fair value estimate.
Our LTIP requires management to make assumptions regarding the likelihood of achieving long-term Company goals as well as
estimate future Russell 2000 results.
Effect if Actual Results Differ From Assumptions
We do not currently believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions
we use to determine cash and share-based compensation expense. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to changes in cash and share-based compensation expense that could be material.
If actual results are not consistent with the assumptions used, the share-based compensation expense reported in our financial
statements may not be representative of the actual economic cost of the share-based compensation. A 10% change in our share-
based compensation expense for the year ended December 31, 2017, would have affected pre-tax earnings by approximately
$0.6 million in 2017.
Due to the timing of availability of the Russell 2000 data, there is a risk that the amount we have recorded as LTIP expense
could be different from the actual payout. A 10.0 percentage point increase in the total performance factor earned for our LTIP
would result in a reduction of 2017 pretax earnings of $1.8 million.
Pension Plans
Methodology
We maintain a qualified defined benefit pension, as well as a non-qualified Supplemental Employees Retirement Plan ("SERP")
for certain key executives. See Note 13, Pension Plans, in the Notes to Consolidated Financial Statements included in this
Form 10-K for further discussion of these plans.
Expenses and liabilities associated with each of these plans are determined based upon actuarial valuations. Integral to these
actuarial valuations are a variety of assumptions including expected return on plan assets and discount rates. We regularly
review these assumptions, which are updated at the measurement date, December 31st. In accordance with generally accepted
accounting principles, the impact of differences between actual results and the assumptions are accumulated and generally
amortized over future periods, which will affect expense recognized in future periods.
In 2016, we began to utilize a "spot rate approach" in the calculation of pension interest and service cost. The spot rate
approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service
cost.
Judgment and Uncertainties
The discount rate represents the interest rate used to determine the present value of future cash flows currently expected to be
required to settle the pension obligation. Management uses the Citigroup Above Median Double-A Curve for discount rate
assumptions. This index was designed to provide a market average discount rate to assist plan sponsors in valuing the liabilities
associated with postretirement obligations. Additionally, we reviewed the changes in the general level of interest rates since the
last measurement date noting that overall rates had decreased when compared to 2016.
56
Based upon this information, we used a 3.50% discount rate as of December 31, 2017, for the qualified defined benefit pension
plan. This rate takes into consideration the participants in our pension plan and the anticipated payment stream as compared to
the Citigroup Above Median Double-A Curve. For the SERP, we used the same methodology as the pension plan and derived a
discount rate of 3.15% in 2017 for the benefit obligation. The difference in the discount rates is primarily due to the expected
duration of SERP payments, which is shorter than the anticipated duration of benefit payments to be made to the average
participant in the pension plan. The qualified defined benefit pension plan and SERP used discount rates of 3.98% and 3.43% at
December 31, 2016, respectively, for purposes of calculating the benefit obligation.
The expected long-term rate of return on plan assets of 7.5% represents the average rate of earnings expected on the funds
invested to provide for anticipated benefit payments. The expected return on assets assumption is developed based upon several
factors. Such factors include current and expected target asset allocation, our historical experience of returns by asset class
type, a risk premium and an inflation estimate.
Effect if Actual Results Differ From Assumptions
A lower discount rate increases the present value of benefit obligations and increases pension expense. A one percentage point
decrease in the assumed discount rate would have increased pension expense in 2017 by $5.4 million. A one percentage point
increase in the assumed discount rate would have decreased pension expense in 2017 by $4.7 million.
A lower expected rate of return on pension plan assets would increase pension expense. For 2017 and 2016, the expected rate of
return on plan assets was 7.5%. A one-percentage point increase/decrease in the assumed return on pension plan assets would
have changed pension expense in 2017 by approximately $5.6 million. During 2017, the actual return on pension plan assets of
17.0% was higher than our expected long-term rate of return on pension plan assets of 7.5%.
Income Taxes
Methodology
Deferred tax assets and liabilities generally represent temporary differences between the recognition of tax benefits/expenses in
our financial statements and the recognition of these tax benefits/expenses for tax purposes.
We establish reserves for deferred taxes when, despite our belief that our tax return positions are valid and defensible, we
believe that certain positions may not prevail if challenged. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit or changes in tax legislation. Our effective tax rate includes the impact of
reserve provisions and changes to reserves that we consider appropriate. This rate is then applied to our quarterly operating
results. In the event that there is a significant unusual or one-time item recognized in our operating results, the tax attributable
to that item would be separately calculated and recorded at the same time as the unusual or one-time item.
As of December 31, 2017, we had recognized $19.6 million of deferred tax assets, net of valuation allowances. A portion of this
amount, $1.6 million, is related to a capital loss recorded on the disposition of our Distribution segment’s Mexico operations.
The realization of these benefits is dependent in part on future taxable capital gains and tax planning strategies designed to
realize the benefit associated with the capital loss. For those jurisdictions where the expiration of tax loss or credit
carryforwards or the projection of operating results indicates that realization is not likely, a valuation allowance is provided.
Judgment and Uncertainties
Management believes that sufficient income will be earned in the future to realize deferred income tax assets, net of valuation
allowances recorded. The realization of these deferred tax assets can be impacted by changes to tax laws or statutory tax rates
and future taxable income levels.
Our effective tax rate on earnings was 47.2% for 2017. This rate was adversely impacted by the Tax Cuts and Jobs Act of 2017,
which required us to revalue our net U.S. deferred tax assets. Our effective tax rate is based on expected or reported income or
loss, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.
Significant judgment is required in determining our effective tax rate and in evaluating our tax positions.
Effect if Actual Results Differ From Assumptions
We do not anticipate a significant change in our unrecognized tax benefits within the next twelve months. We file tax returns in
numerous U.S. and foreign jurisdictions, with returns subject to examination for varying periods, but generally back to and
including 2013. It is our policy to record interest and penalties on unrecognized tax benefits as income taxes. A one percentage
point increase/decrease in our tax rate would have affected our 2017 earnings by $0.9 million.
57
Environmental Costs
Methodology
Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over our foreign operations. As a result, we have established and update, as necessary, policies
relating to environmental standards of performance for our operations worldwide.
When we become aware of an environmental risk, we perform a site study to ascertain the potential magnitude of
contamination and the estimated cost of remediation.
We continually evaluate the identified environmental issues to ensure the time to complete the remediation and the total cost of
remediation are consistent with our initial estimate. If there is any change in the cost and/or timing of remediation, the accrual
is adjusted accordingly.
Judgment and Uncertainties
Environmental costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each
individual site, including existing technology, current laws and regulations and prior remediation experience. Conditions of the
site must be monitored throughout the remediation process as numerous factors could affect the estimated liability, including,
but not limited to, the discovery of geological formations affecting the behavior or movement of contaminants; soil conditions
and soil chemistry affecting the degradation of contaminants; or the discovery of further sources or types of contaminants.
Liabilities with fixed or readily determinable payment dates are discounted.
We believe that expenditures necessary to comply with the present regulations governing environmental protection will not
have a material effect upon our competitive position, consolidated financial position, results of operations or cash flows.
Effect if Actual Results Differ From Assumptions
At December 31, 2017, amounts accrued for known environmental remediation costs were $6.1 million. A 10% change in this
accrual would have impacted pre-tax earnings by $0.6 million. Further information about our environmental costs is provided
in Note 9, Environmental Costs, in the Notes to Consolidated Financial Statements.
RECENT ACCOUNTING STANDARDS
A summary of recent accounting standards is included in Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
SELECTED QUARTERLY FINANCIAL DATA
2017
Net sales ...................................................................
Gross profit...............................................................
Net earnings..............................................................
Basic earnings per share ...........................................
Diluted earnings per share........................................
2016
Net sales ...................................................................
Gross profit...............................................................
Net earnings..............................................................
Basic earnings per share ...........................................
Diluted earnings per share........................................
First
Quarter
$
435,941
124,816
6,291
0.23
0.22
First
Quarter
$
451,198
134,430
9,777
0.36
0.35
58
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share amounts)
473,916
$
447,046
449,006
$
$
134,963
13,458
0.49
0.48
138,935
16,280
0.58
0.58
148,758
13,797
0.50
0.49
Fourth
Third
Second
Quarter
Quarter
Quarter
(in thousands, except per share amounts)
433,062
$
470,642
453,474
$
$
143,766
16,495
0.61
0.59
135,490
17,455
0.64
0.62
135,406
15,127
0.56
0.53
Total
Year
$ 1,805,909
547,472
49,826
1.80
1.75
Total
Year
$ 1,808,376
549,092
58,854
2.17
2.10
Included within certain quarterly results are a variety of unusual or significant adjustments that may affect comparability. The
most significant of such adjustments are described below as well as within Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial Statements. Additionally, due to the nature of the
earnings per share calculation, the sum of quarterly earnings per share data may not equal the cumulative earnings per share
data for the year.
Items within the 2017 quarterly results that may affect comparability are as follows:
2017
First
Quarter
Second
Quarter
Third
Quarter
(in thousands)
Fourth
Quarter
Total
Year
Tax expense associated with the revaluation of U.S
deferred tax assets due to Tax Reform .....................
Costs associated with Distribution productivity
initiatives ..................................................................
Restructuring and severance costs............................
$
$
$
— $
— $
— $
9,733
496
579
$
$
577
42
$
$
514
4,719
$
$
544
1,123
$
$
$
9,733
2,131
6,463
Items within the 2016 quarterly results that may affect comparability are as follows:
2016
First
Quarter
Second
Quarter
Third
Quarter
(in thousands)
Fourth
Quarter
Total
Year
Costs associated with Distribution productivity
initiatives ..................................................................
Restructuring and severance costs............................
Acquisition and integration costs .............................
$
$
$
3,125
460
2,002
$
$
$
2,083
312
2,302
$
$
$
2,787
780
546
$
$
$
4,582
869
295
$
$
$
12,577
2,421
5,145
59
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have various market risk exposures that arise from our ongoing business operations. Market risk is the potential economic
loss that may result from adverse changes in the fair value of financial instruments. Our financial results are impacted by
changes in interest rates, certain foreign currency exchange rates and commodity prices.
Foreign Currencies
We have manufacturing, sales and distribution facilities in various locations throughout the world. As a result, we make
investments and conduct business transactions denominated in various currencies, including the U.S. dollar, the British pound,
the European euro, the Czech koruna, the Japanese yen and the Indian rupee. Total annual foreign sales, including foreign
export sales, averaged approximately $314.5 million over the last three years. Foreign sales represented 18.8% of consolidated
net sales in 2017. We estimate a hypothetical 10% adverse change in foreign currency exchange rates relative to the U.S dollar
for 2017 would have had an unfavorable impact of $13.1 million on sales and a $0.1 million unfavorable impact on operating
income. We manage foreign currency exposures that are associated with committed foreign currency purchases and sales and
other assets and liabilities created in the normal course of business at the subsidiary operations level. Sometimes we may,
through the use of forward contracts, hedge the price risk associated with committed and forecasted foreign denominated
payments and rates. Historically the use of these forward contracts has been minimal. We do not use derivatives for speculative
or trading purposes.
Interest Rates
Our primary exposure to interest rate risk results from our outstanding debt obligations. The level of fees and interest charged
on revolving credit commitments and borrowings are based upon leverage levels and market interest rates.
Our principal debt facilities are contained within a variable rate credit agreement that provides a $600.0 million revolving credit
facility and a $100.0 million term loan commitment. Both these agreements were amended and restated on May 6, 2015 (as
amended), and expire on May 6, 2020. Total average bank borrowings for 2017 were $256.5 million. The impact of a
hypothetical 100 basis point increase in the interest rates on our average bank borrowings would have resulted in a $2.6 million
increase in interest expense.
During the fiscal quarter ended June 30, 2017, we issued $200.0 million aggregate principal of convertible unsecured senior
notes, due May 2024, in a private placement offering. These notes bear 3.25% interest per annum on the principal amount,
payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2017, and have an
effective interest rate of 5.0%.
From time to time we will enter into interest rate swap contracts for the purpose of securing a fixed interest rate on our variable
interest rate borrowings. These contracts allow us to create certainty with respect to future cash flows associated with our
variable rate debt that would otherwise be impacted by fluctuations in LIBOR rates.
Commodity Prices
We are exposed to volatility in the price of raw materials used in certain manufacturing operations as well as a variety of items
procured by our distribution business. These raw materials include, but are not limited to, aluminum, titanium, nickel, copper
and other specialty metals. We manage our exposure related to these price changes through strategic procurement practices.
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Kaman Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kaman Corporation and its subsidiaries as of December 31,
2017 and 2016, and the related consolidated statements of operations, of comprehensive income, of shareholders’ equity, and of
cash flows for each of the three years in the period ended December 31, 2017, including the related notes and schedule of
valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item
15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
61
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely 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 of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 27, 2018
We have served as the Company’s auditor since 2013.
62
CONSOLIDATED BALANCE SHEETS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share and per share amounts)
Current assets:
Assets
Cash and cash equivalents ......................................................................................................
Accounts receivable, net.........................................................................................................
Inventories ..............................................................................................................................
Income tax refunds receivable ................................................................................................
Other current assets.................................................................................................................
Total current assets ..........................................................................................................
Property, plant and equipment, net of accumulated depreciation of $252,611 and $226,366,
respectively ...............................................................................................................................
Goodwill....................................................................................................................................
Other intangible assets, net .......................................................................................................
Deferred income taxes ..............................................................................................................
Other assets ...............................................................................................................................
Total assets ................................................................................................................................
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt...........................................................................................
Accounts payable – trade........................................................................................................
Accrued salaries and wages ....................................................................................................
Advances on contracts ............................................................................................................
Income taxes payable..............................................................................................................
Other current liabilities ...........................................................................................................
Total current liabilities .......................................................................................................
Long-term debt, excluding current portion ...............................................................................
Deferred income taxes ..............................................................................................................
Underfunded pension ................................................................................................................
Other long-term liabilities .........................................................................................................
Commitments and contingencies (Note 15)..............................................................................
Temporary equity, convertible notes.........................................................................................
Shareholders’ equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding........................
Common stock, $1 par value, 50,000,000 shares authorized; voting; 29,141,467 and
28,162,497 shares issued, respectively ..............................................................................
Additional paid-in capital ......................................................................................................
Retained earnings ..................................................................................................................
Accumulated other comprehensive income (loss).................................................................
Less 1,325,975 and 1,054,364 shares of common stock, respectively, held in treasury,
at cost .................................................................................................................................
Total shareholders’ equity................................................................................................
Total liabilities and shareholders’ equity...................................................................................
December 31,
2017
December 31,
2016
$
$
$
$
$
$
36,904
313,451
367,437
2,889
27,188
747,869
185,452
351,717
117,118
27,603
25,693
1,455,452
7,500
127,591
48,352
8,527
1,517
52,812
246,299
391,651
8,024
126,924
46,898
—
—
41,205
230,864
393,814
6,065
26,605
698,553
176,521
337,894
126,444
59,373
27,501
1,426,286
119,548
116,663
43,165
13,356
1,165
59,989
353,886
296,598
6,875
156,427
44,916
1,797
—
29,141
185,332
587,877
(115,814)
28,162
171,162
560,200
(156,393)
(50,880)
635,656
1,455,452
$
(37,344)
565,787
1,426,286
$
See accompanying notes to consolidated financial statements.
63
CONSOLIDATED STATEMENTS OF OPERATIONS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts)
Net sales ...................................................................................................................
Cost of sales .............................................................................................................
Gross profit...............................................................................................................
Selling, general and administrative expenses...........................................................
Restructuring costs ...................................................................................................
Net (gain) loss on sale of assets ...............................................................................
Operating income .....................................................................................................
Interest expense, net .................................................................................................
Other (income) expense, net.....................................................................................
Earnings before income taxes ..................................................................................
Income tax expense ..................................................................................................
Net earnings..............................................................................................................
For the Year Ended December 31,
2017
2016
2015
$ 1,805,909
$ 1,808,376
$ 1,775,125
1,258,437
1,259,284
1,257,891
547,472
430,892
2,661
(256)
114,175
20,581
(784)
94,378
44,552
549,092
442,126
1,032
11
105,923
15,747
472
89,704
30,850
$
49,826
$
58,854
$
517,234
411,547
1,496
(328)
104,519
13,144
3,386
87,989
27,551
60,438
Earnings per share:
Basic earnings per share ......................................................................................
Diluted earnings per share ...................................................................................
Weighted average shares outstanding:
Basic ....................................................................................................................
Diluted .................................................................................................................
Dividends declared per share ...................................................................................
$
$
$
1.80
1.75
$
$
2.17
2.10
$
$
2.22
2.17
27,611
28,418
27,107
28,072
0.80
$
0.72
$
27,177
27,868
0.72
See accompanying notes to consolidated financial statements.
64
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands)
Net earnings..............................................................................................................
Other comprehensive income, net of tax:
Foreign currency translation adjustments ..............................................................
Change in unrealized loss on derivative instruments, net of tax expense of $31,
$6, and $158, respectively .....................................................................................
Pension plan adjustments, net of tax expense (benefit) of $7,661, ($2,412), and
($7,382), respectively.............................................................................................
Other comprehensive income (loss)....................................................................
Total comprehensive income....................................................................................
For the Year Ended December 31,
2017
2016
2015
$
49,826
$
58,854
$
60,438
27,840
(12,271)
(1,949)
51
9
263
12,688
40,579
90,405
$
$
(3,993)
(16,255) $
$
42,599
(12,191)
(13,877)
46,561
$
$
See accompanying notes to consolidated financial statements.
65
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
Common Stock
Additional
Paid-In
Retained
Accumulated
Other
Comprehensive
Treasury Stock
Total
Shareholders'
Shares
$
Capital
Earnings
Income (Loss)
Shares
$
Equity
Balance at December 31, 2014
Net earnings ..............................................
Other comprehensive income ...................
Dividends ..................................................
Purchase of treasury shares.......................
Employee stock plans,
net of tax expense of $327 .....................
Share-based compensation expense..........
Balance at December 31, 2015
Net earnings ..............................................
Other comprehensive income ...................
Dividends ..................................................
Amounts reclassified to temporary equity
Purchase of treasury shares.......................
Employee stock plans ...............................
Share-based compensation expense..........
Balance at December 31, 2016
Net earnings ..............................................
Other comprehensive income ...................
Dividends ..................................................
Amounts reclassified from temporary
equity.........................................................
Changes due to convertible notes
transactions ...............................................
Purchase of treasury shares.......................
Employee stock plans ...............................
Share-based compensation expense..........
Balance at December 31, 2017
$
$
$
27,518,226
—
—
$ 27,518
—
—
$ 145,845
—
—
$ 479,984
60,438
—
—
—
—
—
—
—
(19,557)
—
137,037
80,494
27,735,757
—
—
—
—
—
344,221
82,519
28,162,497
—
—
—
—
624,044
137
81
$ 27,736
—
—
—
—
—
344
82
$ 28,162
—
—
—
4,649
6,309
$ 156,803
—
—
—
(1,797)
—
10,541
5,615
$ 171,162
—
—
—
—
—
$ 520,865
58,854
—
(19,519)
—
—
—
—
$ 560,200
49,826
—
(22,149)
—
624
1,797
(2,582)
—
—
(126,261)
—
(13,877)
—
—
—
—
(140,138)
—
(16,255)
—
—
—
—
—
(156,393)
—
40,579
—
—
—
—
265,886
89,040
29,141,467
—
—
9,074
—
5,881
—
$ 185,332
(115,814)
See accompanying notes to consolidated financial statements.
—
266
89
$ 29,141
—
—
—
$ 587,877
$
385,942
—
—
—
319,234
$ (9,421) $
—
—
—
(12,836)
(8,857)
1,864
698,183
—
—
—
—
316,545
28,672
10,964
1,054,364
—
—
—
70
(2)
$(22,189) $
—
—
—
—
(13,792)
(1,352)
(11)
$(37,344) $
—
—
—
—
—
—
—
218,235
39,647
13,729
1,325,975
(11,552)
(1,970)
(14)
$(50,880) $
517,665
60,438
(13,877)
(19,557)
(12,836)
4,856
6,388
543,077
58,854
(16,255)
(19,519)
(1,797)
(13,792)
9,533
5,686
565,787
49,826
40,579
(22,149)
1,797
(1,958)
(11,552)
7,370
5,956
635,656
66
CONSOLIDATED STATEMENTS OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands)
For the Year Ended December 31,
2016
2015
2017
Cash flows from operating activities:
Net earnings....................................................................................................................
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
49,826
$
58,854
$
60,438
Depreciation and amortization ................................................................................
Amortization of debt issuance costs........................................................................
Accretion of convertible notes discount..................................................................
Provision for doubtful accounts ..............................................................................
Net (gain) loss on sale of assets ..............................................................................
Loss on debt extinguishment...................................................................................
Net (gain) loss on derivative instruments ...............................................................
Stock compensation expense ..................................................................................
Excess tax benefit from share-based compensation arrangements .........................
Deferred income taxes ............................................................................................
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable..............................................................................................
Inventories ............................................................................................................
Income tax refunds receivable ..............................................................................
Other current assets...............................................................................................
Accounts payable - trade ......................................................................................
Accrued contract losses ........................................................................................
Accrued restructuring costs ..................................................................................
Advances on contracts ..........................................................................................
Other current liabilities .........................................................................................
Income taxes payable............................................................................................
Pension liabilities..................................................................................................
Other long-term liabilities.....................................................................................
Net cash provided by operating activities ..........................................................
Cash flows from investing activities:
Proceeds from sale of assets....................................................................................
Expenditures for property, plant & equipment........................................................
Acquisition of businesses including earn out adjustments, net of cash acquired....
Other, net.................................................................................................................
Cash used in investing activities...........................................................................
42,471
2,014
3,410
1,094
(256)
137
(1,126)
5,956
—
24,555
(77,560)
31,095
3,180
1,747
10,164
(957)
1,122
(4,829)
(366)
212
(11,318)
(686)
79,885
618
(27,631)
(1,365)
(3,457)
(31,835)
Cash flows from financing activities:
Net (repayments) borrowings under revolving credit agreements..........................
Borrowings under Term Loan Facility....................................................................
Debt repayment .......................................................................................................
Proceeds from issuance of 2024 convertible notes .................................................
Repayment of 2017 convertible notes.....................................................................
Purchase of capped call - 2024 convertible notes ...................................................
Proceeds from bond hedge settlement - 2017 convertible notes.............................
Bank overdraft.........................................................................................................
Proceeds from exercise of employee stock awards.................................................
Purchase of treasury shares .....................................................................................
Dividends paid ........................................................................................................
Debt and equity issuance costs................................................................................
Windfall tax benefit.................................................................................................
Other........................................................................................................................
Cash (used in) provided by financing activities ...................................................
Net (decrease) increase in cash and cash equivalents ....................................................
Effect of exchange rate changes on cash and cash equivalents......................................
Cash and cash equivalents at beginning of period .........................................................
Cash and cash equivalents at end of period....................................................................
(75,988)
—
(6,875)
200,000
(175,151)
(20,500)
58,564
(1,146)
7,370
(11,552)
(21,462)
(7,473)
—
(523)
(54,736)
(6,686)
2,385
41,205
36,904
$
$
See accompanying notes to consolidated financial statements.
43,393
1,536
2,144
2,635
11
—
1,007
5,686
—
7,928
(778)
(11,891)
(2,474)
4,859
693
745
(1,029)
2,082
2,078
351
(9,087)
(1,036)
107,707
201
(29,777)
(6,631)
(1,376)
(37,583)
(15,147)
—
(5,000)
—
—
—
—
275
9,533
(13,792)
(19,510)
—
—
(318)
(43,959)
26,165
(1,422)
16,462
41,205
36,181
1,548
2,035
1,694
(328)
—
579
6,388
(327)
(1,281)
4,556
(2,928)
(3,463)
(2,823)
4,697
2
1,029
8,868
(2,173)
(2,403)
(2,300)
(405)
109,584
719
(29,932)
(201,252)
(2,143)
(232,608)
143,025
100,000
(83,750)
—
—
—
—
(3,462)
4,856
(12,836)
(19,026)
(1,348)
327
(198)
127,588
4,564
(513)
12,411
16,462
$
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kaman Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945 and is a diversified company that
conducts business in the aerospace and distribution markets. Kaman Corporation reports information for itself and its
subsidiaries (collectively, the "Company") in two business segments, Distribution and Aerospace.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior year financial
statements and notes thereto have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include
the carrying amount of property, plant and equipment, goodwill and other intangible assets; valuation allowances for
receivables, inventories and income taxes; valuation of share-based compensation; vendor incentives; assets and obligations
related to employee benefits; estimates of environmental remediation costs; and accounting for long-term contracts including
claims. Actual results could differ from those estimates.
Foreign Currency Translation
The Company has certain operations outside the United States that prepare financial statements in currencies other than the U.S.
dollar. For these operations, results of operations and cash flows are translated using the average exchange rate throughout the
period. Assets and liabilities are generally translated at end of period rates. The gains and losses associated with these
translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts
receivable. The carrying amounts of these items, as well as trade accounts payable and notes payable, approximate fair value
due to the short-term maturity of these instruments. At December 31, 2017, one customer accounted for more than 10% of
consolidated accounts receivable. At December 31, 2016, no individual customer accounted for more than 10% of consolidated
accounts receivable. At December 31, 2017 and 2016, no individual customer accounted for more than 10.0% of consolidated
net sales. Foreign sales were approximately 18.8%, 18.1% and 15.6% of the Company’s net sales in 2017, 2016 and 2015,
respectively, and are concentrated in the United Kingdom, Germany, Canada, New Zealand, the Middle East and Asia.
Additional Cash Flow Information
Non-cash investing activities in 2017 include an accrual of $3.6 million for purchases of property and equipment (including
capital lease obligations). Non-cash financing activities in 2017 include 624,044 common shares issued for the partial unwind
of warrant transactions during the second quarter of 2017 that had a value of approximately $30.3 million, the receipt of
136,369 shares with an approximate value of $7.5 million to unwind the remaining bond hedge transactions during the fourth
quarter of 2017 and the issuance to bond holders of 136,347 shares with an approximate value of $7.5 million upon conversion
of the remaining 2017 Notes. Other non-cash financing activities in 2017 include an adjustment to other comprehensive income
related to the underfunding of the pension and SERP plans and changes in the fair value of derivative financial instruments that
qualified for hedge accounting. The total net adjustment was $12.7 million, net of tax of $7.7 million. Additionally, non-cash
financing activities in 2017 include $5.6 million of dividends declared but not yet paid.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Additional Cash Flow Information - continued
Non-cash investing activities in 2016 include an accrual of $2.3 million for purchases of property and equipment (including
capital lease obligations), $1.4 million in earn-out payments to the former owners of an aerospace acquisition and an adjustment
of $0.2 million for a certain tax matter. Non-cash financing activities in 2016 include an adjustment to other comprehensive
income related to the underfunding of the pension and SERP plans and changes in the fair value of derivative financial
instruments that qualified for hedge accounting. The total net adjustment was $4.0 million, net of tax of $2.5 million.
Additionally, non-cash financing activities in 2016 include $4.9 million of dividends declared but not yet paid.
Non-cash investing activities in 2015 include $5.4 million in earn-out payments to the former owners of an aerospace
acquisition. Non-cash financing activities in 2015 include an adjustment to other comprehensive income related to the
underfunding of the pension and SERP plans and changes in the fair value of derivative financial instruments that qualified for
hedge accounting. The total net adjustment was $11.9 million, net of tax of $7.2 million. Additionally, non-cash financing
activities in 2015 include $4.9 million of dividends declared but not yet paid.
The Company describes its pension obligations in more detail in Note 13, Pension Plans. The Company describes the
convertible notes transactions in more detail in Note 10, Debt.
Revenue Recognition
Sales and estimated profits under long-term contracts are generally recognized using the percentage-of-completion method of
accounting, using as a measurement basis either the ratio that costs incurred bear to estimated total costs (after giving effect to
estimates of costs to complete based upon most recent information for each contract) or units-of-delivery. Reviews of contracts
are made routinely throughout their lives and the impact of revisions in profit estimates are recorded in the accounting period in
which the revisions are made. Anticipated contract losses are charged to operations when they are probable. In cases where the
Company has multiple contracts with a single customer, each contract is generally treated as a separate profit center and
accounted for as such. Except in the case of contracts accounted for using the cost-to-cost method of percentage-of-completion
accounting, revenues are recognized when the product has been shipped or delivered, depending upon when title and risk of
loss have passed. For certain U.S. Government ("USG") contracts delivery is deemed to have occurred when work is
substantially complete and acceptance by the customer has occurred by execution of a Material Inspection and Receiving
Report, DD Form 250 or Memorandum of Shipment.
Sales contracts are initially reviewed to ascertain if they involve multiple element arrangements. If such an arrangement exists
and there is no evidence of stand-alone value for each element of the undelivered items, recognition of sales for the
arrangement is deferred until all elements of the arrangement are delivered and risk of loss and title have passed (except in the
case of contracts accounted for using the percentage-of-completion method of accounting). For elements that do have stand-
alone value or contracts that are not considered multiple element arrangements, sales and related costs of sales are recognized
as services are performed or when the product has been shipped or delivered depending upon when title and risk of loss have
passed.
Pre-contract costs incurred for items such as materials or tooling for anticipated contracts are included in inventory if recovery
of such costs is considered probable. Thereafter, if the Company determines it will not be awarded an anticipated contract and
the associated pre-contract costs cannot be applied to another program the costs are expensed immediately. As of December 31,
2017 and 2016, approximately $2.3 million and $2.0 million, respectively, of pre-contract costs were included in inventory,
which, in both cases, represented less than 1% of total inventory. Learning or start-up costs incurred in connection with
existing or anticipated follow-on contracts are charged to the existing contract unless the terms of the contract permit recovery
of these costs over a specific contractual term and provide for reimbursement if the contract is canceled.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition - continued
If it is probable that a claim with respect to change orders will result in additional contract revenue and the amount of such
additional revenue can be reliably estimated, then the additional contract revenue is considered in our accounting for the
program, but only if the contract provides a legal basis for the claim, the additional costs were unforeseen and not caused by
deficiencies in our performance, the costs are identifiable and reasonable in view of the work performed and the evidence
supporting the claim is objective and verifiable. If these requirements are met, the claim portion of the program is accounted for
separately to ensure revenue from the claim is recorded only to the extent claim related costs have been incurred; accordingly,
no profit with respect to such costs is recorded until the change order is formally approved. If these requirements are not met,
the forecast of total contract cost at completion (which is used to calculate the gross margin rate) for the basic contract is
generally increased to include all incurred and anticipated claim related costs.
Recognition of sales not accounted for under the cost-to-cost method of percentage-of-completion accounting occurs when the
sales price is fixed, collectability is reasonably assured and the product’s title and risk of loss has transferred to the customer.
The Company includes freight costs charged to customers in net sales and the correlating expense as a cost of sales. Sales tax
collected from customers is excluded from net sales in the accompanying Consolidated Statements of Operations.
Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes costs of products and services sold (i.e., purchased product, raw material, direct labor, engineering labor,
outbound freight charges, depreciation and amortization, indirect costs and overhead charges). Selling expenses primarily
consist of advertising, promotion, bid and proposal, employee payroll and corresponding benefits and commissions paid to sales
and marketing personnel. General and administrative expenses primarily consist of employee payroll including executive,
administrative and financial personnel and corresponding benefits, incentive compensation, independent research and
development, consulting expenses, warehousing costs, depreciation and amortization. Legal costs are expensed as incurred and
are generally included in general and administrative expenses. The Aerospace segment includes general and administrative
expenses as an element of program cost and inventory for certain government contracts.
Certain inventory related costs, including purchasing costs, receiving costs and inspection costs, for the Distribution segment
are not included in cost of sales. For the years ended December 31, 2017, 2016 and 2015, $3.5 million, $3.5 million and $3.2
million, respectively, of such costs are included in general and administrative expenses.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments. These investments are
liquid in nature and have original maturities of three months or less. Bank overdraft positions, which occur when total
outstanding issued checks exceed available cash balances at a single financial institution at the end of a reporting period, are
reclassified to other current liabilities within the consolidated balance sheets. At December 31, 2017 and 2016, the Company
had bank overdrafts of $3.1 million and $4.3 million, respectively, included in other current liabilities.
Accounts Receivable
The Company has three types of accounts receivable: (a) Trade receivables, which consist of amounts billed and currently due
from customers; (b) USG contracts, which consist of (1) amounts billed, and (2) costs and accrued profit – not billed; and (c)
Commercial and other government contracts, which consist of (1) amounts billed, and (2) costs and accrued profit – not billed.
The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the trade accounts
receivable and billed contracts balance. Management determines the allowance based on known troubled accounts, historical
experience and other currently available evidence.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventory of merchandise for resale is stated at cost (using the average costing method) or net realizable value, whichever is
lower. Contracts and other work in process and finished goods are valued at production cost represented by raw material, labor
and overhead. For certain government contracts, allowable general and administrative expenses are also included in inventory.
Initial tooling and startup costs may be included, where applicable. Contracts and other work in process and finished goods are
not reported at amounts in excess of net realizable values. The Company includes raw material amounts in the contracts in
process and other work in process balances. Raw material includes certain general stock materials but primarily relates to
purchases that were made in anticipation of specific programs for which production has not been started as of the balance sheet
date.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is computed primarily on a straight-line basis over the estimated
useful lives of the assets. The estimated useful lives for buildings range from 15 to 40 years and for leasehold improvements
range from 1 to 20 years, whereas machinery, office furniture and equipment generally have useful lives ranging from 3 to 15
years. At the time of retirement or disposal, the acquisition cost of the asset and related accumulated depreciation are eliminated
and any gain or loss is credited to or charged against income.
Long-lived assets, such as property, plant and equipment and purchased intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash
flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not
recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair
value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market
values and third-party independent appraisals, as considered necessary.
Maintenance and repair items are charged against income as incurred, whereas renewals and betterments are capitalized and
depreciated.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase
business combination and is reviewed for impairment at least annually.
Accounting Standards Codification Topic 350, "Intangibles - Goodwill and Other," ("ASC 350") permits the assessment of
qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-
step goodwill impairment test required under ASC 350. The qualitative assessment management performs takes into
consideration the following factors: general economic conditions, industry specific performance, changes in carrying values of
the reporting units, the assessment of assumptions used in the previous fair value calculation and changes in transaction
multiples.
In the first step of the two-step test, the fair value of the reporting unit is compared with its carrying value (including goodwill).
If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting
unit and the enterprise must perform step two of the impairment test (measurement). In Step 2, an impairment loss is recognized
for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
Fair value of the reporting unit is determined using an income methodology based on management’s estimates of forecasted
cash flows for each reporting unit, with those cash flows discounted to present value using rates commensurate with the risks
associated with those cash flows. In addition, management uses a market-based valuation method involving analysis of market
multiples of revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") for (i) a group of
comparable public companies and (ii) recent transactions, if any, involving comparable companies. If the fair value of the
reporting unit exceeds its carrying value, step two need not be performed.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Other Intangible Assets - continued
Goodwill and intangible assets with indefinite lives are evaluated annually for impairment in the fourth quarter, based on annual
forecast information. Intangible assets with finite lives are amortized using the straight-line method over their estimated period
of benefit. Goodwill and other intangible assets are reviewed for possible impairment whenever changes in conditions indicate
that the fair value of a reporting unit is more likely than not below its carrying value. No such charges were recorded in 2017,
2016 or 2015.
Vendor Incentives
The Company’s Distribution segment enters into agreements with certain vendors providing for inventory purchase incentives
that are generally earned upon achieving specified volume-purchasing levels. The Company recognizes rebate income relative
to specific rebate programs as a reduction of the cost of inventory based on a systematic and rational allocation of the cash
consideration offered to each of the underlying transactions that results in progress toward earning the rebate, provided that the
amounts are probable and reasonably estimable. As of December 31, 2017 and 2016, total vendor incentive receivables,
included in other current assets, were approximately $14.5 million and $13.3 million, respectively.
Self-Insured Retentions
To limit exposure to losses related to group health, workers’ compensation, auto and product general liability claims, the
Company obtains third-party insurance coverage. The Company has varying levels of deductibles for these claims. The total
liability/deductible for group health is limited to $0.3 million per claim, workers’ compensation is limited to $0.4 million per
claim and for product/general liability and auto liability the limit is $0.3 million per claim. The cost of such benefits is
recognized as expense based on claims filed in each reporting period and an estimate of claims incurred but not reported
(“IBNR”) during such period. The estimates for the IBNR are based upon historical trends and information provided to us by
the claims administrators, and are periodically revised to reflect changes in loss trends. These amounts are included in other
accruals and payables on the Consolidated Balance Sheets.
Liabilities associated with these claims are estimated in part by considering historical claims experience, severity factors and
other actuarial assumptions. Projections of future losses are inherently uncertain because of the random nature of insurance
claim occurrences and the potential for differences between actual developments and actuarial assumptions. Such self-insurance
accruals will likely include claims for which the ultimate losses will be settled over a period of years.
Research and Development
Customer funded research expenditures (which are included in cost of sales) were $1.1 million in 2017, $0.9 million in 2016
and $0.4 million in 2015. Research and development costs not specifically covered by contracts are recognized as expense as
incurred and included in selling, general and administrative expenses. Such costs amounted to $8.2 million, $7.7 million and
$6.7 million in 2017, 2016 and 2015, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss, capital loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. The deferred income taxes were significantly
impacted by the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), as further discussed in Note 12, Income
Taxes.
The Company records a benefit for uncertain tax positions in the financial statements only when it determines it is more likely
than not that such a position will be sustained upon examination by taxing authorities based on the technical merits of the
position. Unrecognized tax benefits represent the difference between the position taken in the tax return and the benefit
reflected in the financial statements.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share-Based Payment Arrangements
The Company records compensation expense for share-based awards based upon an assessment of the grant date fair value of
the awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation
model. A number of assumptions are used to determine the fair value of options granted. These include expected term, dividend
yield, volatility of the options and the risk free interest rate. See Note 17, Share-Based Arrangements, for further information.
Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to
fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are recognized on the
Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair values of
derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a
derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other
comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item.
The Company does not use derivative instruments for speculative purposes. See Note 5, Derivative Financial Instruments, for
further information.
Pension Accounting
The Company accounts for its defined benefit pension plan by recognizing the overfunded or underfunded status of the plan,
calculated as the difference between the plan assets and the projected benefit obligation, as an asset or liability on the balance
sheet, with changes in the funded status recognized in comprehensive income in the year in which they occur.
Expenses and liabilities associated with the plan are determined based upon actuarial valuations. Integral to the actuarial
valuations are a variety of assumptions including expected return on plan assets and discount rate. The Company regularly
reviews the assumptions, which are updated at the measurement date, December 31st. The impact of differences between actual
results and the assumptions are accumulated and generally amortized over future periods, which will affect expense recognized
in future periods. See Note 13, Pension Plans, for further information.
Recent Accounting Standards
In February 2018, the FASB issued Accounting Standards Update ("ASU") 2018-02 "Income Statement - Reporting
Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income". The objective of this standard is to address the concern that tax effects of items within accumulated other
comprehensive income do not appropriately reflect the tax rate because Tax Reform required the adjustment of deferred taxes
be recorded to income. This ASU provides an entity the election to reclassify stranded tax effects resulting from Tax Reform to
retained earnings from accumulated other comprehensive income. The standard update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently
assessing the potential impact this standard update might have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting
for Hedging Activities". The objective of this standard update is to improve the financial reporting of hedging relationships to
better reflect the economic results of an entity's risk management activities in its financial statements. This ASU expands hedge
accounting for both nonfinancial and financial risk components and refines the measurement of hedge results to better reflect an
entity's hedging strategies. The standard update is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018. Early adoption is permitted. The adoption of this standard update is not expected to have a material
impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification
Accounting". The objective of this standard update is to address the diversity in practice and reduce the cost and complexity of
applying guidance for a change to the terms or conditions of a share-based payment award. This ASU provides guidance on
when an entity should apply modification accounting for stock compensation. The standard update is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this
standard update is not expected to have a material impact on the Company's consolidated financial statements.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Standards - continued
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) -
Premium Amortization on Purchased Callable Debt Securities”. Under this ASU, the amortization period for certain callable
debt securities held at a premium is shortened to more closely align the amortization period with expectations incorporated in
market pricing on the underlying securities. The standard update is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard will not have an impact
on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715) - Improving the Net
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The objective of this standard update
is to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This standard update
requires employers to disaggregate the service cost component from the other components of net benefit cost. This ASU also
provides guidance on how to present the service cost component and the other components of net benefit cost in the income
statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The other components
of net benefit cost, which are expected to more than offset the service cost component, are required to be presented in the
income statement separately from the service cost component and outside of operating profit. The standard update is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017. This ASU will be applied
retrospectively for the presentation of the service cost component and the other components of net benefit cost in the income
statement and prospectively, on and after the effective date, for the capitalization of the service cost component and the other
components of net benefit cost in assets. The standard update allows for a practical expedient that permits an employer to use
the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the
estimation basis for applying the retrospective presentation requirements. The Company intends to apply this practical
expedient for prior period presentation. The Company currently estimates that the service cost component to be included in
operating profit will be approximately $4.9 million and the other components of net benefit cost will have a favorable impact to
other (income) expense, net of approximately $11.5 million in 2018.
In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20)". The objective of this standard update is to clarify the scope of asset derecognition guidance and to
provide new guidance for partial sales of nonfinancial assets. The standard update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. Early adoption is permitted; however, an entity is required to
apply the amendments in this ASU in the same period that it applies the amendments for ASU 2014-09. The adoption of this
standard update is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment". The objective of this standard update is to simplify the subsequent measurement of goodwill,
eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss
recognized does not exceed the total amount of goodwill for the reporting unit. The standard update is effective for fiscal years
beginning after December 15, 2019. Early adoption is permitted. The impact of the adoption of this standard update is
dependent on the Company's goodwill impairment assessment.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash". The objective of
this standard update is to address the diversity in classification and presentation of changes in restricted cash on the statement of
cash flows. Under this ASU, amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The standard update is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact
on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than
Inventory". Under this ASU, income tax consequences of an intra-entity transfer of an asset other than inventory will be
recognized when the transfer occurs. The standard update is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a
material impact on the Company's consolidated financial statements.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Standards - continued
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash
Receipts and Cash Payments". This standard update was issued to address diversity in practice in how certain cash receipts and
cash payments are presented and classified. The provisions of ASU 2016-15 will be effective for interim and annual periods
beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a
material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323) - Simplifying the
Transition to the Equity Method of Accounting”. This standard update eliminates the requirement to retroactively adopt the
equity method of accounting when an investment qualifies for use of the equity method. The standard update is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this standard update
did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in
Debt Instruments”. The objective of this standard update is to eliminate inconsistent practices with regards to assessing
embedded contingent put and call options in debt instruments. The standard update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016. The adoption of this standard update did not have a material
impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815) - Effect of Derivative Contract
Novations on Existing Hedge Accounting Relationships”. The objective of this standard update is to clarify whether a change in
the counterparty to a derivative instrument results in a requirement to dedesignate that hedging relationship and discontinue the
application of hedge accounting. The standard update is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016. The adoption of this standard update did not have a material impact on the Company’s
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under this ASU as amended, lessees will be required
to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-
use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Lessor accounting is largely unchanged under this ASU as amended. This standard update is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company has
developed a project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment
phase, was completed in the third quarter of 2017. The Company began the second phase in the fourth quarter of 2017, which
includes implementing new lease administration software, establishing policies and understanding the initial financial impact
this standard update will have on the Company's consolidated financial statements. Phase three, which the Company anticipates
beginning in the second half of 2018, will include integrating the standard update into financial reporting processes and systems
and developing a more robust understanding of the financial impact of this standard update. The Company anticipates the ASU
will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the
balance sheet; however it does not expect the ASU to have a material impact on the Company's cash flows or results of
operations.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and
Measurement of Financial Assets and Financial Liabilities”. The objective of this standard update is to remove inconsistent
practices with regards to the accounting for financial instruments between US GAAP and International Financial Reporting
Standards (“IFRS”). The standard update intends to improve the reporting model for financial instruments to provide users of
financial statements with more decision-useful information. The provisions of this standard update are effective for interim and
annual periods beginning after December 15, 2017. The Company does not expect these changes to have a material impact on
its consolidated financial statements.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Standards - continued
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330) - Simplifying the Measurement of Inventory". ASU
2015-11 requires an entity to measure inventory within the scope of the standard at the lower of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal and transportation. The standard update is effective for fiscal years beginning after December 15, 2016,
including interim periods within those years. The adoption of this standard update did not have a material impact on the
Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of this
standard update is to remove inconsistent practices with regard to revenue recognition between US GAAP and IFRS. The
standard intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital
markets. The provisions of ASU No. 2014-09 will be effective for interim and annual periods beginning after December 15,
2017, with early adoption permitted for annual periods beginning after December 15, 2016. The Company has developed a
project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, was
completed in early 2016. The Company concluded the second phase of the project, which included conversion activities such as
establishing policies, identifying system impacts and developing a basic understanding of the impact this standard update will
have on the Company's consolidated financial statements, during the fourth quarter of 2016. Phase three, which began during
the first quarter of 2017, includes the integration of the standard update into financial reporting processes and systems, and
developing a more robust understanding of the financial impact of this standard update on the Company's consolidated financial
statements.
The Company will transition using the modified retrospective method upon adoption of this standard update. The Distribution
segment currently recognizes the majority of its revenue at a point in time, which will continue under Topic 606, with only a
small percentage of revenue streams moving to an over time revenue recognition model. The majority of our long-term
contracts in the Aerospace segment are currently accounted for under the percentage-of-completion method using units-of-
delivery as a measurement basis. For these programs, early-contract unit costs in excess of the average expected cost over the
life of the contract are capitalized and amortized over the number of units in the contract. With the adoption of this standard
update, certain deferred unit costs in excess of the contract average will be adjusted within the cumulative effect to retained
earnings and will not be amortized into future earnings. The Company anticipates that many of these contracts will move to an
over time revenue model under the percentage-of-completion method. For example, revenue for the Company's Joint
Programmable Fuze ("JPF") program with the USG will move from percentage-of-completion using units-of-delivery as the
measurement basis to the over time revenue recognition model using input costs as the basis for recognizing progress to
completion. Conversely, revenue for the K-MAX® program will move from cost-to-cost revenue recognition to point in time,
with revenue on these aircraft being recognized upon delivery to the end customer. The Company estimates that the adoption of
Topic 606 will result in a net reduction to opening retained earnings of approximately $9.0 million to $11.0 million, net of tax,
as of January 1, 2018.
Subsequent to the issuance of ASU 2014-09, the FASB has issued the following updates: ASU 2015-14, "Revenue from
Contracts with Customers (Topic 606) - "Deferral of the Effective Date"; ASU 2016-08, “Revenue from Contracts with
Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU 2016-10,
"Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing"; ASU 2016-12,
"Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients"; and ASU
2016-20, "Technical Corrections and Improvements to Topic 606". The amendments in these updates affect the guidance
contained within ASU 2014-09 and have been assessed as part of the Company's revenue recognition project plan.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
2. RESTRUCTURING COSTS
During the third quarter of 2017, the Company initiated restructuring activities at its Aerospace segment to support the ongoing
effort of improving capacity utilization and operating efficiency to better position the Company for increased profitability and
growth. Such actions include workforce reductions and the consolidation of operations, which began in the third quarter of
2017 and will continue through the planned completion of restructuring activities in the fourth quarter of 2018. The Company
currently expects these actions to result in approximately $7.0 million to $8.5 million in pre-tax restructuring and transition
charges. The Company anticipates these actions will result in total cost savings of approximately $4.0 million annually
beginning in 2019.
The following table summarizes the accrual balances by cost type for the restructuring actions:
In thousands
Restructuring accrual balance at December 31, 2016 ............
Provision...............................................................................
Cash payments......................................................................
Changes in foreign currency exchange rates........................
Restructuring accrual balance at December 31, 2017 ............
(1) Includes costs associated with consolidation of facilities.
$
$
Severance
Other (1)
Total
— $
— $
1,369
(202)
5
178
—
1
1,172
$
179
$
—
1,547
(202)
6
1,351
The above accrual balance was included in other current liabilities on the Company's Consolidated Balance Sheets. For the year
ended December 31, 2017, restructuring expense, totaling $2.7 million, was included in restructuring costs on the Company's
Consolidated Statements of Operations. Included in this expense is approximately $1.0 million of cost that primarily relates to
the write-off of inventory for various small order programs that the Company will no longer continue to manufacture as a result
of the consolidation of operations.
In addition to the restructuring activity, the Distribution segment and Aerospace segment incurred $0.5 million and $0.4 million,
respectively, of other severance expense in 2017. There was also $2.8 million in separation costs associated with two senior
executives recorded in accrued salaries and wages on the Company's Consolidated Balance Sheets as of December 31, 2017.
These amounts are not included in the table above.
During the third quarter of 2016, the Company offered a voluntary retirement program to certain employees of its Distribution
segment. This program resulted in $0.3 million of expense, all of which was included in "Selling, general and administrative
expenses" on the Company's Consolidated Statements of Operations for the year ended December 31, 2016. In addition to the
restructuring activity, the Distribution segment and Aerospace segment incurred $0.7 million and $2.5 million of severance
expense in 2016, respectively. These amounts are not included in the table above.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
In thousands
Trade receivables.......................................................................................................................
U.S. Government contracts:
At December 31,
2017
2016
$
152,078
$
143,471
Billed..................................................................................................................................
Costs and accrued profit – not billed .................................................................................
26,093
862
Commercial and other government contracts:
Billed..................................................................................................................................
Costs and accrued profit – not billed .................................................................................
Less allowance for doubtful accounts .......................................................................................
Total ............................................................................................................................
$
107,962
30,590
(4,134)
313,451
$
17,244
1,478
50,560
22,234
(4,123)
230,864
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
3. ACCOUNTS RECEIVABLE, NET (CONTINUED)
The increase in commercial and other government contracts billed is primarily related to receivables due under a JPF DCS
program, secured by a letter of credit from our customer.
Additionally, $3.7 million of unbilled receivables and accrued profit for the K-MAX® program were included in Other assets
on the Company's Consolidated Balance Sheet as of December 31, 2016, as the amounts due were expected to be collected
more than one year after the balance sheet date. At December 31, 2017, all receivables for the K-MAX® program were
included in accounts receivable, net, as the amounts due are expected to be collected within one year of the balance sheet date.
Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for
unanticipated contract costs. These amounts are as follows:
At December 31,
2017
2016
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs ......
Total ......................................................................................................................
$
$
900
900
$
$
900
900
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or the price paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date.
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs
used to measure fair value are as follows:
• Level 1 — Quoted prices in active markets for identical assets or liabilities.
• Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are
not active or other inputs that are observable or can be corroborated by observable market data.
• Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of
the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The following table provides the carrying value and fair value of financial instruments that are not carried at fair value at
December 31, 2017 and 2016:
In thousands
Long-term debt:
2017
2016
Carrying Value
Fair Value
Carrying Value
Fair Value
Level 1 ...........................................
Level 2 ...........................................
Total..................................................
$
$
— $
405,602
405,602
$
— $
428,432
428,432
$
113,203
303,855
417,058
$
$
170,935
279,582
450,517
The above fair values were computed based on quoted market prices (Level 1 and 2) and discounted future cash flows (Level 2
observable inputs), as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when
the transactions occurred. The fair values of cash and cash equivalents, accounts receivable, net, and accounts payable - trade
approximate their carrying amounts due to the short-term maturities of these instruments.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Recurring Fair Value Measurements
The Company holds derivative instruments for foreign exchange contracts and interest rate swaps that are measured at fair
value using observable market inputs such as forward rates and our counterparties’ credit risks. Based on these inputs, the
derivative instruments are classified within Level 2 of the valuation hierarchy and have been included in Other current assets
and Other assets on the Consolidated Balance Sheet at December 31, 2017 and 2016. Based on the continued ability to trade
and enter into forward contracts and interest rate swaps, the Company considers the markets for the fair value instruments to be
active.
The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as
of December 31, 2017, such credit risks have not had an adverse impact on the fair value of these instruments.
Nonrecurring Fair Value Measurements
Goodwill and indefinite-lived intangible assets are tested for possible impairment during the fourth quarter of each year. The
nonrecurring fair value measurement for goodwill was developed using significant unobservable inputs (Level 3). For step-one
of the impairment analysis, the primary valuation technique used was an income methodology based on management’s
estimates of forecasted cash flows for each business unit, with those cash flows discounted to present value using rates
commensurate with the risks associated with those cash flows. In addition, management used a market-based valuation method
involving analysis of market multiples of revenues and EBITDA for a group of comparable public companies.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to
fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are reported on the
Consolidated Balance Sheets at fair value. Changes in the fair values of derivatives are reported each period in earnings or
accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains
and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in
earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for
speculative purposes.
The Company held forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies
and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of those
contracts were designated as cash flow hedges. The Company will include in earnings amounts currently included in
accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction.
Cash Flow Hedges
Interest Rate Swaps
The Company’s Term Loan Facility (“Term Loan”) contains floating rate obligations and is subject to interest rate
fluctuations. During 2015, the Company entered into interest rate swap agreements for the purposes of hedging the eight
quarterly variable-rate Term Loan interest payments due in 2016 and 2017. Additionally, the Company entered into interest rate
swap agreements to effectively convert $83.8 million of our variable rate revolving credit facility debt to a fixed interest rate.
These interest rate swap agreements were designated as cash flow hedges and intended to manage interest rate risk associated
with our variable-rate borrowings and minimize the impact on our earnings and cash flows of interest rate fluctuations
attributable to changes in LIBOR rates. These agreements were not material to the Company's Consolidated Balance Sheets for
the years ended December 31, 2017 and 2016. As of December 31, 2017, these interest rate swap agreements had all matured
and were no longer outstanding.
The activity related to these contracts was not material to the Company's Consolidated Financial Statements for the year ended
December 31, 2017. The Company reclassified $0.9 million of expense from other comprehensive income for the year ended
2016, respectively. No amounts related to cash flow hedges are expected to be reclassified from other comprehensive income
over the next twelve months.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
5. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives Not Designated as Hedges
Forward Exchange Contracts
From time to time, the Company will enter into foreign exchange contracts that are not designated as hedging instruments.
These contracts are entered into in order to minimize the impact of foreign currency fluctuations on the Company's earnings
and cash flows. The Company reports expense related to these contracts in Other (income) expense, net on the Consolidated
Statements of Operations.
During the fourth quarter of 2015, the Company entered into forward exchange contracts to minimize the impact of foreign
currency fluctuations on the Company's earnings and cash flows. These contracts were entered into as a result of forecasted
foreign currency transactions associated with a portion of the purchase price of GRW in the amount of €135.0 million . For the
year ended December 31, 2015, the Company reported expense of $2.2 million in Other (income) expense, net related to the
change in the value of these contracts from the date the Company entered into them to their settlement date. At the settlement
date, the Company took delivery of the Euros and further decreases in the exchange rate resulted in expense of $0.8 million,
reported in Other (income) expense, net for the period of time between the settlement of the contracts and the closing of the
acquisition.
In addition to the forward exchange contract mentioned above, the Company held forward exchange contracts to mitigate the
risk associated with foreign currencies that were not designated as hedging instruments as of December 31, 2017 and 2016. The
balances associated with the contracts and the gains or losses reported in Other (income) expense, net were not material for the
years ended December 31, 2017, 2016 or 2015.
6. INVENTORIES
Inventories consist of the following:
In thousands
Merchandise for resale ..............................................................................................................
Raw materials............................................................................................................................
Contracts in process:
U.S. Government, net of progress payments of $10,810 and $28,824 in 2017 and 2016,
respectively .............................................................................................................................
Commercial and other government contracts .........................................................................
Other work in process (including certain general stock materials) ........................................
Finished goods ..........................................................................................................................
Total ............................................................................................................................
At December 31,
2017
2016
$
151,520
$
158,618
18,871
20,592
75,448
55,510
40,445
25,643
85,779
81,420
22,096
25,309
$
367,437
$
393,814
General and administrative costs charged to inventory by Aerospace segment operations during 2017 and 2016 were $14.7
million and $13.0 million, respectively. The estimated amounts of general and administrative costs remaining in contracts in
process at December 31, 2017 and 2016, were $10.6 million and $11.0 million, respectively. These estimates are based on the
ratio of such costs to total costs of production.
The Company had inventory of $5.2 million and $6.4 million as of December 31, 2017 and 2016, respectively, on consignment
at customer locations, the majority of which is held by Distribution segment customers.
Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for
unanticipated contract costs, which totaled $4.4 million and $3.6 million at December 31, 2017 and 2016, respectively.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
6. INVENTORIES (CONTINUED)
At December 31, 2017 and 2016, $25.5 million and $32.0 million, respectively, of K-MAX® inventory, including inventory
associated with the new build aircraft, was included in contracts and other work in process inventory and finished goods on the
Company's Consolidated Balance Sheets. Management believes that approximately $15.7 million of the K-MAX® inventory
will be sold after December 31, 2018, based upon the anticipation of additional aircraft manufacturing and supporting the fleet
for the foreseeable future.
At December 31, 2017 and 2016, $6.2 million and $7.2 million, respectively, of SH-2G(I), formerly SH-2G(A), inventory was
included on the Company's balance sheet in contracts and other work in process inventory. Management believes that
approximately $3.3 million of the SH-2G(I) inventory will be sold after December 31, 2018. This balance represents spares
requirements and inventory to be used in SH-2G programs.
At December 31, 2017, backlog for the A-10 program with Boeing was $1.2 million, representing 3 shipsets, and total program
inventory was $8.7 million, of which $7.0 million is associated with nonrecurring costs and $0.5 million represents materials to
be utilized on future shipset orders. Through December 31, 2017, the Company has delivered 170 shipsets over the life of the
program. In 2017, the U.S Air Force ("USAF") confirmed that the A-10 fleet would continue indefinitely due to its unique
close-air support functions, with support from both Congress and the White House. The government budget released in May
2017 outlined the plan to maintain the fleet and the defense bill signed in December 2017 authorized wing replacements.
Although Congress must authorize the spending requirement, lawmakers have pushed for approval as the grounding of these
aircraft would result in a significant capability gap for U.S. service members. The Company has not received any orders for
additional shipsets in 2017; however, the customer has not given any indication that this program will be terminated. Final
production and deliveries of existing orders under this contract are anticipated to be completed during 2018. Tooling and
nonrecurring costs on this program are being amortized over 242 shipsets, the number of shipsets under the program of record.
These nonrecurring costs may not be recoverable in the event of an extended break in production or program termination.
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net is summarized as follows:
In thousands
Land......................................................................................................................................
Buildings ..............................................................................................................................
Leasehold improvements......................................................................................................
Machinery, office furniture and equipment..........................................................................
Construction in process ........................................................................................................
Total...............................................................................................................................
Less accumulated depreciation.............................................................................................
Property, plant and equipment, net.......................................................................................
$
$
At December 31,
2017
2016
15,163
104,763
20,746
269,417
27,974
438,063
(252,611)
185,452
$
$
14,921
97,265
20,068
249,068
21,565
402,887
(226,366)
176,521
Depreciation expense was $27.7 million, $27.5 million and $24.1 million for 2017, 2016 and 2015, respectively.
The Company is currently implementing new enterprise resource planning ("ERP") systems at both its Aerospace segment and
its Distribution segment. For the years ended December 31, 2017, 2016 and 2015, expenses incurred totaled approximately
$1.2 million, $2.0 million and $1.2 million, respectively, and capital expenditures totaled $3.6 million, $4.1 million, and $6.4
million, respectively. Total to date ERP system capital expenditures as of December 31, 2017, were $48.2 million. Depreciation
expense for the ERP systems for the years ended December 31, 2017, 2016 and 2015, totaled $3.3 million, $3.9 million and
$3.8 million, respectively.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
7. PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
Capital Leases
For the year ended December 31, 2017, $7.2 million of assets purchased under the Company's master leasing agreement with
PNC Equipment Finance ("PNC") and accounted for as capital leases was included in machinery, office furniture and
equipment and construction in process, with accumulated depreciation of $0.8 million. For the year ended December 31, 2016,
$3.6 million of assets purchased under the Company's master leasing agreement with PNC and accounted for as capital leases
was included in machinery, office furniture and equipment with accumulated depreciation of $0.4 million. Depreciation
expense associated with the capital leases was $0.4 million, $0.3 million and $0.1 million for 2017, 2016 and 2015,
respectively. See Note 15, Commitments and Contingencies, for a discussion on the master leasing agreement.
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company:
2017
2016
Distribution Aerospace
Total
Distribution
Aerospace
Total
In thousands
Gross balance at beginning of
period...........................................
Accumulated impairment ..........
Net balance at beginning of
period ........................................
Additions .....................................
Impairments.................................
Foreign currency translation........
Purchase price adjustment (1) .......
Net balance at end of period........
Accumulated impairment at end
of period.......................................
$
149,204
$
—
$
204,942
(16,252)
354,146
(16,252)
$
149,204
$
—
$
219,758
(16,252)
368,962
(16,252)
149,204
188,690
337,894
149,204
—
—
—
—
—
—
13,823
—
—
—
13,823
—
—
—
—
—
149,204
$
202,513
$
351,717
$
149,204
$
203,506
2,138
—
(7,342)
(9,612)
188,690
$
352,710
2,138
—
(7,342)
(9,612)
337,894
— $
(16,252) $
(16,252) $
— $
(16,252) $
(16,252)
$
$
(1) During the purchase price measurement period, the Company made adjustments to the purchase price allocation related to the
GRW acquisition. These adjustments were for the finalization of certain tax matters and the reduction of the accrual related to
the environmental remediation at the Rimpar, Germany facility.
2017 Analysis
In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible
impairment on at least an annual basis. Upon completion of the 2017 qualitative assessment of events and circumstances
affecting recorded goodwill as described in Note 1, Summary of Significant Accounting Policies, the Company concluded that
the Aerosystems and Distribution reporting units should receive a Step 1 analysis, while qualitative assessments should be
performed for the Specialty Bearings and Engineered Products and KPP - Orlando reporting units.
The qualitative assessment performed for Specialty Bearings and Engineered Products and KPP - Orlando took into
consideration the following factors: general economic conditions, industry specific performance, changes in carrying values of
the reporting unit, the assessment of assumptions used in the previous fair value calculation and changes in transaction
multiples. The results of these analyses indicated that these reporting units did not need to proceed to the two-step impairment
test.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Goodwill - continued
2017 Analysis - continued
A Step 1 analysis was performed for the Distribution and Aerosystems reporting units. The results of the Step 1 analyses
indicated that the Company did not need to proceed to Step 2, as the percentage by which the fair value exceeds the carrying
value was greater than 68% and 25% for the Distribution and Aerosystems reporting units, respectively. The increase in fair
value for these reporting units, as compared to 2016, was partially driven by a benefit to future cash flows as a result of the
enactment of Tax Reform during the fourth quarter of 2017. The Company performed a sensitivity analysis relative to the
discount rate and growth rate selected and determined a decrease of one percentage point in the terminal growth rate or an
increase of one percentage point in the discount rate would not result in a fair value calculation less than the carrying value for
both reporting units.
2016 Analysis
The Company performed a reevaluation of its reporting units for the purposes of its annual goodwill assessment. As previously
disclosed in our 2015 Form 10-K, RWG, EXTEX and GRW were reorganized under the single management team of Kaman
Specialty Bearings and Engineered Products. The Company tested the new reporting unit for impairment immediately after its
creation by comparing the sum of the fair values of the entities moved into the new reporting unit to the carrying value of the
new reporting unit, noting the fair value exceeded the carrying value. Prior to the reorganization, these reporting units were
stand-alone reporting units. The fair value of RWG was assessed as part of our 2015 annual test for goodwill impairment,
prepared during the fourth quarter of 2015. EXTEX and GRW were acquired during the fourth quarter of 2015 and as such
were not included in the 2015 annual test for goodwill impairment. There were no significant changes to the conditions of the
entities in the new reporting unit that would have impacted the results of the analysis as of January 1, 2016. Since this was the
first year the Company assessed goodwill at this reporting unit level, the two-step impairment test was performed.
Upon completion of our 2016 qualitative assessment of events and circumstances affecting recorded goodwill as described in
Note 1, Summary of Significant Accounting Policies, the Company concluded that all reporting units, other than KPP - Orlando,
should receive a Step 1 analysis. The qualitative assessment performed for KPP - Orlando took into consideration the following
factors: general economic conditions, industry specific performance, changes in carrying values of the reporting unit, the
assessment of assumptions used in the previous fair value calculation and changes in transaction multiples. The results of this
analysis indicated that this reporting unit did not need to proceed to the two-step impairment test.
For the remaining reporting units the Company performed a Step 1 analysis. The results of the Step 1 analyses indicated that
the Company did not need to proceed to Step 2, as the percentage by which the fair value exceeds the carrying value was
greater than 25% for all reporting units other than Aerosystems, whose fair value exceeded carrying value by 4%. The
Company performed a sensitivity analysis relative to the discount rate and growth rate selected and determined a decrease of
one percentage point in the terminal growth rate or an increase of one percentage point in the discount rate would not result in a
fair value calculation less than the carrying value for the Kaman Specialty Bearings and Engineered Products and Kaman
Distribution reporting units. An increase of one percentage point in the discount rate would result in a fair value approximately
5% less than the carrying value for the Kaman Aerosystems reporting unit. A decrease of one percentage point in the terminal
growth rate would not result in a fair value calculation less than the carrying value for the Kaman Aerosystems reporting unit.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Other Intangible Assets
Other intangible assets consisted of:
In thousands
Customer lists / relationships ............
Developed technologies ....................
Trademarks / trade names .................
Non-compete agreements and other..
Patents ...............................................
Total...................................................
At December 31,
2017
At December 31,
2016
Amortization
Period
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
6-26 years
10-20 years
3-15 years
1-9 years
17 years
$
159,592
$
20,148
8,995
8,345
523
$
197,603
$
(65,036) $
(2,790)
(3,905)
(8,319)
(435)
(80,485) $
154,745
$
19,049
8,344
8,096
523
190,757
$
(51,800)
(1,394)
(3,250)
(7,444)
(425)
(64,313)
The decrease in the other intangible assets, net balance at December 31, 2017, as compared to December 31, 2016, was
primarily due to amortization. Intangible asset amortization expense was $14.6 million, $15.6 million and $11.8 million in
2017, 2016 and 2015, respectively.
2017 Analysis
In accordance with ASC 360 - Property, Plant, and Equipment ("ASC 360"), the Company is required to evaluate long-lived assets
for possible impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
As a result of operating losses, the Company identified a triggering event during the fourth quarter of 2017. The Company evaluated
certain long-lived assets associated with the U.K. and Engineering Services facilities, for which the primary assets within the asset
groups were intangible assets. The total amount of intangible assets at the U.K. and Engineering Services businesses at December
31, 2017 was $11.3 million and $1.2 million, respectively. The Company compared the carrying amount of these long-lived assets
to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. The carrying
value did not exceed the fair value, indicating there was no impairment of long-lived assets held by the U.K. and Engineering
Services businesses.
2016 Analysis
During the fourth quarter of 2016, the Company evaluated certain long-lived assets associate with the U.K. Composites facility.
The Company compared the carrying amount of these long-lived assets to the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the assets. The carrying value did not exceed the fair value, indicating there was
no impairment of long-lived assets held by the U.K. Composites business.
Estimated amortization expense for the next five years associated with intangible assets existing as of December 31, 2017, is as
follows:
In thousands
2018.......................................................................................................................................................... $
2019.......................................................................................................................................................... $
2020.......................................................................................................................................................... $
2021.......................................................................................................................................................... $
2022.......................................................................................................................................................... $
13,866
12,456
11,957
11,435
11,042
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Other Intangible Assets - continued
In order to determine the useful life of acquired intangible assets, the Company considers numerous factors, most importantly
the industry considerations associated with the acquired entities. The Company determines the amortization period for acquired
intangible assets, such as customer relationships based primarily on an analysis of their historical customer sales attrition
information and the period over which the assets are expected to deliver meaningful cash flow generation in support of the fair
value of the asset.
9. ENVIRONMENTAL COSTS
The following table displays the activity and balances associated with accruals related to environmental costs included in other
accruals and payables and other long-term liabilities:
2017
2016
In thousands
Balance at January 1 .................................................................................................................
Additions to accrual ...........................................................................................................
Payments ............................................................................................................................
Other(1) ...............................................................................................................................
Changes in foreign currency exchange rates .....................................................................
Balance at December 31 ...........................................................................................................
6,635
(1) In 2015, the Company recorded approximately $4.2 million related to environmental remediation at the newly acquired Rimpar, Germany
facility. During 2016, the Company reduced this liability to approximately $0.5 million based on the results of the Phase II assessment. See
Note 15, Commitments and Contingencies for further detail on this matter.
314
(1,543)
(3,779)
34
442
(1,062)
—
11,609
6,057
6,635
42
$
$
$
$
Bloomfield
In August 2008, the Company completed its purchase of the portion of the Bloomfield campus that Kaman Aerospace
Corporation had leased from NAVAIR for many years. In connection with the purchase, the Company has assumed
responsibility for environmental remediation at the facility as may be required under the Connecticut Transfer Act (the
“Transfer Act”) and it continues the effort to define the scope of the remediation that will be required by the Connecticut
Department of Environmental Protection (“CTDEP”). The transaction was recorded by taking the undiscounted estimated
remediation liability of $20.8 million and discounting it at a rate of 8% to its present value. The fair value of the Navy Property
asset, which at that time approximated the discounted present value of the assumed environmental liability of $10.3 million, is
included in Property, plant and equipment, net. This remediation process will take many years to complete.
The following represents estimated future payments for the undiscounted environmental remediation liability related to the
Bloomfield campus as of December 31, 2017:
In thousands
2018........................................................................................................................................................................ $
2019........................................................................................................................................................................
2020........................................................................................................................................................................
2021........................................................................................................................................................................
2022........................................................................................................................................................................
Thereafter ...............................................................................................................................................................
Total ..................................................................................................................................................................... $
403
451
171
513
151
4,524
6,213
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
9. ENVIRONMENTAL COSTS (CONTINUED)
Other
During 2014, the Company sold its former manufacturing facility in Moosup, Connecticut to TD Development, LLC. In
connection with the sale, the Company agreed to contribute $4.0 million in cash to an escrow account over a four-year period to
fund TD's environmental remediation work performed on the site. The Company funded $1.6 million to the escrow account
between 2014 and 2015. TD stopped work on the site in 2016 and is in default of its obligations under the sale agreements. The
accrual related to this matter remained at $2.4 million as of December 31, 2017, unchanged from the prior year.
The Company's environmental accrual also includes estimated environmental remediation costs that the Company expects to
incur at the former Music segment’s New Hartford, CT facility and the Aerospace segment’s facility in Rimpar, Germany. The
Company continues to assess the work that may be required at each of these facilities, which may result in a change to this
accrual. For further discussion of these matters, see Note 15, Commitments and Contingencies.
10. DEBT
Long-Term Debt
The Company has long-term debt as follows:
At December 31,
2017
2016
In thousands
Revolving credit agreement ......................................................................................................
Term loan ..................................................................................................................................
Convertible notes ......................................................................................................................
Total ...................................................................................................................................
Less current portion ..................................................................................................................
Total excluding current portion..........................................................................................
$
140,074
$
212,605
84,375
181,153
405,602
7,500
$
398,102
$
91,250
113,203
417,058
120,078
296,980
At December 31, 2017 and 2016, the Company's Consolidated Balance Sheets were net of debt issuance costs of $6.5 million
and $0.9 million, respectively.
The weighted average interest rate on long-term borrowings outstanding as of December 31, 2017 and 2016, was 3.02% and
2.48%, respectively.
For the years ended December 31, 2017 and 2016, $5.0 million and $2.6 million, respectively, of liabilities associated with our
capital leases are included in other long-term liabilities. See Note 15, Commitments and Contingencies, for a discussion of the
master leasing agreement.
The aggregate annual maturities of long-term debt for each of the next five years are approximately as follows:
In thousands
2018........................................................................................................................................................................ $
2019........................................................................................................................................................................ $
2020........................................................................................................................................................................ $
2021........................................................................................................................................................................ $
2022........................................................................................................................................................................ $
7,500
9,375
207,574
—
—
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Convertible Notes
Overview
During the fiscal quarter ended June 30, 2017, the Company issued $200.0 million aggregate principal amount of convertible
senior unsecured notes due May 2024 (the "2024 Notes") pursuant to an indenture (the "Indenture"), dated May 12, 2017,
between the Company and U.S. Bank National Association, as trustee. In connection therewith, the Company entered into
certain capped call transactions that cover, collectively, the number of shares of the Company's common stock underlying the
2024 Notes. In a separate transaction, the Company repurchased $103.5 million aggregate principal amount of its existing
convertible senior unsecured notes due November 15, 2017 (the "2017 Notes"). In connection with the repurchase and
conversion transactions of the 2017 Notes, the Company settled the associated outstanding bond hedge transactions and a
portion of the associated warrant transactions it entered into in 2010 in connection with their issuance.
The remaining portion of the 2017 Notes were convertible at the option of the noteholders until the close of business on the
second Scheduled Trading Day (as defined in the 2017 Notes indenture) immediately preceding the maturity date. On
November 10, 2017 and November 13, 2017, the Company received conversion notices from bondholders, totaling the
remaining $11.5 million principal amount outstanding under the 2017 Notes. The Company also settled the remaining portion
of the bond hedge.
The existing warrant transactions associated with the 2017 Notes remained outstanding, with scheduled expiration dates
between February 13, 2018 and June 21, 2018, unless earlier settled, which will result in a reduction in additional paid-in-
capital. The Company anticipates settling the outstanding warrants with approximately 90,000 shares of the Company's
common stock. See below for further discussion on the issuance of the 2024 Notes, the repurchase of the 2017 Notes and the
related transactions.
2024 Notes
On May 12, 2017, the Company issued $175.0 million in principal amount of 2024 Notes, in a private placement offering. On
May 24, 2017, the Company issued an additional $25.0 million in principal amount of 2024 Notes pursuant to the initial
purchasers' exercise of their overallotment option, resulting in the issuance of an aggregate $200.0 million principal amount of
2024 Notes. The 2024 Notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 1
and November 1 of each year, beginning on November 1, 2017. The 2024 Notes will mature on May 1, 2024, unless earlier
repurchased by the Company or converted. The Company will settle any conversions of the 2024 Notes in cash, shares of the
Company's common stock or a combination of cash and shares of common stock, at the Company's election.
Use of proceeds from the issuance of the 2024 Notes was as follows:
In thousands
Proceeds:
Gross proceeds .....................................................................................................................
Commission fees and other expenses(1)................................................................................
Net proceeds .........................................................................................................................
Use of Proceeds:
Cost to repurchase $103.5 million aggregate principal amount of 2017 Notes(2) ................
Cost for capped call transaction related to 2024 Notes ........................................................
Payment made to reduce revolving credit facility(3).............................................................
Total use of proceeds............................................................................................................
(1) Debt issuance fees paid to the counterparties and other expenses (i.e. legal and accounting fees) related to the issuance of the 2024 Notes
(106,744)
(20,500)
(65,408)
(192,652)
200,000
(7,348)
192,652
$
$
$
$
were capitalized.
(2) The total aggregate cost to repurchase 90% of the 2017 Notes was $165.3 million, of which $58.6 million was repaid using the proceeds
received from the unwind of the bond hedge transactions. Included in this balance is $1.7 million of related accrued interest payments.
(3) Additional payments to the revolving credit facility were made from proceeds received as part of the bond hedge settlement related to the
repurchase of the 2017 Notes. See the 2017 Notes section below for further discussion.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Convertible Notes - continued
2024 Notes - continued
The following table illustrates the conversion rate at the date of issuance of the 2024 Notes:
2024 Notes
Conversion Rate per $1,000 principal amount (1) ...................................................................................
Conversion Price (2).................................................................................................................................
Contingent Conversion Price (3)..............................................................................................................
Aggregate shares to be issued upon conversion (4) .................................................................................
(1) Represents the number of shares of Common Stock hypothetically issuable per each $1,000 principal amount of 2024 Notes, subject to
15.3227
65.2626
84.84
3,064,540
$
$
adjustments upon the occurrence of certain specified events in accordance with the terms of the Indenture.
(2) Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option
within the 2024 Notes. If the Company's share price exceeds the conversion price at conversion, the noteholders would be entitled to
receive additional consideration either in cash, shares or a combination thereof, the form of which is at the sole discretion of the Company.
(3) Prior to November 1, 2023, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after
July 1, 2017, and only during any such fiscal quarter, if the last reported sale price of the Company's common stock was greater than or
equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding fiscal quarter, (2) during the five consecutive business day
period following any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount
of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the
Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of specified corporate events. On or
after November 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders
may convert their notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change (as
defined in the Indenture), holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase
price equal to 100% of the principal amount to be repurchased, plus any accrued and unpaid interest. As of December 31, 2017, none of the
conditions permitting the holders of the 2024 Notes to convert had been met. Therefore, the 2024 Notes are classified as long-term debt.
(4) This represents the number of shares hypothetically issuable upon conversion of 100% of the outstanding aggregate principal amount of the
2024 Notes at each date; however, the terms of the 2024 Notes state that the Company may pay or deliver, as the case may be, cash, shares of
the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The Company currently
intends to settle the aggregate principal amount in cash. Amounts due in excess of the principal, if any, also may be settled in cash, shares of
the Company's common stock or a combination of cash and shares of common stock, at the Company's election.
In connection with the 2024 Notes offering, the Company entered into capped call transactions with certain of the initial
purchasers or their respective affiliates. These transactions are intended to reduce the potential dilution to the Company's
shareholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon any
future conversion of the notes in the event that the market price per share of the Company's common stock is greater than the
strike price of the capped call transactions, with such reduction and/or offset subject to a cap based on the cap price of the
capped call transactions. Under the terms of the capped call transactions, the strike price ($65.2626) and the cap price
($88.7570) are each subject to adjustment in certain circumstances. In connection with establishing their initial hedges of the
capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with
respect to the Company’s common stock concurrently with or shortly after the pricing of the notes. The capped call
transactions, which cost an aggregate $20.5 million, were recorded as a reduction of additional paid-in capital.
Accounting Standards Codification ("ASC") Topic 815 - Derivatives and Hedging ("ASC 815") provides that contracts are
initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the
company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The
settlement terms of our capped call transactions require net-share settlement. Based on the guidance in ASC 815, the capped
call transactions were recorded as a reduction of equity as of the trade date. ASC 815 states that a reporting entity shall not
consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own
stock and classified in shareholders' equity in its balance sheet. The Company concluded the capped call transactions should be
accounted for in shareholders' equity and are, therefore, not to be considered a derivative instrument.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Convertible Notes - continued
2024 Notes - continued
ASC 470-20 "Debt with Conversion and Other Options" (“ASC 470-20”) clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer
of such instruments should separately account for the liability and equity components of the instruments in a manner that
reflects the issuer's non-convertible debt borrowing rate which interest costs are to be recognized in subsequent periods. The
note payable principal balance for the 2024 Notes at the date of issuance of $200.0 million was bifurcated into the debt
component of $179.5 million and the equity component of $20.5 million. The difference between the note payable principal
balance and the fair value of the debt component representing the debt discount is being accreted to interest expense over the
term of the 2024 Notes. The fair value of the debt component was recognized using a 5.0% discount rate, representing the
Company's borrowing rate at the date of issuance for a similar debt instrument without a conversion feature with an expected
life of seven years.
The Company incurred $7.4 million of debt issuance costs in connection with the sale of the 2024 Notes, which was allocated
between the debt and equity components of the instrument. Of the total amount, $0.7 million was recorded as an offset to
additional paid-in capital. The balance, $6.7 million, was recorded as a contra-debt balance and is being amortized over the
term of the 2024 Notes. Total amortization expense for the year ended December 31, 2017 was $0.5 million.
The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount
and the net carrying value of the liability are as follows:
2024 Notes
December 31,
2017
December 31,
2016
In thousands
Principal amount of liability .............................................................................................
Unamortized discount .......................................................................................................
Carrying value of liability .................................................................................................
Equity component .............................................................................................................
$
$
$
200,000
18,847
181,153
20,459
$
$
$
Because the embedded conversion option is indexed to the Company’s own stock and would be classified in shareholders’
equity, it does not meet the criterion under ASC 815 that would require separate accounting as a derivative instrument.
As of December 31, 2017, the "if converted value" did not exceed the principal amount of the 2024 Notes since the closing
sales price of the Company's common stock was less than the conversion price of the 2024 Notes.
Interest expense associated with the 2024 Notes consisted of the following:
In thousands
Contractual coupon rate of interest ................................................... $
Accretion of convertible notes discount............................................
Interest expense - convertible notes........................................... $
4,207
1,612
5,819
$
$
— $
—
— $
For the year ended December 31,
2017
2016
2015
—
—
—
—
—
—
—
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Convertible Notes - continued
2017 Notes
2017 Notes
December 31,
2017
December 31,
2016
In thousands
Principal amount of liability .............................................................................................
Unamortized discount .......................................................................................................
Carrying value of liability .................................................................................................
$
$
— $
—
— $
115,000
1,797
113,203
In November 2010, the Company issued convertible senior unsecured notes due on November 15, 2017, in the aggregate
principal amount of $115.0 million in a private placement offering. These notes bore 3.25% interest per annum on the principal
amount, payable semiannually in arrears on May 15 and November 15 of each year, beginning in 2011. In May 2017, the
Company used a portion of the net proceeds from the issuance of the 2024 Notes, along with cash received from the
counterparties in connection with the termination of the existing convertible note hedge transactions referred to below, to
repurchase $103.5 million principal amount of the 2017 Notes from a limited number of holders in an arm's length transaction.
This repurchase represented approximately 90% of the aggregate principal amount of 2017 Notes. The repurchases were
accounted for as an extinguishment of the outstanding instrument. Of the total aggregate cost of $165.3 million, $60.0 million
was allocated to the equity component of the 2017 Notes and was recorded as a reduction to additional paid-in capital. The
remainder of the cost was attributed to the outstanding principal repurchased and accrued interest.
The repayment of a portion of the 2017 Notes was not contingent upon the issuance of the 2024 Notes. As such, the repurchase
of the 2017 Notes was accounted for as a debt extinguishment.
See below for further details on the loss on extinguishment:
In thousands
Carrying value of 2017 Notes..........................................................................................................
$
113,943
Carrying value of Redeemed Debt ..................................................................................................
Fair value of consideration transferred allocated to debt component(1)...........................................
Loss on extinguishment of 2017 Notes(2) ........................................................................................
Acceleration of the related portion of debt issuance cost(3).............................................................
Total loss on extinguishment of 2017 Notes(4) ................................................................................
(1) The fair value of consideration transferred was calculated using a discount rate of 3%, representing the Company's borrowing rate at the
103,637
(1,089)
(297)
(1,386)
102,548
$
$
$
date of issuance for a similar debt instrument with a remaining expected life of six months (for the 2017 Notes).
(2) The majority of this balance relates to the write-off of approximately $1.0 million, 90% of the unamortized debt discount.
(3) The Company determined that in connection with the repurchase of the 2017 Notes, 90% of the unamortized debt issuance costs should be
written off, representing the approximate outstanding portion of these costs related to the notes repurchased.
(4) This loss is included in interest expense, net on the Company's Consolidated Statement of Operations.
In connection with the 2017 Notes, the Company had entered into convertible note hedge transactions and warrant transactions
("existing call spread transactions") with certain financial institutions. These transactions were accounted for as equity
instruments at the time of issuance in 2010. With the intention of repurchasing the 2017 Notes, the Company entered into
agreements with these financial institutions to terminate a portion of the existing call spread transactions concurrently with the
offering. In connection with these transactions, the Company received $58.6 million in payments related to the unwind of 90%
of the convertible note hedge transactions and made deliveries of 624,044 shares of the Company's common stock in
connection with the partial unwind of the warrant transactions. The Company used a portion of the proceeds from the bond
hedge settlement to repurchase the 2017 Notes as described above and to make a payment to the revolving credit facility. The
cash proceeds received were recorded as an increase of additional paid-in-capital which was partially offset by the delivery of
shares.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Convertible Notes - continued
2017 Notes - continued
The remaining portion of the 2017 Notes were convertible at the option of the bondholders until the close of business on the
second Scheduled Trading Day (as defined in the 2017 Notes indenture) immediately preceding the maturity date. On
November 10, 2017 and November 13, 2017, the Company received conversion notices from bondholders, totaling the
remaining $11.5 million principal amount outstanding under the 2017 Notes. The Company settled the principal amount of
$11.5 million in cash, with the excess settled in shares, delivering 136,347 shares of the Company's common stock with an
approximate value of $7.5 million, and any fractional shares settled in cash. Additionally, the Company received 136,369 shares
to settle the remaining 10% of the convertible note hedge transactions associated with the 2017 Notes. The cash proceeds
received were recorded as an increase of additional paid-in-capital which were offset by the delivery of shares.
The existing warrant transactions associated with the 2017 Notes remained outstanding, with scheduled expiration dates
between February 13, 2018 and June 21, 2018, unless earlier settled, which will result in a reduction in additional paid-in-
capital.
Interest expense associated with the 2017 Notes consisted of the following:
For the year ended December 31,
2017
2016
2015
In thousands
Contractual coupon rate of interest ................................................... $
Accretion of convertible notes discount............................................
Interest expense - convertible notes........................................... $
3,270
1,797
5,067
$
$
3,738
2,144
5,882
$
$
3,738
2,035
5,773
Revolving Credit and Term Loan Agreements
The Company has a $700.0 million Credit Agreement (the "Credit Agreement"), as amended, with JPMorgan Chase Bank N.A.,
as Administrative Agent, Bank of America, N.A. and Citizens Bank, N.A. as Co-Syndication Agents and SunTrust Bank,
KeyBank N.A., TD Bank, N.A., BB&T and Fifth Third Bank, as Co-Documentation Agents. The Credit Agreement matures on
May 6, 2020 and has revolving commitments of $600.0 million and a Term Loan commitment of $100.0 million. Capitalized
terms used but not defined within this Note 10, Debt, have the meanings ascribed thereto in the Credit Agreement.
The Term Loan commitment requires quarterly payments of principal (which commenced on June 30, 2015) at the rate of $1.25
million, increasing to $1.875 million on June 30, 2017, and then to $2.5 million on June 30, 2019, with $65.0 million payable in
the final quarter of the facility's term. The facility includes an accordion feature that allows the Company to increase the
aggregate amount available up to $900.0 million with additional commitments from the Lenders.
The revolving credit facility permits the Company to pay cash dividends. The Lenders have been granted a security interest in
substantially all of the Company’s and its domestic subsidiaries’ personal property and other assets (including intellectual
property but excluding real estate), including a pledge of 66% of the Company’s equity interest in certain foreign subsidiaries
and 100% of the Company’s equity interest in its domestic subsidiaries, as collateral for the Company’s obligations under the
Credit Agreement.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
10. DEBT (CONTINUED)
Revolving Credit and Term Loan Agreements - continued
The following table shows the amounts available for borrowing under the Company's revolving credit facility:
In thousands
Total facility...............................................................................................................................
Amounts outstanding, excluding letters of credit......................................................................
Amounts available for borrowing, excluding letters of credit...................................................
Letters of credit under the credit facility ...................................................................................
Amounts available for borrowing..............................................................................................
Amounts available for borrowing subject to EBITDA, as defined by the Credit Agreement...
At December 31,
2017
2016
$
600,000
$
140,074
459,926
6,455
453,471
246,031
$
$
$
$
600,000
212,605
387,395
5,655
381,740
209,467
Interest rates on amounts outstanding under the Credit Agreement are variable, and are determined based on the Consolidated
Senior Secured Leverage Ratio, as defined in the Credit Agreement. In addition, the Company is required to pay a quarterly
commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.175% to 0.300% per annum, based
on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 1.25% to 2.00%, based on
the Consolidated Senior Secured Leverage Ratio.
The interest rate for the outstanding amounts on both the revolving credit facility and term loan commitment are as follows:
At December 31,
2017
2016
Interest rate ................................................................................................................................
2.84%
2.19%
The financial covenants associated with the Credit Agreement include a requirement that (i) the Consolidated Senior Secured
Leverage Ratio cannot be greater than 3.50 to 1.00, with an election to increase the maximum to 3.75 to 1.00 for four
consecutive quarters, in connection with a Permitted Acquisition with consideration in excess of $125.0 million; (ii) the
Consolidated Total Leverage Ratio, as defined in the Credit Agreement, cannot be greater than 4.00 to 1.00, with an election to
increase the maximum to 4.25 to 1.00 for four consecutive quarters, in connection with a Permitted Acquisition with
consideration in excess of $125.0 million; (iii) the Consolidated Interest Coverage Ratio cannot be less than 4.00 to 1.00; and
(iv) Liquidity: (a) as of the last day of the fiscal quarter of the Company ending two full fiscal quarters prior to the stated
maturity of the 2017 Convertible Notes, cannot be less than an amount equal to 50% of the outstanding principal amount of the
2017 Convertible Notes, and (b) as of the last day of each fiscal quarter of the Company ending thereafter, cannot be less than
an amount equal to the outstanding principal amount of the 2017 Convertible Notes as of such day. The Company was in
compliance with those financial covenants as of and for the quarter ended December 31, 2017, and management does not
anticipate noncompliance in the foreseeable future.
Debt Issuance Costs
In 2015, the Company incurred an additional $2.3 million in debt issuance costs in connection with the Credit Agreement.
These costs have been capitalized and will be amortized over the term of the agreement. Total amortization expense for the
years ended December 31, 2017, 2016 and 2015 was $1.0 million each period.
Interest Payments
Cash payments for interest were $17.9 million, $14.3 million and $11.4 million in 2017, 2016 and 2015, respectively.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are shown below:
In thousands
Foreign currency translation:
Beginning balance.................................................................................................................
Net gain (loss) on foreign currency translation ..................................................................
Ending balance ......................................................................................................................
Pension and other post-retirement benefits (a):
Beginning balance.................................................................................................................
Reclassification to net income ............................................................................................
Amortization of net loss, net of tax expense of $5,304 and $4,849, respectively............
Change in net gain (loss), net of tax expense (benefit) of $2,357 and ($7,261),
respectively.......................................................................................................................
Other comprehensive gain (loss), net of tax benefit.........................................................
Ending balance ......................................................................................................................
Derivative instruments (b):
Beginning balance.................................................................................................................
Net gain (loss) on derivative instruments, net of tax expense (benefit) of $73 and
($354), respectively ............................................................................................................
Reclassification to net income, net of tax (benefit) expense of ($42) and $360,
respectively .........................................................................................................................
Other comprehensive income, net of tax..........................................................................
Ending balance ......................................................................................................................
2017
2016
(34,896) $
27,840
(7,056) $
(22,625)
(12,271)
(34,896)
(121,448) $
(117,455)
8,785
8,027
3,903
12,688
(108,760) $
(12,020)
(3,993)
(121,448)
(49) $
121
(70)
51
2
$
(58)
(587)
596
9
(49)
$
$
$
$
$
$
Total accumulated other comprehensive income (loss) ........................................................
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost
(115,814) $
(156,393)
$
(see Note 13, Pension Plans for additional information)
(b) See Note 5, Derivative Financial Instruments, for additional information regarding the Company's derivative instruments.
12. INCOME TAXES
The components of income tax expense (benefit) are as follows:
For the year ended December 31,
2015
2016
2017
In thousands
Current:
Federal...............................................................................................................
State...................................................................................................................
Foreign ..............................................................................................................
$
Deferred:
Federal...............................................................................................................
State...................................................................................................................
Foreign ..............................................................................................................
Total..........................................................................................................................
$
16,979
1,301
2,362
20,642
23,498
251
161
23,910
44,552
$
$
20,405
2,312
738
23,455
10,133
(1,023)
(1,715)
7,395
30,850
$
$
25,170
349
931
26,450
5,474
(2,682)
(1,691)
1,101
27,551
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
12. INCOME TAXES (CONTINUED)
During the fourth quarter of 2017, Tax Reform was enacted by the federal government. The SEC issued Staff Accounting
Bulletin 118 ("SAB 118") in December 2017, which provides guidance on accounting for the tax effects of Tax Reform. SAB
118 provides a measurement period in which to finalize the accounting under Accounting Standards Codification 740, Income
Taxes ("ASC 740") as it relates to Tax Reform. This measurement period should not extend beyond one year from the Tax
Reform enactment date. In accordance with SAB 118, the Company is required to reflect the income tax effects of those aspects
of the legislation for which the accounting under ASC 740 is complete. To the extent that the Company's accounting for certain
of the income tax effects is incomplete, but the Company is capable of reasonably estimating the effects, the Company must
record a provisional amount in the Company's Consolidated Financial Statements based on this estimate. To the extent the
Company could not reasonably estimate the provisional impacts of Tax Reform, the Company is required to apply ASC 740 on
the basis of tax law in place immediately prior to the enactment. In accordance with SAB 118, the revaluation of U.S. net
deferred tax assets, the U.S. income tax attributable to Tax Reform's deemed repatriation provision (currently estimated to be
zero) and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts
due to the enactment date and the complexities of Tax Reform. The new tax legislation provides for significant changes in
corporate taxation, including a reduction in the applicable corporate tax rate from 35% to 21%, effective January 1, 2018. As a
result of this rate reduction, the Company's U.S. net deferred tax assets were required to be revalued as of December 31, 2017.
This resulted in a one-time charge to tax expense of $9.7 million in the fourth quarter of 2017. Other Tax Reform provisions
that will impact the Company include the elimination of the deduction for manufacturing activities, changes to the deductibility
of executive compensation and various international tax law changes.
One of the international tax law changes provided for with Tax Reform relates to the taxation of a corporation's global
intangible low-taxed income ("GILTI") for tax years beginning after December 31, 2017. Due to the complexity of the new
GILTI tax rules, the Company is continuing to evaluate this provision of Tax Reform and the application of ASC 740. Under
U.S. GAAP, the Company is allowed to make an accounting policy change for either (1) treated taxes due on future U.S.
inclusions in taxable income related to GILTI as a current period expense when incurred ("period cost method"), or (2)
factoring such amounts into the Company's measurement of its deferred taxes ("deferred method"). The Company's selection of
an accounting policy will depend, in part, on analyzing the Company's global income to determine whether the Company
expects to have future U.S. inclusions in taxable income related to GILTI and, if so, the expected impact. Whether the Company
expects to have future U.S. inclusions in taxable income related to GILTI depends not only on the Company's current structure
and estimated future results of global operations, but also on the intent and ability to modify the Company's structure and/or
business. As a result, the Company was not able to determine a reasonable estimate of the effect of this provision as of
December 31, 2017. The Company has not made a policy decision regarding whether to record deferred taxes on GILTI and,
therefore, the Company has not made any adjustments related to the potential GILTI tax on the Company's Consolidated
Financial Statements.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
In thousands
Deferred tax assets:
Deferred employee benefits ......................................................................................................
Inventories.................................................................................................................................
Tax loss and credit carryforwards .............................................................................................
Accrued liabilities and other items............................................................................................
Total deferred tax assets.....................................................................................................
Deferred tax liabilities:
Property, plant and equipment...................................................................................................
Intangibles .................................................................................................................................
Other items ................................................................................................................................
Total deferred tax liabilities ...............................................................................................
Net deferred tax assets before valuation allowance ..................................................................
Valuation allowance ..................................................................................................................
Net deferred tax assets after valuation allowance .....................................................................
94
At December 31,
2016
2017
$
$
46,539
5,528
20,813
7,031
79,911
(10,756)
(40,258)
(4,020)
(55,034)
24,877
(5,298)
19,579
$
$
82,836
9,694
19,216
12,433
124,179
(15,653)
(48,785)
(3,100)
(67,538)
56,641
(4,143)
52,498
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
12. INCOME TAXES (CONTINUED)
The $1.2 million change in the valuation allowance from December 31, 2016 to December 31, 2017, primarily relates to
additional losses incurred by the Kaman UK entities and the cumulative tax effect of the reduction in the federal rate from 35%
to 21% as a result of Tax Reform. Valuation allowances reduced the deferred tax asset attributable to these state and foreign loss
and credit carryforwards to an amount that, based upon all available information, is more likely than not to be realized. Reversal
of the valuation allowance is contingent upon the recognition of future taxable income in the respective jurisdictions or changes
in circumstances which cause the realization of the benefits of carryforwards to become more likely than not.
A portion of the net deferred tax assets, $1.6 million, is related to a capital loss recorded on the disposition of the Company's
Distribution segment’s Mexico operations. The realization of these benefits is dependent in part on future taxable capital gains.
Pre-tax income from foreign operations amounted to $0.7 million in 2017, while pre-tax losses from foreign operations
amounted to $5.0 million and $4.3 million in 2016 and 2015, respectively. U.S. income taxes have not been provided on $23.2
million of undistributed earnings of foreign subsidiaries since it is the Company’s intention to permanently reinvest such
earnings or to distribute them only when it is tax efficient to do so. It is impracticable to estimate the total tax liability, if any,
that would be created by the future distribution of these earnings. The Company is evaluating the impact of Tax Reform on its
existing accounting position related to undistributed earnings. Due to the inherent complexities in determining any incremental
U.S. Federal and State taxes and the non-U.S. taxes that may be due if the earnings were remitted to the U.S. and in accordance
with SAB 118, this evaluation has not been completed and no provisional amount has been recorded in regards to this amount.
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
For the year ended December 31,
2015
2016
2017
In thousands
Federal tax at 35% statutory rate..............................................................................
State income taxes, net of federal benefit ................................................................
Tax effect of:
Section 199 Manufacturing deduction ..............................................................
Impact of tax rate changes, including Tax Reform ...........................................
Other, net...........................................................................................................
Income tax expense ..................................................................................................
$
$
$
33,032
917
$
31,396
999
30,796
(1,517)
(1,616)
10,032
2,187
44,552
$
(2,153)
613
(5)
30,850
$
(2,275)
(224)
771
27,551
During the fourth quarter of 2016, the Company elected to early adopt ASU 2016-09, "Compensation - Stock Compensation
(Topic 718) - Improvements to Employee Share-Based Payment Accounting". The objective of this standard update is to
simplify several aspects of the accounting for share-based payment transactions, including, but not limited to, income tax
consequences. The standard update was effective for fiscal years, and interim periods within those years, beginning after
December 31, 2016. Pursuant to this standard the Company recorded tax benefits of $0.8 million and 0.5 million in 2017 and
2016, respectively.
The Company records a benefit for uncertain tax positions in the financial statements only when it determines it is more likely
than not that such a position will be sustained upon examination by taxing authorities. Unrecognized tax benefits represent the
difference between the position taken and the benefit reflected in the financial statements. On December 31, 2017, 2016 and
2015, the total liability for unrecognized tax benefits was $3.4 million, $2.8 million and $3.0 million, respectively (including
interest and penalties of $0.4 million in 2017, $0.2 million in 2016 and $0.5 million in 2015).
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
12. INCOME TAXES (CONTINUED)
The change in the liability for 2017, 2016 and 2015 is explained as follows:
In thousands
Balance at January 1.................................................................................................
Additions based on current year tax positions ..................................................
Changes for tax positions of prior years ...........................................................
Settlements ........................................................................................................
Additions due to acquired business...................................................................
Reductions due to lapses in statutes of limitation .............................................
Balance at December 31...........................................................................................
$
$
2017
2016
2015
2,832
381
152
58
—
—
3,423
$
$
2,996
211
(96)
(155)
—
(124)
2,832
$
$
2,441
117
(160)
19
954
(375)
2,996
Included in unrecognized tax benefits at December 31, 2017, were items approximating $3.0 million that, if recognized, would
favorably affect the Company’s effective tax rate in future periods. The Company files tax returns in numerous U.S. and foreign
jurisdictions, with returns subject to examination for varying periods, but generally back to and including 2013. During 2017,
2016 and 2015, $0.1 million or less of interest and penalties was recognized each year as a component of income tax expense. It
is the Company’s policy to record interest and penalties on unrecognized tax benefits as income taxes.
Cash payments for income taxes, net of refunds, were $16.6 million, $24.8 million and $35.7 million in 2017, 2016 and 2015,
respectively.
13. PENSION PLANS
The Company has a non-contributory qualified defined benefit pension plan (the “Qualified Pension Plan”). On February 23,
2010, the Company’s Board of Directors approved an amendment to the Qualified Pension Plan that, among other things,
closed the Qualified Pension Plan to all new hires on or after March 1, 2010, and stipulated that years of service would continue
to be added for purposes of the benefit calculations only through December 31, 2015, with no further accrual of benefits for
service thereafter. Given that effective December 31, 2015, the qualified pension plan was frozen with respect to future benefit
accruals, under U.S. Government Cost Accounting Standard (“CAS”) 413 the Company must determine the USG’s share of any
pension curtailment adjustment calculated in accordance with CAS. During the fourth quarter of 2016, the Company accrued a
$0.3 million liability representing our estimate of the amount due to the USG based on our pension curtailment adjustment
calculation, which was submitted to the USG for review in December 2016. The Company has maintained its accrual at $0.3
million as of December 31, 2017. There can be no assurance that the ultimate resolution of this matter will not have a material
adverse effect on the Company's results of operations, financial position and cash flows.
The Company also has a Supplemental Employees’ Retirement Plan (“SERP”), which is considered a non-qualified pension
plan. The SERP provides certain key executives, whose compensation is in excess of the limitations imposed by federal law on
the qualified defined benefit pension plan, with supplemental benefits based upon eligible earnings, years of service and age at
retirement. During 2010, the Company's Board of Directors also approved an amendment to the SERP that made changes
consistent with the pension plan amendment. The Board's Personnel & Compensation Committee and the Board have not
approved any new participants to the SERP since February 28, 2010, and do not intend to do so at any time in the future. The
measurement date for both these plans is December 31.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Obligations and Funded Status
The changes in the actuarial present value of the projected benefit obligation and fair value of plan assets are as follows:
For the year ended December 31,
Qualified Pension Plan
SERP
2017
2016
2017
2016
$
$
$
$
—
4,596
4,794
24,488
24,358
10,184
10,059
728,601
712,842
In thousands
Projected benefit obligation at beginning of year ............................
Service cost ......................................................................................
Interest cost ......................................................................................
Actuarial liability loss (a) ..................................................................
Benefit payments..............................................................................
Projected benefit obligation at end of year ....................................
Fair value of plan assets at beginning of year ..................................
Actual return on plan assets .............................................................
534
Employer contributions ....................................................................
(534)
Benefit payments..............................................................................
—
Fair value of plan assets at end of year ..........................................
(10,059)
Funded status at end of year...........................................................
10,059
Accumulated benefit obligation .......................................................
(a) The actuarial liability loss amount for the qualified pension plan for 2017 and 2016 is principally due to the effect of changes
$
$
$
$ (126,924) $ (156,427) $
$
$
$
— $
(7,896) $
$
7,896
10,000
(33,913)
572,174
20,588
(33,913)
728,601
10,000
(34,870)
643,392
47,433
(34,870)
770,316
155
(534)
10,059
652
(3,056)
7,896
553,858
42,229
572,174
96,088
3,056
(3,056)
— $
—
770,316
728,601
—
—
254
241
—
$
$
$
$
$
$
$
in the discount rate.
The Company has recorded liabilities related to our qualified pension plan and SERP as follows:
At December 31,
Qualified Pension Plan
SERP
2017
2016
2017
2016
In thousands
Current liabilities (a) ..........................................................................
Noncurrent liabilities........................................................................
Total..................................................................................................
$
— $
— $
(942) $
(126,924)
(156,427)
$ (126,924) $ (156,427) $
(6,954)
(7,896) $
(3,061)
(6,998)
(10,059)
(a) The current liabilities are included in other accruals and payables on the Consolidated Balance Sheets.
The following table presents amounts included in accumulated other comprehensive income on the Consolidated Balance
Sheets that will be recognized as components of pension cost in future periods.
At December 31,
Qualified Pension Plan
SERP
2017
2016
2017
2016
In thousands
Unrecognized loss ............................................................................
Amount included in accumulated other comprehensive income .....
$
$
173,214
173,214
$
$
193,764
193,764
$
$
1,410
1,410
$
$
1,209
1,209
The amount of unrecognized loss for the qualified pension plan and the SERP, respectively, that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next year is estimated to be $11.1 million and
$0.3 million.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Obligations and Funded Status - continued
The pension plan net periodic benefit costs on the Consolidated Statements of Operations and other amounts recognized in
other comprehensive income (loss) on the Consolidated Statements of Comprehensive Income and Consolidated Statements of
Shareholders’ Equity were computed using the projected unit credit actuarial cost method and included the following
components:
For the year ended December 31,
Qualified Pension Plan
2016
2017
2015
2017
SERP
2016
2015
In thousands
Service cost for benefits earned
during the year..................................
Interest cost on projected benefit
obligation..........................................
Expected return on plan assets .........
Amortization of prior service cost....
Recognized net loss ..........................
Additional amount recognized due
to curtailment/settlement................
Net pension benefit cost.................
Change in net gain or (loss)..............
Amortization of prior service cost....
Amortization of net loss ...................
$
4,794
$
4,596
$
14,131
$
— $
— $
24,358
(42,049)
—
13,943
24,488
(40,767)
—
12,694
27,514
(44,130)
57
9,920
—
—
—
$
1,046
$
1,011
$
7,492
$
(6,607)
—
(13,943)
19,126
—
(12,694)
29,923
(57)
(9,920)
241
—
—
146
305
692
347
—
(146)
$
254
—
—
182
—
436
155
—
(182)
$
206
318
—
—
218
—
742
(155)
—
(218)
Total recognized in other
comprehensive income (loss).........
Total recognized in net periodic
benefit cost and other
comprehensive income (loss).........
$
$
(20,550) $
6,432
$
19,946
$
201
$
(27) $
(373)
(19,504) $
7,443
$
27,438
$
893
$
409
$
369
The following tables show the amount of the contributions made to the Qualified Pension Plan and SERP during each period
and the amount of contributions the Company expects to make during 2018:
In thousands
Contributions..............................................................
$
10,000
$
10,000
$
3,056
$
534
Qualified Pension Plan
SERP
2017
2016
2017
2016
Qualified Pension Plan (a)
SERP
In thousands
Expected contributions during 2018 ..........................
(a) The Company contributed $10.0 million to the qualified pension plan in January 2018. Currently, the Company does not
10,000
$
$
942
intend to make any further contributions to the qualified pension plan in 2018; however, given Tax Reform the Company is
evaluating its options.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Obligations and Funded Status - continued
Expected future benefit payments, which reflect expected future service, are as follows:
In thousands
2018......................................................................................................................................
2019......................................................................................................................................
2020......................................................................................................................................
2021......................................................................................................................................
2022......................................................................................................................................
2023-2027.............................................................................................................................
$
$
$
$
$
$
34,878
37,000
38,692
39,960
41,689
223,256
$
$
$
$
$
$
942
517
503
2,464
469
2,018
Qualified
Pension Plan
SERP
Mortality is a key assumption in developing actuarial estimates, and therefore could significantly impact the valuation of the
Company's obligations under the qualified pension plan and SERP. The Company reviewed the mortality data and based on the
size and demographics of the plan's participant population, the Company determined the RP-2000 Scale AA Generational based
mortality table was the most appropriate assumption.
Since 2014, the Company has been using the Citigroup Above Median Double-A Curve, as it is deemed to be the most
appropriate basis for generating the Company's discount rate assumption, as the future cash flows of the plan are most closely
aligned to the Above Median Double-A Curve. The discount rates used in determining benefit obligations of the pension plans
are as follows:
At December 31,
Qualified Pension Plan
SERP
2017
2016
2017
2016
Discount rate ....................................................................................
3.50%
3.98%
3.15%
3.43%
The actuarial assumptions used in determining the net periodic benefit cost of the pension plans are as follows:
For the year ended December 31,
SERP
Qualified Pension Plan
2017
2016
2017
2016
Discount rate ....................................................................................
Expected return on plan assets .........................................................
Average rate of increase in compensation levels..............................
3.98%
7.50%
N/A
4.17%
7.50%
N/A
3.43%
N/A
N/A
3.47%
N/A
N/A
Other
In 2016, the Company began utilizing a "spot rate approach" in the calculation of pension interest and service cost. The spot
rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and
service cost.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Qualified Pension Plan Assets
The expected return on plan assets rate was determined based upon historical returns adjusted for estimated future market
fluctuations. For 2017 and 2016, the expected rate of return on plan assets was 7.5%. During 2017, the actual return on pension
plan assets, net of expenses, was 17.0%.
Plan assets are invested in a diversified portfolio consisting of equity and fixed income securities. The investment goals for
pension plan assets are to improve and/or maintain the Plan’s funded status by generating long-term asset returns that exceed
the rate of growth of the Plan’s liabilities. The Plan invests assets in a manner that seeks to (a) maximize return within
reasonable and prudent levels of risk of loss of funded status; and (b) maintain sufficient liquidity to meet benefit payment
obligations and other periodic cash flow requirements on a timely basis. The return generation/liability matching asset
allocation ratio is currently 56.8%/43.2%. As the plan’s funded status changes, the pension plan’s Administrative Committee
(the management committee that is responsible for plan administration) will act through an immediate or gradual process, as
appropriate, to reallocate assets.
Under the current investment policy, no Investment Manager may invest in investments deemed illiquid by the Investment
Manager at the time of purchase, development programs, real estate, mortgages or private equities or securities of Kaman
Corporation without prior written authorization from the Finance Committee of the Board of Directors. In addition, with the
exception of USG securities, managers’ holdings in the securities of any one issuer, at the time of purchase, may not exceed
7.5% of the total market value of that manager’s account.
The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the
investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Short-term Investments – This investment category consists of cash and cash equivalents and futures and options contracts.
Cash and cash equivalents are comprised of investments with maturities of three months or less when purchased, including
certain short-term fixed-income securities, and are classified as Level 1 investments. Futures contracts and options contracts
requiring the investment managers to receive from or pay to the broker an amount of cash equal to daily fluctuations are
included in short-term investments and are classified as Level 2 investments.
Corporate Stock – This investment category consists primarily of domestic common stock issued by U.S. corporations.
Common shares are traded actively on exchanges and price quotes for these shares are readily available. Holdings of corporate
stock are classified as Level 1 investments.
Mutual Funds –Mutual funds are traded actively on public exchanges. The share prices for these mutual funds are published at
the close of each business day. Holdings of mutual funds are classified as Level 1 investments.
Common Trust Funds – Common trust funds are comprised of shares or units in commingled funds that are not publicly
traded. The values of the commingled funds are not publicly quoted and must trade through a broker. For equity and fixed-
income commingled funds traded through a broker, the fund administrator values the fund using the net asset value (“NAV”)
per fund share, derived from the value of the underlying assets. The underlying assets in these funds (equity securities, fixed
income securities and commodity-related securities) are publicly traded on exchanges and price quotes for the assets held by
these funds are readily available. Holdings of common trust funds are not subject to leveling.
Fixed Income Securities - For fixed income securities, multiple prices and price types are obtained from pricing vendors
whenever possible, which enables cross-provider validations. A primary price source is identified based on asset type, class or
issue for each security. The fair values of fixed income securities are based on evaluated prices that reflect observable market
information, such as actual trade information of similar securities, adjusted for observable differences, and are categorized as
Level 2. These securities are primarily investment grade securities.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Qualified Pension Plan Assets - continued
The fair values of the Company’s qualified pension plan assets at December 31, 2017 and 2016, are as follows:
Total Carrying
Value at
December 31,
2017
Quoted prices
in
active markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Not subject to
leveling
In thousands
Short-term investments:
Cash and cash equivalents..........
Futures contracts - assets............
Futures contracts - liabilities ......
Fixed income securities ................
Mutual funds.................................
Common trust funds(1) ..................
Corporate stock.............................
Subtotal .........................................
Accrued income/expense ..............
Total ..............................................
$
$
$
35,046
116
(1,384)
96,318
126,955
314,420
70,879
642,350
1,042
643,392
$
$
$
35,046
—
—
—
126,955
—
70,879
232,880
120
233,000
$
$
$
— $
116
(1,384)
96,318
—
—
—
95,050
873
95,923
$
$
— $
—
—
—
—
—
—
— $
—
— $
—
—
—
—
—
314,420
—
314,420
49
314,469
Total Carrying
Value at
December 31,
2016
Quoted prices
in
active markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Not subject to
leveling
$
$
$
— $
In thousands
Short term investments:
Cash and cash equivalents ..........
—
Futures contracts - liabilities ......
—
Fixed income securities ................
—
Mutual funds.................................
—
Common trust funds(1) ..................
216,354
Corporate stock.............................
—
Subtotal .........................................
216,354
Accrued income/expense ..............
—
Total ..............................................
216,354
(1) In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value
using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The
fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts
presented for the total pension plan assets.
21,537
(1,346)
127,857
131,897
216,354
74,348
570,647
1,527
572,174
21,537
—
—
131,897
—
74,348
227,782
133
227,915
(1,346)
127,857
—
—
—
126,511
1,394
127,905
— $
—
—
—
—
—
— $
—
— $
$
$
$
$
$
$
$
$
Derivatives are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative
instruments mainly consist of equity futures and interest rate futures.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
13. PENSION PLANS (CONTINUED)
Other Plans
The Company also maintains a Defined Contribution Plan that has been adopted by most of its U.S. subsidiaries. Employees of
the adopting employers who meet the eligibility requirements of the plan may participate. Employer matching contributions are
made to the plan based on a percentage of each participant’s pre-tax contribution. For each dollar that a participant contributes,
up to 5% of compensation, participating subsidiaries make employer contributions of one dollar. Employer contributions to the
plan totaled $12.6 million, $11.9 million and $11.9 million in 2017, 2016 and 2015, respectively.
One of the Company's foreign subsidiaries maintains a defined benefit plan of its own for its local employees. The net pension
liability associated with this plan as of December 31, 2017 and 2016, of $0.1 million is included in Other current liabilities on
the Company's Consolidated Balance Sheets.
14. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
In thousands
Supplemental employees' retirement plan ("SERP") .......................................................................
Deferred compensation ....................................................................................................................
Long-term incentive plan .................................................................................................................
Noncurrent income taxes payable ....................................................................................................
Environmental remediation liability.................................................................................................
Capital leases....................................................................................................................................
Other.................................................................................................................................................
Total ...............................................................................................................................................
$
$
At December 31,
2016
2017
6,954
15,862
9,475
3,363
2,602
4,985
3,657
46,898
$
$
6,998
15,238
8,346
2,903
3,763
2,588
5,080
44,916
The Company maintains a non-qualified deferred compensation plan for certain of its employees as well as a non-qualified
deferred compensation plan for its Board of Directors. Generally, participants in these plans have the ability to defer a certain
amount of their compensation, as defined in the agreement. The deferred compensation liability will be paid out either upon
retirement or as requested based upon certain terms in the agreements and in accordance with Internal Revenue Code Section
409A.
Disclosures regarding the assumptions used in the determination of the SERP liabilities are included in Note 13, Pension Plans.
Discussions of our environmental remediation liabilities are in Note 9, Environmental Costs, and Note 15, Commitments and
Contingencies.
15. COMMITMENTS AND CONTINGENCIES
Asset Retirement Obligations
The Company has unrecorded Asset Retirement Obligation’s (“AROs”) that are conditional upon certain events. These AROs
generally include the removal and disposition of non-friable asbestos. The Company has not recorded a liability for these
conditional AROs at December 31, 2017, because the Company does not currently believe there is a reasonable basis for
estimating a date or range of dates for major renovation or demolition of these facilities. In reaching this conclusion, the
Company considered the historical performance of each facility and has taken into account factors such as planned
maintenance, asset replacements and upgrades, which, if conducted as in the past, can extend the physical lives of the facilities
indefinitely. The Company also considered the possibility of changes in technology and risk of obsolescence in arriving at its
conclusion.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Asset Retirement Obligations - continued
The Company currently leases various properties under leases that give the lessor the right to make the determination as to
whether the lessee must return the premises to their original condition, except for normal wear and tear. The Company does not
normally make substantial modifications to leased property, and many of the Company's leases either require lessor approval of
planned improvements or transfer ownership of such improvements to the lessor at the termination of the lease. Historically the
Company has not incurred significant costs to return leased premises to their original condition.
Operating Leases
Rent commitments under various leases for office space, warehouses, land and buildings expire at varying dates from January
2018 to December 2026. The terms of most of these leases are in the range of 3 to 5 years. Some of the Company’s leases have
rent escalations, rent holidays or contingent rent that are recognized on a straight-line basis over the entire lease term. Material
leasehold improvements and other landlord incentives are amortized over the shorter of their economic lives or the lease term,
including renewal periods, if reasonably assured. Certain annual rentals are subject to renegotiation, with certain leases
renewable for varying periods.
Lease periods for machinery and equipment range from 1 to 5 years.
Substantially all real estate taxes, insurance and maintenance expenses associated with leased facilities are obligations of the
Company. It is expected that in the normal course of business leases that expire will be renewed or replaced by leases on other
similar property.
The following minimum future rental payments are required under operating leases that have initial or remaining non-
cancellable lease terms in excess of one year as of December 31, 2017:
In thousands
2018........................................................................................................................................................................ $
2019........................................................................................................................................................................
2020........................................................................................................................................................................
2021........................................................................................................................................................................
2022........................................................................................................................................................................
Thereafter ...............................................................................................................................................................
Total ..................................................................................................................................................................... $
25,773
21,193
16,273
11,557
7,691
15,300
97,787
Lease expense for all operating leases, including leases with terms of less than one year, amounted to $28.0 million, $27.3
million and $26.4 million for 2017, 2016 and 2015, respectively.
Capital Leases
During 2014, the Company entered into a master leasing agreement with PNC for financing the purchases of equipment, with
total capacity of $5.0 million. In May 2017, the Company amended the master leasing agreement with PNC to increase the total
capacity to $10.0 million. Such leases are classified as capital for accounting purposes and are recorded at the present value of
the future minimum lease payments at the inception of the lease. Amounts due under capital leases are recorded as liabilities,
and assets acquired under capital leases are recorded as equipment. Amortization of assets recorded under capital leases is
included in depreciation and amortization expense.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capital Leases - continued
The following minimum payments are required under capital leases that have initial or remaining non-cancellable lease terms
in excess of one year as of December 31, 2017:
In thousands
2018 ....................................................................................................................................................................... $
2019 .......................................................................................................................................................................
2020 .......................................................................................................................................................................
2021 .......................................................................................................................................................................
2022 .......................................................................................................................................................................
Thereafter ..............................................................................................................................................................
Total..................................................................................................................................................................... $
1,155
1,457
1,249
1,113
863
307
6,144
Interest expense related to capital leases was immaterial in 2017 and 2016. There was no interest expense associated with
capital leases in 2015. See Note 7, Property, Plant and Equipment, Net, for additional information regarding our capital leases.
Other Matters
Pension Freeze
Effective December 31, 2015, the Company's qualified pension plan was frozen with respect to future benefit accruals. Under
CAS 413 the Company must determine the USG’s share of any pension curtailment adjustment calculated in accordance with
CAS. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount
due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3
million liability representing our estimate of the amount due to the USG based on the Company's pension curtailment
adjustment calculation, which was submitted to the USG for review in December 2016. The Company has maintained its
accrual at $0.3 million as of December 31, 2017. There can be no assurance that the ultimate resolution of this matter will not
have a material adverse effect on the Company's results of operations, financial position and cash flows.
Aerospace Claim Matter
On June 29, 2016, the Company received notification from a customer of their intent to file a claim for recovery of costs and
expenses related to rework on certain aerostructures components previously delivered by the Company to the customer. The
notification did not indicate the extent of the rework undertaken by the customer, the cost or expenses incurred by the customer
or the time frame in which the customer anticipated filing its formal claim. On October 17, 2017, the Company received a letter
from the customer seeking to recover $12.4 million associated with the rework of these components and related costs incurred
by the customer. The Company does not believe the claim has merit and will continue to defend against the claim. The
Company estimates the cost to rework the aerostructure components delivered to the customer over the time period in question
is approximately $0.2 million. Based on this analysis, the Company has accrued $0.2 million, the estimated cost to rework the
aerostructure components, as of December 31, 2017; however, there can be no assurance that the ultimate resolution of this
matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Matters - continued
New Hartford
In connection with sale of the Company’s Music segment in 2007, the Company assumed responsibility for meeting certain
requirements of the Transfer Act that applied to our transfer of the New Hartford, Connecticut, facility leased by that segment
for guitar manufacturing purposes (“Ovation”). Under the Transfer Act, those responsibilities essentially consist of assessing
the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to
the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental
assessment, which began in 2008, has been completed and site remediation is in process.
The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million,
all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is
$1.6 million. At December 31, 2017, the Company had $0.7 million accrued for these environmental remediation activities. A
portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in
other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these
environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the
resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Bloomfield
In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation
had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be
required under the Transfer Act and is currently remediating the property under the guidance of the Connecticut Department of
Environmental Protection ("CTDEP"). The assumed environmental liability of $10.3 million was determined by taking the
undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will
take many years to complete. The total amount paid to date in connection with these environmental remediation activities is
$12.9 million. At December 31, 2017, the Company had $2.6 million accrued for these environmental remediation activities. A
portion ($0.6 million) of the accrual related to this property is included in other current liabilities, and the balance is included in
other long-term liabilities. Although it is reasonably possible that additional costs will be paid in connection with the resolution
of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Rimpar
In connection with the Company's purchase of GRW, the Company assumed responsibility for the environmental remediation at
the Rimpar, Germany facility. As part of the purchase price allocation, the Company initially accrued approximately $4.2
million during the year ended December 31, 2015. In 2016, the Company completed a Phase II assessment in order to better
understand the extent of the environmental effort necessary to remediate the facility. Based on this assessment, the Company
adjusted the accrual to $0.5 million, as results of the assessment indicate a lower level of remediation effort will be required.
The total amount paid to date in connection with these environmental remediation activities is $0.2 million. The balance ($0.3
million) of the accrual related to this property is included in other current liabilities. Although it is reasonably possible that
additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of
such additional costs, if any, at this time.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
16. COMPUTATION OF EARNINGS PER SHARE
The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of
common stock outstanding for each year. The computation of diluted earnings per share includes the common stock
equivalency of dilutive options granted to employees under the Company's stock incentive plan and shares issuable on
redemption of its Convertible Notes.
For the Year Ended December 31,
2017
2016
2015
In thousands, except per share amounts
Net earnings ...........................................................................................................
$
49,826
$
58,854
$
60,438
Basic:
Weighted average number of shares outstanding...................................................
Basic earnings per share.........................................................................................
27,611
27,107
$
1.80
$
2.17
$
27,177
2.22
Diluted:
Weighted average number of shares outstanding...................................................
Weighted average shares issuable on exercise of dilutive stock options ...............
Weighted average shares issuable on exercise of convertible notes ......................
Weighted average shares issuable on exercise of warrants related to 2017 Notes
Total ................................................................................................................
27,611
27,107
27,177
160
466
181
141
773
51
133
558
—
28,418
28,072
27,868
Diluted earnings per share .....................................................................................
$
1.75
$
2.10
$
2.17
Equity awards
Excluded from the diluted earnings per share calculation for the years ended December 31, 2017, 2016 and 2015, respectively,
are 245,361, 472,328 and 487,071 shares associated with equity awards granted to employees that are anti-dilutive based on the
average stock price.
2017 Convertible Notes
For the years ended December 31, 2017, 2016 and 2015, shares issuable under the 2017 Notes that were dilutive during the
period were included in the calculation of earnings per share as the conversion price for the Convertible Notes was less than the
average share price of the Company's stock.
2024 Convertible Notes
For the year ended December 31, 2017, shares issuable under the 2024 Notes were excluded from the calculation of earnings
per share as the conversion price for the Convertible Notes was greater than the average share price of the Company's stock.
Warrants
For the years ended December 31, 2017 and 2016, shares issuable under the warrants sold in connection with the Company’s
2017 Convertible Note offering were included in the calculation of diluted earnings per share as the strike price of the warrants
was less than the average share price of the Company’s stock. Excluded from the diluted earnings per share calculation for the
year ended December 31, 2015, were 3,422,477 shares, associated with these warrants, as they were anti-dilutive. For further
information on the Convertible Notes, see Note 10, Debt.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
17. SHARE-BASED ARRANGEMENTS
General
The Company accounts for stock options, restricted stock awards, restricted stock units and performance shares as equity
awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and
recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan which is accounted
for as a liability award.
Compensation expense for stock options, restricted stock awards and restricted stock units is recognized on a straight-line basis
over the vesting period of the awards. Share-based compensation expense recorded for the years ended December 31, 2017,
2016 and 2015 was $6.0 million, $5.7 million and $6.4 million, respectively.
Stock Incentive Plan
On April 17, 2013, the shareholders of the Company approved the 2013 Management Incentive Plan (the "2013 Plan"), which
replaced the 2003 Stock Incentive Plan. The 2013 Plan provides the Company with the ability to use equity-based awards of up
to 2,250,000 authorized shares and is designed as a flexible share authorization plan, such that the Company's share
authorization is based on the least costly type of award (stock options). Shares issued pursuant to “Full Value Awards” as
defined in the 2013 Plan (awards other than stock options or stock appreciation rights which are settled by the issuance of
shares, e.g., restricted stock, restricted stock units, performance shares, performance units if settled with stock, or other stock-
based awards) count against the 2013 Plan's share authorization at a rate of 3 to 1, while shares issued upon exercise of stock
options or stock appreciation rights count against the share authorization at a rate of 1 to 1. This means that every time an
option is granted, the authorized pool of shares is reduced by one (1) share and every time a Full Value Award is granted, the
authorized pool of shares is reduced by 3 shares. In deriving the valuation ratio used in the 2013 Plan, the Company used the
Black Scholes Fair Value model as the basis for determining the approximate value of an option as compared to a "full value
share." As of December 31, 2017, there were 525,310 shares available for grant under the plan.
LTIP awards provide certain senior executives an opportunity to receive award payments in either stock or cash as determined
by the Personnel and Compensation Committee of the Board of Directors in accordance with the Plan, at the end of each
performance cycle. For the performance cycle, the Company’s financial results are compared to the Russell 2000 indices for the
same periods based upon the following: (a) average return on total capital, (b) earnings per share growth and (c) total return to
shareholders. No awards will be payable if the Company’s performance is in the bottom quartile of the designated indices. The
maximum award is payable if performance reaches the 75th percentile of the designated indices. Awards are paid out at 100% at
the 50th percentile. Awards for performance between the 25th and 75th percentiles are determined by straight-line interpolation
between 0% and 200%. Generally, LTIP awards are paid in cash.
Stock options are granted with an exercise price equal to the average market price of our stock at the date of grant. Stock
options and Stock Appreciation Rights ("SARs") granted under the plan generally expire ten years from the date of grant and
vest 20% each year over a 5-year period on each of the first five anniversaries of the date of grant. Restricted Stock Awards
("RSAs") are generally granted with restrictions that lapse at the rate of 20% per year over a 5-year period on each of the first
five anniversaries of the date of grant. Generally, these awards are subject to forfeiture if a recipient separates from service with
the Company.
From time-to-time, the Company has issued additional stock awards with market and performance based conditions. Currently,
there are three awards with these conditions that have not been settled. The number of shares earned under an award granted in
2014 has been determined at a 139.9% achievement level, representing 1,506 shares to be delivered in 2019. The remaining
shares for the awards granted in 2015 and 2016 are 2,165, assuming a 100% achievement level. The Company measures the
cost of these awards based on their grant date fair value to the extent of the probable number of shares to be earned upon
vesting. Amortization of this cost will be recorded on a straight-line basis over the requisite service period. Throughout the
course of the requisite service period, the Company will monitor the level of achievement compared to the target and adjust the
number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the updated most
probable outcome. Compensation expense for these awards for the years ended December 31, 2017 and 2016 was not material.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
17. SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock Incentive Plan - continued
Stock option activity is as follows:
Options outstanding at December 31, 2016...................................................................
Granted ...................................................................................................................
Exercised.................................................................................................................
Forfeited or expired ................................................................................................
Options outstanding at December 31, 2017...................................................................
958,679
226,315
(201,767)
(57,842)
925,385
$
$
36.18
51.97
32.44
43.02
40.43
Options
Weighted average-
exercise price
The following table presents information regarding options outstanding as of December 31, 2017:
Weighted-average remaining contractual term - options outstanding (years) ...........................................................
Aggregate intrinsic value - options outstanding (in thousands)................................................................................. $
Weighted-average exercise price - options outstanding............................................................................................. $
Options exercisable....................................................................................................................................................
Weighted-average remaining contractual term - options exercisable (years)............................................................
Aggregate intrinsic value - options exercisable (in thousands) ................................................................................. $
Weighted-average exercise price - options exercisable ............................................................................................. $
6.4
17,034
40.43
378,725
4.4
9,571
33.57
The intrinsic value represents the amount by which the market price of the stock on the measurement date exceeds the exercise
price of the option. The intrinsic value of options exercised in 2017, 2016 and 2015 was $3.9 million, $3.9 million and $1.0
million, respectively. The Company currently has an open stock repurchase plan, which would enable the Company to
repurchase shares as needed. Since 2008 the Company has generally issued shares related to option exercises and RSAs from
its authorized but unissued common stock.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The
following table indicates the weighted-average assumptions used in estimating fair value:
Expected option term (years) ...................................................................................
Expected volatility....................................................................................................
Risk-free interest rate ...............................................................................................
Expected dividend yield ...........................................................................................
Per share fair value of options granted.....................................................................
$
5.0
19.9%
1.9%
1.6%
8.61
$
5.2
26.0%
1.2%
1.8%
8.63
$
5.1
29.0%
1.6%
1.6%
9.28
2017
2016
2015
The expected term of options granted represents the period of time option grants are expected to be outstanding based upon
historical exercise patterns. Forfeitures of options are estimated based upon historical data and are adjusted based upon actual
occurrences. The cumulative effect of stock award forfeitures was immaterial. The volatility assumption is based on the
historical daily price data of the Company’s stock over a period equivalent to the weighted-average expected term of the
options. Management evaluated whether there were factors during that period that were unusual and would distort the volatility
figure if used to estimate future volatility and concluded that there were no such factors. The Company relies only on historical
volatility since future volatility is expected to be consistent with historical volatility.
The risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates determined at the date of
option grant. Expected dividends are based upon a historical analysis of our dividend yield over the past year.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
17. SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock Incentive Plan - continued
Restricted Stock Award and Restricted Stock Unit activity is as follows:
Restricted Stock outstanding at December 31, 2016 .............................................
Granted ...........................................................................................................
Vested..............................................................................................................
Forfeited or expired ........................................................................................
Restricted Stock outstanding at December 31, 2017 .............................................
Restricted Stock
Awards
Weighted-
average grant
date fair value
167,674
79,508
(78,571)
(13,729)
154,882
$
$
40.27
50.30
41.70
42.46
44.50
The grant date fair value for restricted stock is the average market price of the unrestricted shares on the date of grant. The total
fair value of restricted stock awards vested during 2017, 2016 and 2015 was $5.7 million, $4.3 million and $3.8 million,
respectively.
The Company records a tax benefit and associated deferred tax asset for compensation expense recognized on non-qualified
stock options and restricted stock for which the Company is allowed a tax deduction. For 2017, 2016 and 2015, respectively,
the Company recorded a tax benefit of $2.0 million, $2.0 million and $2.2 million for these two types of compensation expense.
The windfall tax benefit is the tax benefit realized on the exercise of non-qualified stock options and disqualifying dispositions
of stock acquired by exercise of incentive stock options and Employee Stock Purchase Plan stock purchases in excess of the
deferred tax asset originally recorded. During the fourth quarter of 2016, the Company early adopted ASU 2016-09,
"Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting". Prior to
the adoption of this standard update, windfall tax benefits were recorded in equity. With the adoption of this standard update, all
of the tax effects related to share-based payments at settlement or expiration now flow through the income statement.
Accordingly, there was no windfall tax benefit recorded in equity in 2017 and 2016. The total windfall tax benefit recorded in
equity in 2015 was $0.3 million.
As of December 31, 2017, future compensation costs related to non-vested stock options and restricted stock grants is $6.9
million. The Company anticipates that this cost will be recognized over a weighted-average period of 3.0 years.
Employees Stock Purchase Plan
The Kaman Corporation Employees Stock Purchase Plan (“ESPP”) allows employees to purchase common stock of the
Company, through payroll deductions, at 85% of the market value of shares at the time of purchase. The plan provides for the
grant of rights to employees to purchase a maximum of 1,500,000 shares of common stock.
During 2017, 63,874 shares were issued to employees at prices ranging from $46.79 to $57.27. During 2016, 74,273 shares
were issued to employees at prices ranging from $32.95 to $42.40. During 2015, 79,294 shares were issued to employees at
prices ranging from $31.64 to $36.46. At December 31, 2017, there were 171,191 shares available for purchase under the plan.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
18. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized based upon the nature of its products and services, and is composed of two operating segments each
overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its Chief
Operating Decision Maker (“CODM”), reviews operating results for the purposes of allocating resources and assessing
performance. The Company has not aggregated operating segments for purposes of identifying reportable segments.
The Distribution segment is a leading power transmission, motion control, and fluid power industrial distributor with
operations throughout the United States. The segment provides electro-mechanical products, bearings, power transmission,
motion control and electrical and fluid power components, along with engineered integrated solutions to its customers' most
challenging applications serving a broad spectrum of industrial markets, including both MRO and OEM customers.
The Aerospace segment produces and markets proprietary aircraft bearings and components; super precision, miniature ball
bearings for the medical, industrial and aerospace markets; complex metallic and composite aerostructures for commercial,
military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the
U.S. and allied militaries. The segment also markets the design and supply of aftermarket parts to businesses performing MRO
in aerospace markets; performs helicopter subcontract work; restores, modifies and supports the Company's SH-2G Super
Seasprite maritime helicopters; manufactures and supports the Company's K-MAX® manned and unmanned medium-to-heavy
lift helicopters; and provides engineering design, analysis and certification services.
Summarized financial information by business segment is as follows:
For the year ended December 31,
2015
2016
2017
In thousands
Net sales:
Distribution .......................................................................................................
Aerospace (a) ......................................................................................................
Net sales ...................................................................................................................
Operating income:
Distribution .......................................................................................................
Aerospace..........................................................................................................
Net gain (loss) on sale of assets ........................................................................
Corporate expense.............................................................................................
Operating income .....................................................................................................
Interest expense, net .................................................................................................
Other (income) expense, net.....................................................................................
Earnings before income taxes ..................................................................................
Income tax expense ..................................................................................................
Net earnings..............................................................................................................
$ 1,080,965
724,944
$ 1,805,909
$ 1,106,322
702,054
$ 1,808,376
$ 1,177,539
597,586
$ 1,775,125
$
$
52,482
119,889
256
(58,452)
114,175
20,581
(784)
94,378
44,552
49,826
$
$
41,859
115,005
(11)
(50,930)
105,923
15,747
472
89,704
30,850
58,854
$
$
49,441
110,328
328
(55,578)
104,519
13,144
3,386
87,989
27,551
60,438
(a) Net sales by the Aerospace segment under contracts with USG agencies (including sales to foreign governments through
foreign military sales contracts with USG agencies) totaled $248.6 million, $244.4 million and $211.4 million in 2017, 2016
and 2015, respectively, and represent direct and indirect sales to the USG and related agencies.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
18. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
In thousands
Identifiable assets (a):
At December 31,
2016
2015
2017
Distribution .......................................................................................................
Aerospace..........................................................................................................
Corporate (b).......................................................................................................
Total assets ...............................................................................................................
Capital expenditures:
Distribution .......................................................................................................
Aerospace..........................................................................................................
Corporate...........................................................................................................
Total capital expenditures.........................................................................................
Depreciation and amortization (c):
$
537,911
$
540,900
$
558,630
810,278
107,263
720,823
164,563
738,426
142,555
$ 1,455,452
$ 1,426,286
$ 1,439,611
$
9,621
$
9,016
$
17,208
802
17,935
2,826
10,685
13,378
5,869
$
27,631
$
29,777
$
29,932
Distribution .......................................................................................................
Aerospace..........................................................................................................
Corporate...........................................................................................................
Total depreciation and amortization .........................................................................
(a) Identifiable assets are year-end assets at their respective net carrying values segregated as to segment and corporate use.
(b) For the periods presented, the corporate identifiable assets are principally comprised of cash, short-term and long-term
16,107
42,471
15,083
43,393
23,584
23,717
3,671
3,702
$
$
$
$
$
$
16,368
16,275
3,538
36,181
deferred income tax assets, cash surrender value of life insurance policies and fixed assets.
(c) Depreciation and amortization amounts exclude amortization of debt issuance costs.
The following table summarizes total sales of the Company, which are principally derived from the sale of products:
For the year ended December 31,
2017
2016
2015
in thousands
Bearings and Power Transmission (a)......................................................
Automation, Control and Energy............................................................
Fluid Power.............................................................................................
Military and Defense, other than fuzes...................................................
Missile and Bomb Fuzes.........................................................................
Commercial Aerospace and Other ..........................................................
Total sales (b) ...........................................................................................
1,775,125
(a) Aerospace bearings are not included in this caption, as they are reported in either the "Military and Defense" or "Commercial
1,805,909
1,808,376
354,771
548,736
228,257
337,428
220,158
218,705
201,760
338,544
536,143
242,112
205,812
326,117
594,511
234,719
332,055
164,187
184,640
120,755
$
$
$
$
$
$
Aerospace and Other" categories.
(b) Service revenue was not material for the years ended December 31, 2017, 2016 and 2015.
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 2017, 2016 and 2015
18. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Sales are attributed to geographic regions based on the location to which the product is shipped. Geographic distribution of
sales recorded is as follows:
For the year ended December 31,
2016
2015
2017
In thousands
North America ..............................................................................................
Europe ..........................................................................................................
Middle East ..................................................................................................
Asia...............................................................................................................
Oceania.........................................................................................................
Other.............................................................................................................
Total..............................................................................................................
$
$
1,505,768
169,353
81,343
35,521
10,868
3,056
1,805,909
Geographic distribution of long-lived assets is as follows:
In thousands
United States ............................................................................................................................
Germany ...................................................................................................................................
United Kingdom.......................................................................................................................
Czech Republic ........................................................................................................................
Mexico......................................................................................................................................
Total..........................................................................................................................................
$
$
$
$
1,514,595
168,456
61,409
46,805
13,385
3,726
1,808,376
$
$
1,518,416
112,057
65,740
33,020
37,959
7,933
1,775,125
At December 31,
2017
2016
456,023
169,782
47,486
5,448
1,241
679,980
$
$
465,906
151,336
44,702
4,766
1,650
668,360
For the purpose of this disclosure the Company excluded deferred tax assets of $27.6 million and $59.4 million as of
December 31, 2017 and 2016, respectively.
19. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the issuance date of these financial statements. No material subsequent
events were identified that require disclosure.
112
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9.
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company has carried out an evaluation, under the supervision and with the participation of our management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that, as of December 31, 2017, the Company's disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2017.
In making its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31,
2017, management utilized the criteria set forth by the Committee of Sponsoring Organizations ("COSO") of the Treadway
Commission in Internal Control—Integrated Framework (2013). Management concluded that based on its assessment the
Company’s internal control over financial reporting was effective as of December 31, 2017. The effectiveness of internal
control over financial reporting as of December 31, 2017, has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, changes in the Company’s internal controls over financial reporting during 2017.
During the fourth quarter ended December 31, 2017, management made no changes to internal control over financial reporting
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
The Company’s evaluation described in this Item was undertaken acknowledging that there are inherent limitations to the
effectiveness of any system of controls, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective controls can only provide reasonable assurance of achieving their control
objectives.
ITEM 9B.
OTHER INFORMATION
None.
113
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Other than the list of executive officers of the Company set forth in Item 1, Executive Officers of the Registrant, all information
under this caption may be found in the Company’s proxy statement to be delivered to stockholders in connection with the
Annual Meeting of Shareholders, which is scheduled for April 18, 2018, (the “Proxy Statement”) in the following sections:
“Class I Director Nominees for Election at the 2018 Annual Meeting,” “Information about Nominees and Continuing
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Director Nominees,” "Code of Business Conduct
and Other Governance Documents Available on the Company's Website" and “Audit Committee.” Those portions of the Proxy
Statement are incorporated by reference into this Item 10.
ITEM 11.
EXECUTIVE COMPENSATION
Information about the compensation of Kaman’s named executive officers appears under the captions "Compensation
Discussion and Analysis," "Summary Compensation Table," "Post-Termination Payments and Benefits" and "2017 Pay Ratio
Disclosure" in the Proxy Statement. Information about the compensation of Kaman’s directors appears under "Non-Employee
Director Compensation" in the Proxy Statement. Information required pursuant to Item 407(d) and (e) of Regulation S-K
appears under the captions "Compensation Committee Interlocks and Insider Participation" and "Personnel & Compensation
Committee Report." Those portions of the Proxy Statement are incorporated by reference into this Item 11.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information about security ownership of certain beneficial owners and management appears under "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement. That portion of the Proxy Statement is incorporated by
reference into this Item 12.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2017, concerning Common Stock issuable under the Company’s
equity compensation plans.
(a)
Number of
securities to be issued
upon exercise of
outstanding
options, warrants and
rights
(b)
Weighted-
average exercise price
of outstanding
options, warrants
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
266,990
658,395
—
—
925,385
$
$
30.53
44.45
—
—
40.43
—
525,310
171,191
—
696,501
Plan Category
Equity compensation plans approved by
security holders:
2003 Stock Incentive Plan ..........................
2013 Management Incentive Plan ..............
Employees Stock Purchase Plan.................
Equity compensation plans not approved by
security holders ..................................................
Total ...................................................................
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information about certain relationships and related transactions appears under “Related Party Transactions” and “Board and
Committee Independence Requirements” in the Proxy Statement. Those portions of the Proxy Statement are incorporated by
reference into this Item 13.
114
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding audit fees and all other fees, in addition to the Audit Committee’s pre-approval policies and procedures
appears under “Principal Accounting Fees and Services” and "Audit Committee Preapproval Policy" in the Proxy Statement.
Those portions of the Proxy Statement are incorporated by reference into this Item 14.
115
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
PART IV
(a)(1) FINANCIAL STATEMENTS.
See Item 8 of this Form 10-K setting forth our Consolidated Financial Statements.
Page Number in
Form 10-K
61
(a)(2) FINANCIAL STATEMENT SCHEDULE.
KAMAN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(Dollars in Thousands)
DESCRIPTION
Additions
Balance
Beginning of
Period
Charged to
Costs and
Expenses
Others (A)
Deductions
(B)
Balance End
of
Period
2017
Allowance for doubtful accounts........................
2016
Allowance for doubtful accounts........................
2015
Allowance for doubtful accounts........................
$
$
$
4,123
2,989
3,208
$
$
$
1,164
2,635
1,694
$
$
$
— $
1,153
19
96
$
$
1,520
2,009
$
$
$
4,134
4,123
2,989
(A) Additions to allowance for doubtful accounts attributable to acquisitions.
(B) Recoveries and write-off of bad debts.
DESCRIPTION
2017
Valuation allowance on deferred tax assets ............................
2016
Valuation allowance on deferred tax assets ............................
2015
Valuation allowance on deferred tax assets ............................
$
$
$
Additions (Reductions)
Balance
Beginning of
Period
Current Year
Provision
(Benefit)
Others
Balance End
of Period
4,143
11,122
4,694
$
$
$
830
269
281
$
$
$
325
$
5,298
(7,248) $
4,143
6,147
$
11,122
(a)(3) EXHIBITS.
Page Number in
Form 10-K
An index to the exhibits filed or incorporated by reference immediately precedes such exhibits.
118
ITEM 16.
FORM 10-K SUMMARY
None.
116
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Bloomfield, State of Connecticut,
on this 27th day of February 2018.
SIGNATURES
KAMAN CORPORATION
(Registrant)
By:
/s/ Neal J. Keating
Neal J. Keating
Chairman, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title:
Date:
/s/ Neal J. Keating
Neal J. Keating
/s/ Robert D. Starr
Robert D. Starr
/s/ John J. Tedone
John J. Tedone
/s/ Neal J. Keating
Neal J. Keating
Attorney-in-Fact for:
Brian E. Barents
E. Reeves Callaway III
Karen M. Garrison
A. William Higgins
Scott E. Kuechle
George E. Minnich
Jennifer M. Pollino
Thomas W. Rabaut
Richard J. Swift
Chairman, President,
February 27, 2018
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President
February 27, 2018
and Chief Financial Officer
(Principal Financial Officer)
Vice President – Finance and
February 27, 2018
Chief Accounting Officer
(Principal Accounting Officer)
February 27, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
117
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9
KAMAN CORPORATION
INDEX TO EXHIBITS
Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated November
4, 2005, File No. 333-66179).
Previously
Filed
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K dated June 9, 2017, File No.
001-35419).
Indenture, dated as of May 12, 2017, by and between Kaman Corporation and U.S.
Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Previously
Filed
Kaman Corporation 2013 Management Incentive Plan (incorporated by reference to
Annex A to the Company's Definitive Proxy Statement on Schedule 14A filed with the
Securities and Exchange Commission on March 1, 2013, File No. 001-35419).*
Previously
Filed
First Amendment to the Kaman Corporation 2013 Management Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-
K dated February 23, 2015, File No. 001-35419).*
Previously
Filed
Form of Nonqualified Stock Option Agreement under the Kaman Corporation 2013
Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated February 24, 2014, File No.
001-35419).*
Form of Restricted Share Agreement under the Kaman Corporation 2013 Management
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated February 24, 2014, File No. 001-35419).*
Form of Restricted Stock Unit Agreement under the Kaman Corporation 2013
Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated June 6, 2014, File No 001-35419).*
Form of Long-Term Performance Award Agreement (Payable in Cash) under the Kaman
Corporation 2013 Management Incentive Plan (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K dated February 24, 2014, File No.
001-35419).*
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Form of Long-Term Performance Award Agreement (Payable in Cash) granted under the
Kaman Corporation 2013 Management Incentive Plan, for awards granted on or after
February 17, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 2017, File No. 001-35419).*
Previously
Filed
Form of Long-Term Performance Award Agreement (Payable in Shares) granted under
the Kaman Corporation 2013 Management Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K dated February 24, 2014,
File No. 001-35419).*
Previously
Filed
Form of Award Agreement for Non-Employee Directors under the Kaman Corporation
2013 Management Incentive Plan (incorporated by reference to Exhibit 10.6 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013,
File No. 001-35419).*
Previously
Filed
118
Exhibit 10.10
Exhibit 10.11
Exhibit 10.12
Exhibit 10.13
Exhibit 10.14
Exhibit 10.15
Exhibit 10.16
Exhibit 10.17
Exhibit 10.18
Kaman Corporation 2003 Stock Incentive Plan (incorporated by reference to Exhibit
10(a)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 2, 2009, File No. 000-01093), as amended by amendments thereto filed with
the SEC on April 7, 2010 (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated April 7, 2010, File No. 000-01093) and November 1,
2010 (incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended October 1, 2010, File No. 000-01093), and
February 22, 2012 (incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K, dated February 22, 2012, File No. 000-01093).*
Form of Incentive Stock Option Agreement under the Kaman Corporation 2003 Stock
Incentive Plan (incorporated by reference to Exhibit 10h(i) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, File No.
000-01093).*
Form of Non-Statutory Stock Option Agreement under the Kaman Corporation 2003
Stock Incentive Plan (incorporated by reference to Exhibit 10h(ii) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No.
000-01093).*
Form of Stock Appreciation Rights Agreement under the Kaman Corporation 2003
Stock Incentive Plan (incorporated by reference to Exhibit 10h(iii) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No.
000-01093).*
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Form of Restricted Stock Agreement under the Kaman Corporation 2003 Stock
Incentive Plan (incorporated by reference to Exhibit 10h(iv) to the Company's Form 10-
Q for the fiscal quarter ended June 29, 2007, File No. 000-01093).*
Previously
Filed
Form of Long Term Performance Award Agreement under the Kaman Corporation 2003
Stock Incentive Plan (incorporated by reference to Exhibit 10h(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2011, File No.
001-35419).*
Previously
Filed
Form of Restricted Stock Unit Agreement under the Kaman Corporation 2003 Stock
Incentive Plan (incorporated by reference to Exhibit 10h(vi) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, File No.
000-10093).*
Kaman Corporation Employees Stock Purchase Plan (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 1, 2010, File No. 000-01093), as amended by the First Amendment
thereto filed with the SEC on February 27, 2012 (incorporated by reference to Exhibit
10b to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2011, File No. 001-35419), the Second Amendment thereto filed with the SEC on
February 25, 2013 (incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2012, File No. 001-35419)
and the Third Amendment thereto filed with the SEC on February 27, 2014 by reference
to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2013, File No. 001-35419).*
Previously
Filed
Previously
Filed
Kaman Corporation Supplemental Employees' Retirement Plan (incorporated by
reference to Exhibit 10c to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, File No. 333-66179), as amended by an amendment
thereto filed with the SEC on March 5, 2004 (incorporated by reference to Exhibit 10c
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003, File No. 333-66179), and an amendment thereto filed with the SEC on February
26, 2007 (incorporated by reference to Exhibit 10.10 to the Company's Current Report
on Form 8-K, dated February 26, 2007, File No. 000-01093).*
Previously
Filed
119
Exhibit 10.19
Exhibit 10.20
Exhibit 10.21
Exhibit 10.22
Exhibit 10.23
Exhibit 10.24
Post-2004 Supplemental Employees' Retirement Plan (incorporated by reference to
Exhibit 10.11 to the Company's Current Report on Form 8-K, dated February 26, 2007,
File No. 000-01093), as amended by the First Amendment thereto filed with the SEC on
February 28, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, dated February 28, 2008, File No. 000-01093) and the Second
Amendment thereto filed with the SEC on February 25, 2010 (incorporated by reference
to Exhibit 10(c)(iii) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, File No. 000-01093).*
Kaman Corporation Amended and Restated Deferred Compensation Plan (incorporated
by reference to Exhibit 10d to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, File No. 333-66179), as amended by an
amendment thereto filed with the SEC on March 5, 2004 (incorporated by reference to
Exhibit 10d to the Company's Annual report on Form 10-K for the fiscal year ended
December 31, 2003 File No. 333-66179), and an amendment thereto filed with the SEC
on August 3, 2004 (incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, File No.
333-66179).*
Kaman Corporation Post-2004 Deferred Compensation Plan (incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated February 28, 2008,
File No. 000-01093), as amended by the First Amendment thereto filed with the SEC on
February 27, 2012 (incorporated by reference to Exhibit 10d(ii) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2011, File No.
001-35419), the Second Amendment thereto (incorporated by reference to Exhibit 10.20
to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2013, File No. 001-35419), the Third Amendment thereto (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 21, 2014,
File No. 001-35419) and the Fourth Amendment thereto (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 13, 2016, File
No. 001-35419). *
Amended and Restated Executive Employment Agreement between Kaman Corporation
and Neal J. Keating, originally dated as of August 7, 2007 and amended and restated as
of November 11, 2008 (incorporated by reference to Exhibit 10g(xviii) to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
File No. 000-01093), as amended by Amendment No. 1 thereto dated January 1, 2010
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-
K, dated February 23, 2010, File No. 000-01093), Amendment No. 2 thereto dated
September 17, 2010 (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, dated September 20, 2010, File No. 000-01093), and
Amendment No. 3 thereto dated November 18, 2014 (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K, dated November 21, 2014,
File No. 000-01093).*
Executive Employment Agreement between Kaman Corporation and Robert D. Starr,
dated as of November 18, 2014 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 21, 2014, File No.
001-35419).*
Amended and Restated Executive Employment Agreement between Kaman Aerospace
Group, Inc. and Gregory L. Steiner, originally dated as of July 7, 2008 and amended and
restated as of November 11, 2008 (incorporated by reference to Exhibit 10g(xx) to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2009,
File No. 000-01093), as amended by Amendment No. 1 thereto, dated June 7, 2011
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-
K dated June 7, 2011, File No. 000-01093).*
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Exhibit 10.25
Transition and Retirement Agreement between Kaman Corporation and Gregory L.
Steiner dated September 21, 2017 (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated September 21, 2017, File No.
001-35419).
Previously
Filed
120
Exhibit 10.26
Exhibit 10.27
Exhibit 10.28
Exhibit 10.29
Exhibit 10.30
Exhibit 10.31
Exhibit 10.32
Exhibit 10.33
Exhibit 10.34
Exhibit 10.35
Exhibit 10.36
Exhibit 10.37
Exhibit 10.38
Executive Employment Agreement between Kaman Industrial Technologies Corporation
and Steven J. Smidler dated as of September 1, 2010 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated September 10, 2010,
File No. 000-01093.)*
Previously
Filed
Offer Letter between Kaman Corporation and Richard R. Barnhart effective as of
September 24, 2017 (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated September 21, 2017, File No. 001-35419).
Form of Amended and Restated Change in Control Agreement by and between the
Company and each of its executive officers (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated April 22, 2016, File No.
001-35419).*
Base Convertible Bond Hedging Transaction Confirmation dated November 15, 2010,
by and between Kaman Corporation and The Royal Bank of Scotland plc, acting
through RBS Securities Inc., as its agent (incorporated by reference to Exhibit 10.2(a) to
the Company's Current Report on Form 8-K dated November 19, 2010, File No.
000-01093).
Base Convertible Bond Hedging Transaction Confirmation dated November 15, 2010,
by and between Kaman Corporation and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 10.2(b) to the Company's Current Report on Form 8-K dated
November 19, 2010, File No. 000-01093).
Base Convertible Bond Hedging Transaction Confirmation dated November 15, 2010,
by and between Kaman Corporation and Bank of America, N.A. (incorporated by
reference to Exhibit 10.2(c) to the Company's Current Report on Form 8-K dated
November 19, 2010, File No. 000-01093).
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Confirmation of Base Warrants dated November 15, 2010, by and between Kaman
Corporation and The Royal Bank of Scotland plc, acting through RBS Securities Inc., as
its agent (incorporated by reference to Exhibit 10.3(a) to the Company's Current Report
on Form 8-K dated November 19, 2010, File No. 000-01093).
Previously
Filed
Confirmation of Base Warrants dated November 15, 2010, by and between Kaman
Corporation and Goldman, Sachs & Co. (incorporated by reference to Exhibit 10.3(b) to
the Company's Current Report on Form 8-K dated November 19, 2010, File No.
000-01093).
Previously
Filed
Confirmation of Base Warrants dated November 15, 2010, by and between Kaman
Corporation and Bank of America, N.A., filed as (incorporated by reference to Exhibit
10.3(c) to the Company's Current Report on Form 8-K dated November 19, 2010, File
No. 000-01093).
Call Option Termination Agreement, dated May 8, 2017, between Goldman Sachs &
Co. LLC and Kaman Corporation (incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Call Option Termination Agreement, dated May 8, 2017, between Bank of America,
N.A. and Kaman Corporation (incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Previously
Filed
Previously
Filed
Call Option Termination Agreement, dated May 8, 2017, between The Royal Bank of
Scotland plc and Kaman Corporation (incorporated by reference to Exhibit 10.8 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Warrant Termination Agreement, dated May 8, 2017, between Goldman Sachs & Co.
LLC and Kaman Corporation (incorporated by reference to Exhibit 10.9 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
121
Exhibit 10.39
Exhibit 10.40
Exhibit 10.41
Exhibit 10.42
Exhibit 10.43
Exhibit 10.44
Exhibit 10.45
Exhibit 10.46
Exhibit 10.47
Exhibit 10.48
Warrant Termination Agreement, dated May 8, 2017, between Bank of America, N.A.
and Kaman Corporation (incorporated by reference to Exhibit 10.10 to the Company's
Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Warrant Termination Agreement, dated May 8, 2017, between The Royal Bank of
Scotland plc and Kaman Corporation (incorporated by reference to Exhibit 10.11 to the
Company's Current Report on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Purchase Agreement, dated May 8, 2017, among Kaman Corporation and J.P. Morgan
Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
representatives of the several Initial Purchasers (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K dated May 12, 2017, File No.
001-35419).
Previously
Filed
Letter Agreement, dated May 8, 2017, between Bank of America, N.A. and Kaman
Corporation, regarding the Capped Call Transaction (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated May 12, 2017, File
No. 001-35419).
Previously
Filed
Letter Agreement, dated May 8, 2017, between JPMorgan Chase Bank, National
Association, London Branch and Kaman Corporation, regarding the Capped Call
Transaction (incorporated by reference to Exhibit 10.4 to the Company's Current Report
on Form 8-K dated May 12, 2017, File No. 001-35419).
Previously
Filed
Letter Agreement, dated May 8, 2017 between UBS AG, London Branch and Kaman
Corporation, regarding the Capped Call Transaction (incorporated by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K dated May 12, 2017, File
No. 001-35419).
Previously
Filed
Letter Agreement, dated May 22, 2017, between Bank of America, N.A. and Kaman
Corporation, regarding the Additional Capped Call Transaction (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 25,
2017, File No. 001-35419).
Previously
Filed
Letter Agreement, dated May 22, 2017, between JPMorgan Chase Bank, National
Association, London Branch and Kaman Corporation, regarding the Additional Capped
Call Transaction (incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated May 25, 2017, File No. 001-35419).
Previously
Filed
Letter Agreement, dated May 22, 2017, between UBS AG, London Branch and Kaman
Corporation, regarding the Additional Capped Call Transaction (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated May 25,
2017, File No. 001-35419).
Previously
Filed
Security Agreement dated as of November 20, 2012 among Kaman Corporation,
JPMorgan Chase Bank, N.A., as Administrative Agent and the domestic subsidiary
guarantors signatory thereto (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated November 21, 2012, File No.
001-35419.)
Previously
Filed
122
Exhibit 10.49
Exhibit 10.50
Exhibit 10.51
Exhibit 10.52
Amendment and Restatement Agreement, dated as of May 6, 2015, by and among
Kaman Corporation, RWG Germany GmbH and Kaman Composites-UK Holdings
Limited, as Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent, and
Bank of America, N.A. and Citizens Bank, N.A. as Co-Syndication Agents, including,
attached as Exhibit A thereto, the Credit Agreement dated as of November 20, 2012, as
amended and restated as of May 6, 2015, among Kaman Corporation, RWG Germany
GmbH and Kaman Composites-UK Holdings Limited, as Borrowers, JPMorgan Chase
Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citizens Bank, N.A.
as Co-Syndication Agents, Suntrust Bank, Keybank National Association, TD Bank,
N.A., Branch Banking & Trust Company and Fifth Third Bank, as Co-Documentation
Agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Citizens Bank, N.A., as Joint Bookrunners and Joint Lead Arrangers,
and various Lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated May 7, 2015, File No. 001-35419).
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of May 6,
2015, by and among Kaman Corporation, RWG Germany GmbH, Kaman Composites -
UK Holdings Limited and the other subsidiary borrowers from time to time party
thereto, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and SunTrust Bank, KeyBank National Association, TD Bank,
N.A., Branch Banking and Trust Company and Fifth Third Bank, as Co-Documentation
agents (incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated May 12, 2017, File No.001-35419).
Amendment No. 2 to Amended and Restated Credit Agreement, dated as of May 6,
2015, by and among Kaman Corporation, RWG Germany GmbH, Kaman Composites -
UK Holdings Limited, Kaman Lux Holding, S.à r.l and the other subsidiary borrowers
from time to time party thereto, the Lenders from time to time party thereto, JPMorgan
Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citizens Bank,
N.A., as Co-Syndication Agents, and SunTrust Bank, KeyBank National Association,
TD Bank, N.A., Branch Banking and Trust Company and Fifth Third Bank, as Co-
Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated December 15, 2017, File No. 001-35419).
Amendment No. 3 to Amended and Restated Credit Agreement, dated as of May 6,
2015, by and among Kaman Corporation, RWG Germany GmbH, Kaman Composites -
UK Holdings Limited, Kaman Lux Holding, S.à r.l and the other subsidiary borrowers
from time to time party thereto, the Lenders from time to time party thereto, JPMorgan
Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citizens Bank,
N.A., as Co-Syndication Agents, and SunTrust Bank, KeyBank National Association,
TD Bank, N.A., Branch Banking and Trust Company and Fifth Third Bank, as Co-
Documentation Agents (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated February 16, 2018, File No. 001-35419).
Exhibit 21
List of Subsidiaries
Previously
Filed
Previously
Filed
Previously
Filed
Previously
Filed
Filed
Herewith
Exhibit 23
Consent of PricewaterhouseCoopers LLP, the Company’s current independent registered
public accounting firm.
Filed
Herewith
Exhibit 24
Power of attorney under which this report was signed on behalf of certain directors
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934.
Filed
Herewith
Filed
Herewith
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934.
Filed
Herewith
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed
Herewith
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed
Herewith
123
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Management contract or compensatory plan
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
Filed
Herewith
124
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LEADERSHIP
KAMAN CORPORATION
EXECUTIVE OFFICERS
DIRECTORS
DIRECTORS EMERITUS
Neal J. Keating
Chairman, President and
Chief Executive Officer
Robert D. Starr
Executive Vice President and
Chief Financial Officer
Richard R. Barnhart
Executive Vice President –
Kaman Corporation and
President Kaman Aerospace Group
Philip A. Goodrich
Senior Vice President –
Corporate Development
Alphonse J. Lariviere, Jr.
Executive Vice President
Kaman Corporation and
President Kaman Distribution Group
Shawn G. Lisle
Senior Vice President, General
Counsel and Assistant Secretary
John J. Tedone
Vice President – Finance
Chief Accounting Officer
Gregory T. Troy
Senior Vice President –
Human Resources and
Chief Human Resources Officer
Paul M. Villani
Senior Vice President and
Chief Information Officer
Neal J. Keating
Chairman, President and
Chief Executive Officer
Kaman Corporation
Brian E. Barents 3,4
Executive Chairman and Chief Executive
Officer, Aerion Corporation
E. Reeves Callaway III 3,4
Founder and Chief Executive Officer
The Callaway Companies
Frank C. Carlucci
John A. DiBiaggio
STANDING COMMITTEE
ASSIGNMENTS
1 Corporate Governance
2 Audit
3 Personnel and Compensation
4 Finance
* Denotes Chairmanship
Karen M. Garrison 1*,4
Lead Independent Director;
President, Retired
Pitney Bowes Business Services
A. William Higgins 1,4*
Chairman, President and
Chief Executive Officer, Retired
CIRCOR International, Inc.
Scott E. Kuechle 1,2*
Executive Vice President and
Chief Financial Officer, Retired
Goodrich Corporation
George E. Minnich 2,3
Senior Vice President and
Chief Financial Officer, Retired
ITT Corporation
Jennifer M. Pollino 2,3
Executive Coach and Consultant
JMPollino LLC and
Executive Vice President – Human
Resources and Communications,
Retired Goodrich Corporation
Thomas W. Rabaut 2,4
Operating Executive,
The Carlyle Group
Richard J. Swift 1, 3*
Chairman, President and
Chief Executive Officer, Retired
Foster Wheeler, Ltd. and former
Chairman, Financial Accounting
Standards Advisory Council
(cid:37)(cid:79)(cid:82)(cid:82)(cid:80)(cid:564)(cid:72)(cid:79)(cid:71)(cid:15)(cid:3)(cid:38)(cid:82)(cid:81)(cid:81)(cid:72)(cid:70)(cid:87)(cid:76)(cid:70)(cid:88)(cid:87)(cid:3)
(cid:11)(cid:27)(cid:25)(cid:19)(cid:12)(cid:3)(cid:21)(cid:23)(cid:22)(cid:514)(cid:26)(cid:20)(cid:19)(cid:19)(cid:3)
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