Kaman Earnings 2018-12-31

KAMN 10K Annual Report

Balance Sheet	Income Statement	Cash Flow

10-K 1 kamn-12312018x10xk.htm 10-K Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2018

Commission File No. 001-35419

KAMAN CORPORATION

(Exact name of registrant as specified in its charter)



Connecticut		06-0613548
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		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		Name of each exchange on which registered
Common Stock ($1 par value)		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 x 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 x

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 x No ¨

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x 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 x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x 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 x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value on June 29, 2018, (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 $1,911,530,392.

At January 25, 2019, there were 27,871,010 shares of Common Stock outstanding.

Documents Incorporated Herein By Reference

Portions of our definitive proxy statement for our 2019 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	3
Item 1A	Risk Factors	10
Item 1B	Unresolved Staff Comments	23
Item 2	Properties	24
Item 3	Legal Proceedings	25
Item 4	Mine Safety Disclosures	26

Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6	Selected Financial Data	29
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	62
Item 8	Financial Statements and Supplementary Data	63
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	127
Item 9A	Controls and Procedures	127
Item 9B	Other Information	127

Part III
Item 10	Directors, Executive Officers and Corporate Governance	128
Item 11	Executive Compensation	128
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	128
Item 13	Certain Relationships and Related Transactions, and Director Independence	128
Item 14	Principal Accounting Fees and Services	129

Part IV
Item 15	Exhibits, Financial Statement Schedule	130
Item 16	Form 10-K Summary	130

PART I

ITEM 1.
BUSINESS

GENERAL

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 2018 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 approximately 6 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 55,000 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; and manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters.

Principal customers include the U.S. military, foreign allied militaries, 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.

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 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 12, 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,
	2018		2017		2016
Sales
Distribution	60.8	%	59.9	%	61.2	%
Aerospace	39.2	%	40.1	%	38.8	%
Total	100.0	%	100.0	%	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, steel, 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. From time to time, we have experienced shortages in raw materials which have impacted our near term results; however, 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 28 U.S. and foreign trademarks.

BACKLOG

The majority of our backlog is attributable to the Aerospace segment. We anticipate that approximately 59.1% of our Aerospace backlog at the end of 2018 will be performed in 2019. Approximately 37.4% of the Aerospace segment's backlog at the end of 2018 is related to U.S. Government ("USG") contracts or subcontracts.

Total backlog at December 31, 2018, 2017 and 2016, and the portion of the backlog we expect to complete in 2019, is as follows:



	Total Backlog at December 31, 2018		2018 Backlog to be completed in 2019		Total Backlog at December 31, 2017		Total Backlog at December 31, 2016
In thousands
Aerospace	$	851,814	$	503,553	$	616,090	$	581,619
Distribution	134,332		134,332		126,025		108,681
Total	$	986,146	$	637,885	$	742,115	$	690,300

Backlog related to uncompleted contracts for which we have recorded a provision for estimated losses was $0.4 million as of December 31, 2018. As of December 31, 2018, backlog related to firm but not yet funded orders was not material. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 1, Summary of Significant Accounting Policies, of 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.

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 2018, approximately 97.7% 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 17, 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.

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, 2018.

COMPETITION

The Distribution segment competes for business with several other national distributors of bearings, power transmission, motion control and 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 corporate 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 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, the USG's perceptions of those foreign customers and the ability to obtain necessary export approvals, licenses or authorizations from the U.S. Government.

EMPLOYEES

As of December 31, 2018, we employed approximately 5,100 individuals.

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.

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.

EXECUTIVE OFFICERS OF THE REGISTRANT

The Company’s executive officers as of the date of this report are as follows:



Name	Age	Position	Prior Experience
Neal J. Keating	63	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.
Richard R. Barnhart	58	President of Kaman Aerospace Group, Inc. and Executive Vice President of Kaman Corporation	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 tenure of divisional 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.
Alphonse J. Lariviere Jr.	59	President of Kaman Industrial Technologies and Executive Vice President of Kaman Corporation	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.
Robert D. Starr	51	Executive Vice President and Chief Financial Officer	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.



Name	Age	Position	Prior Experience
Phillip A. Goodrich	62	Senior Vice President - Corporate Development	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.
Shawn G. Lisle	52	Senior Vice President and General Counsel	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.
Gregory T. Troy	63	Senior Vice President – Human Resources and Chief Human Resources Officer	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.
John J. Tedone	54	Vice President, Finance and Chief Accounting Officer	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.
Paul M. Villani	53	Senior Vice President and Chief Information Officer	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.

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;


•	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; and


•	The issuance and timely receipt of necessary export approvals, licenses and authorizations from the U.S. Government.

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 60.8% of our 2018 consolidated net sales and approximately 35.3% of our 2018 operating income before corporate expenses, loss on sale of business and net gain (loss) 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.

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 39.2% of our 2018 consolidated net sales and approximately 64.7% of our 2018 operating income before corporate expenses, loss on sale of business and net gain (loss) 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 and Combat Rescue Helicopter programs, the Joint Programmable Fuze (“JPF”) program and the AH-1Z 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.

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.

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 numerous laws and regulations relating to the export of our products and technologies, including, among others, the FMU-152A/B JPF, before we are permitted to sell those products and technologies outside of the United States. Compliance often entails the submission and timely receipt of necessary export approvals, licenses or authorizations from the U.S. Government and, depending on the size and nature of the proposed transaction, may even require the submission of formal notification to the United States Congress, which then has the ability to pass a joint resolution of disapproval blocking or amending the sale. In recent months, the U.S. export licensing environment for munitions, such as the JPF, has been adversely affected by a number of factors, including, but not limited to, the changing geopolitical environment and heightened tensions with other countries (which shift and evolve over time). Accordingly, we can give no assurance that we will be successful in obtaining, in a timely manner or at all, the approvals, licenses or authorizations we need to sell our products and technologies outside the United States, which may result in the cancellation of orders, the incurrence of significant penalties payable by the Company and the return of advance payments to our customers if we do not make deliveries and fulfill our contractual commitments. 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.

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.

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.

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.

We could be negatively impacted by the loss of key suppliers, the consolidation of 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. Suppliers have consolidated and formed alliances to broaden their product and integrated system offerings, and achieve critical mass. Supplier consolidation could cause us to compete against certain competitors with greater financial resources, market penetration and purchasing power. 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, monitor our inventory levels and obtain second sources when applicable 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 February 2016, the FASB issued Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), which supersedes nearly all existing generally accepted accounting principles ("GAAP") lease guidance. The updated standard is effective for us in the first quarter of 2019 and we have elected the transition method allowing entities to apply the new standard at the adoption date recognizing a cumulative-effect adjustment in the period of adoption. We have completed our preliminary evaluation of the likely impact of ASU 2016-02 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. Additionally, during the first quarter of 2018, we implemented ASU 2014-09, Revenue from Contracts with Customers, which superseded nearly all GAAP revenue recognition guidance. For additional information on the impact of this standard, please refer to Note 2, Accounting Changes, 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.

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 2013 through 2017. 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 was favorable to earnings in 2018, the rate change also required a revaluation of our existing net U.S. deferred tax assets as of December 31, 2017. Other provisions of Tax Reform also impacted the Company, but given the rate reduction, the overall impact of the Tax Reform was beneficial to the Company in 2018. For additional information on Tax Reform, please refer to Note 14, Income Taxes, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Recently enacted tariffs on certain imports to the United States and other potential changes to U.S. tariff and import/export regulations may have a negative effect on global economic conditions and our business, financial results and financial condition.

In 2018, new tariffs were implemented on imports of steel and aluminum into the United States. As the implementation of tariffs is ongoing, more tariffs may be added in the future. While any steel and aluminum we use in our products is produced primarily in North America, the new tariffs may provide domestic steel and aluminum producers the flexibility to increase their prices, at least to a level where their products would still be priced below foreign competitors once the tariffs are taken into account. These tariffs could have an adverse impact on our financial results, which include, but are not limited to, the following: products we sell include steel and aluminum and if we are unable to pass such price increases through to our customers, it would likely increase our cost of sales and, as a result, decrease our gross margins, operating income and net income. In addition, in response to the new tariffs, a number of other countries are threatening to impose tariffs on U.S. imports, which, if implemented, could increase the price of our products in these countries and may result in our customers looking to alternative sources for our products. This would result in decreased sales, which could have a negative impact on our net income and financial condition. Any of these factors could depress economic activity and restrict our access to suppliers or customers and have a material adverse effect on our business, financial condition and results of operations.

The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results.

As of December 31, 2018, we had approximately $17.4 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, 2018. 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.

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 over time 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 this 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;


•	Product warranty issues;


•	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.

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.

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 thirty-six 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 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 corporate 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 corporate 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 corporate 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.

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, manipulation of 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, including trade secrets, 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. To address the risks to our information technology systems and data, we manage an information security program, maintain strong incident report capabilities and perform daily off-site backups. Additionally, we have put in place business continuity plans and security precautions for our critical systems, including a back-up data center. Updates on cyber security are provided to the Board of Directors at least annually.

In the event 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 information security program, incident report capabilities, 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.

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.

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. Changes in our estimates and assumptions, including economic and market projections in our Distribution Segment and commercial and military program awards in our Aerospace Segment, could adversely impact projected cash flows and the fair value of reporting units. 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, employment, 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 became effective 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 17, Commitments and Contingencies, and Note 11, Environmental Costs, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

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.

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 the UK is currently negotiating the terms of its exit from the EU, which is scheduled for March 29, 2019. In November 2018, the UK and the EU agreed upon a draft Withdrawal Agreement that sets out the terms of the UK's departure, including commitments on citizen rights after its withdrawal, a financial settlement from the UK and a transition period from March 29, 2019 through December 31, 2020 to allow time for a future deal to be agreed upon. On January 15, 2019, the draft Withdrawal Agreement was rejected by the UK parliament, creating significant uncertainty regarding the terms and timing under which the UK will leave the EU. 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;


•	Difficulties in staffing and managing foreign operations;


•	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


•	Cultural and legal differences impacting the conduct of business.

In addition, our contracts with foreign customers may include terms and reflect legal requirements that create additional risks. These include, among others, industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations, known as offset requirements, and provide for significant penalties if we fail to meet such requirements. Our foreign customers may also require us to enter in letters of credit, performance or surety bonds, bank guarantees and/or other financial arrangements to secure our performance obligations. All or any of these factors have the potential to have a material adverse effect 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.

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:


•	Changes in demand for our products;


•	Introduction, enhancement or announcement of products by us or our competitors;


•	Market acceptance of our new products;


•	The growth rates of certain market segments in which we compete;


•	Size, timing and shipment terms of significant orders;


•	Difficulties with our technical programs;


•	Budgeting cycles of customers;


•	Pricing pressures from customers;


•	Customer advances;


•	Longer payment terms required by our 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;


•	Fluctuations in oil and utility costs;


•	Health care reform;


•	Completion or announcement of acquisitions; and


•	General economic conditions in regions in which we conduct business.

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 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 investments in 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) the ability to recover from cyber-based or other security attacks, information technology failures or other disruptions; (xvii) changes in supplier sales or vendor incentive policies; (xviii) the ability of our suppliers to satisfy their performance obligations; (xix) the effects of price increases or decreases; (xx) 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; (xxi) future levels of indebtedness and capital expenditures; (xxii) the continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs for such items; (xxiii) the effects of currency exchange rates and foreign competition on future operations; (xxiv) changes in laws and regulations, taxes, interest rates, inflation rates and general business conditions; (xxv) the effects, if any, of the UK's exit from the EU; (xxvi) future repurchases and/or issuances of common stock; (xxvii) the occurrence of unanticipated restructuring costs or the failure to realize anticipated savings or benefits from past or future expense reduction actions; (xxviii) the ability to recruit and retain skilled employees; and (xxix) 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.

ITEM 2.
PROPERTIES

Our facilities are generally suitable for, and adequate to serve, their intended uses. At December 31, 2018, we occupied major facilities at the following principal locations:



Segment	Location	Property Type ⁽¹⁾
Aerospace	Jacksonville, Florida	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
	Orlando, Florida	Owned - Manufacturing & 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	Owned - Office
	Ontario, California	Leased - Distribution Center & Office
	Latham, 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



	Square Feet
Distribution ⁽²⁾	2,263,438
Aerospace	2,043,938
Corporate ⁽³⁾	103,041
Total	4,410,417


(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.

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, 2018. 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, 2018, 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 17, Commitments and Contingencies, and Note 11, Environmental Costs, 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, 2018, will not have a material adverse effect on our business, financial condition and results of operations or cash flows. Additional information relating to certain of these matters is set forth in Note 17, Commitments and Contingencies, and Note 11, Environmental Costs, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

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.

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 2018.

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 25, 2019, there were 3,089 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.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information about purchases of Common Stock by the Company during the three months ended December 31, 2018:



Period	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan (b)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan (in thousands)
September 29, 2018 – October 26, 2018	26,617	$	63.81	26,000	$	51,278
October 27, 2018 – November 23, 2018	51,265	$	58.75	50,507	$	48,311
November 24, 2018 – December 31, 2018	46,615	$	55.98	46,500	$	45,707
Total	124,497			123,007

(a) During the quarter the Company purchased 1,490 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.

PERFORMANCE GRAPH

Following is a comparison of our total shareholder return for the period 2013 – 2018 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.



	2013	2014	2015	2016	2017	2018
Kaman Corporation	100.00	102.51	106.22	129.47	158.09	152.63
S&P Small Cap 600	100.00	105.76	103.67	131.20	148.56	135.96
Russell 2000	100.00	104.89	100.26	121.63	139.44	124.09

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SELECTED FINANCIAL DATA

(in thousands, except per share amounts, shareholders and employees)



	2018 ^1,6,7		2017 ^2,6,7		2016 ^3,6,7		2015 ^4,6,7		2014 ^5,6,7
OPERATIONS
Net sales from continuing operations	$	1,875,425	$	1,805,909	$	1,808,376	$	1,775,125	$	1,794,962
Operating income from continuing operations	83,064		111,119		102,774		98,416		102,932
Earnings from continuing operations before income taxes	75,237		94,378		89,704		87,989		96,502
Income tax expense	21,068		44,552		30,850		27,551		30,722
Earnings from continuing operations	54,169		49,826		58,854		60,438		65,780
Loss from discontinued operations, net of taxes	—		—		—		—		(2,924		)
Loss on disposal of discontinued operations, net of taxes	—		—		—		—		(4,984		)
Net earnings	$	54,169	$	49,826	$	58,854	$	60,438	$	57,872
FINANCIAL POSITION
Current assets	$	773,105	$	747,869	$	698,553	$	676,035	$	662,256
Current liabilities	298,476		246,299		353,886		236,689		221,724
Working capital	474,629		501,570		344,667		439,346		440,532
Property, plant and equipment, net	184,224		185,452		176,521		175,586		147,825
Total assets	1,460,313		1,455,452		1,426,286		1,439,611		1,199,281
Long-term debt, excluding current portion	284,256		391,651		296,598		434,227		269,308
Shareholders’ equity	633,157		635,656		565,787		543,077		517,665
PER SHARE AMOUNTS
Basic earnings per share from continuing operations	$	1.94	$	1.80	$	2.17	$	2.22	$	2.43
Basic earnings (loss) per share from discontinued operations	—		—		—		—		(0.11		)
Basic earnings (loss) per share from disposal of discontinued operations	—		—		—		—		(0.18		)
Basic earnings per share	$	1.94	$	1.80	$	2.17	$	2.22	$	2.14
Diluted earnings per share from continuing operations	$	1.92	$	1.75	$	2.10	$	2.17	$	2.37
Diluted earnings (loss) per share from discontinued operations	—		—		—		—		(0.11		)
Diluted earnings (loss) per share from disposal of discontinued operations	—		—		—		—		(0.18		)
Diluted earnings per share	$	1.92	$	1.75	$	2.10	$	2.17	$	2.08
Dividends declared	$	0.80	$	0.80	$	0.72	$	0.72	$	0.64
Shareholders’ equity	22.72		22.85		20.87		20.09		19.08
AVERAGE SHARES OUTSTANDING
Basic	27,945		27,611		27,107		27,177		27,053
Diluted	28,223		28,418		28,072		27,868		27,777
GENERAL STATISTICS
Registered shareholders	3,085		3,142		3,261		3,402		3,532
Employees	5,065		5,297		5,265		5,258		4,797

(See Footnotes below)

(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.

Results from 2018 include a $10.0 million write-off of other intangibles associated with the impairment for a certain asset group at our U.K. business, $6.0 million in expense related to restructuring activities at Aerospace, a $5.7 million loss on the sale of our U.K. Tooling business, $3.4 million in costs associated with corporate development activities, $3.0 million in costs incurred for employee-tax related matters at Aerospace, a $1.5 million gain on the sale of land, $1.4 million in costs associated with the termination of certain distributor agreements and separation costs for certain employees not covered by the restructuring activities at Aerospace, a $0.7 million loss on the sale of substantially all the assets and liabilities of our Engineering Services business and $0.6 million in separation costs for certain employees at Distribution.

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.

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.

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.


5.	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.

On January 1, 2018, we adopted new revenue recognition guidance ("ASC 606") using the modified retrospective method. As a result, we applied the new revenue recognition guidance only to contracts that were not completed as of January 1, 2018; therefore, current period results are presented under the new revenue recognition guidance and prior period results are presented in accordance with previous revenue recognition guidance ("ASC 605"). The adoption of this standard resulted in an additional $64.3 million in net sales and $17.0 million in operating income in 2018, which otherwise would not have been recorded in 2018 under previous guidance. See Note 1, Summary of Significant Accounting Policies, and Note 2, Accounting Changes in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

On January 1, 2018, we adopted the new accounting standard that resulted in the net periodic pension cost and net post retirement cost other than service costs to no longer be presented in cost of sales and selling, general and administrative expenses, but instead be presented within non-service pension and post retirement benefit cost. This ASU was 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. See Note 1, Summary of Significant Accounting Policies, and Note 2, Accounting Changes in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

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; and manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters.

Company financial performance


•	Net sales increased 3.8% compared to the prior year driven by an increase in net sales at Distribution and a less significant increase in net sales at Aerospace. Adoption of ASC 606 had a favorable impact of 3.5% on net sales in 2018.


•	Net earnings increased 8.7% compared to the prior year. This increase reflects the benefits realized from the Tax Cut and Jobs Act ("Tax Reform"), partially offset by the $10.0 million other intangible assets impairment charge incurred in the third quarter of 2018.


•	Diluted earnings per share increased to $1.92 in 2018 compared to $1.75 in the prior year.


•	Cash flows provided by operating activities were $162.4 million for 2018, an increase of $82.5 million when compared to the prior year. The increase in cash flows provided by operating activities was largely driven by advance payments received in connection with a Joint Programmable Fuze ("JPF") direct commercial sales ("DCS") contract.


•	Total backlog increased 32.9% to $986.1 million, mostly driven by JPF orders.

Recent events


•	In the fourth quarter of 2018, our Aerospace segment received three additional orders of K-MAX® helicopters from both new and existing customers. 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 medium-lift utility helicopter into 2020 at a minimum.


•	In December 2018, our Aerospace segment sold its U.K. Tooling business to better position the Company for increased profitability. This sale resulted in a loss of $5.7 million in 2018.


•	During 2018, our Aerospace segment received two orders under Option 14 of its JPF contract with the U.S. Air Force ("USAF") with a total value of approximately $121.4 million.


•	In September 2018, our Aerospace segment was awarded a DCS contract for our JPF with an expected total value of

$48.6 million.


•	During 2018, we contributed $30.0 million to the pension plan. The Company had not made annual contributions to the pension plan in excess of $10.0 million since 2010.


•	In September 2018, our Aerospace segment recorded a $10.0 million impairment charge on its customer lists/

relationships of a certain asset group within its U.K. business.


•	In July 2018, our Aerospace segment entered into an agreement with Rainier Heli International Inc., under which

Rainier will offer K-MAX® leasing solutions to customers.


•	In May 2018, the Company donated a refurbished SH-2F Seasprite helicopter to the National Naval Aviation Museum in Pensacola, FL.


•	In April 2018, our Aerospace segment entered into a new contract with Bell Helicopter to manufacture sheet metal

details and subassemblies for the AH-1Z attack helicopter. The expected total value of the contract is approximately

$25.6 million annually with deliveries anticipated in 2019 and 2020.


•	In April 2018, the Company announced its plan to pay a bonus of $1,000 to approximately 2,400 eligible employees as a way of sharing benefits from Tax Reform.


•	In April 2018, the Company celebrated a collaboration agreement with Airbus, who designated the Company as a

strategic supplier.


•	On January 31, 2018, our Aerospace segment announced it had been awarded a 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.


•	On January 16, 2018, our Aerospace segment announced it had received a contract modification from the USAF under Option 13 of its JPF contract with a value of approximately $17.0 million. This modification increased the total value of Option 13 to more than $102.0 million. Delivery of these fuzes began in 2018 and will continue into 2019.

RESULTS OF OPERATIONS

Consolidated Results

Also on January 1, 2018, we adopted new revenue recognition guidance ("ASC 606") using the modified retrospective method. As a result, we applied the new revenue recognition guidance only to contracts that were not completed as of January 1, 2018; therefore, current period results are presented under the new revenue recognition guidance and prior period results are presented in accordance with previous revenue recognition guidance ("ASC 605"). See Note 1, Summary of Significant Accounting Policies, and Note 2, Accounting Changes, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

The method of revenue recognition at the Distribution segment remained substantially the same. Under the new revenue recognition guidance Distribution will generally recognize revenue using the point-in-time method, at the time control of products is transferred to our customers.

In the prior period, the majority of our long-term contracts in the Aerospace segment were accounted for under the percentage-of-completion method using units-of-delivery as a measurement basis, generally recognizing revenue upon delivery to our customer. Revenue recognition under many of these contracts has moved to an over time method under the new revenue recognition guidance, using input costs as the basis for recognizing progress to completion. Under this method, revenue is generally recognized when costs are incurred as work progresses on a program prior to delivery to the customer. The two programs most significantly impacted by the adoption of the new revenue recognition guidance were our JPF program with the U.S. Government ("USG") and our K-MAX® program. Revenue recognition for our JPF program with the USG moved from percentage-of-completion using units-of-delivery to an over time method using input costs as the basis for recognizing progress to completion. Conversely, revenue recognition for our K-MAX® program moved from percentage-of-completion on a cost-to-cost basis to a point-in-time method with revenue recognized at the time control is transferred to our customer.

Net Sales



	2018			2017			2016
In thousands
Distribution	$	1,139,431		$	1,080,965		$	1,106,322
Aerospace	735,994			724,944			702,054
Total	$	1,875,425		$	1,805,909		$	1,808,376
$ change	69,516			(2,467		)	33,251
% change	3.8		%	(0.1		)%	1.9		%

The following table details the components of ASC 606 changes as a percentage of consolidated net sales as compared to the corresponding period in 2017:



	2018

Increase in sales associated with ASC 606	3.5	%
Increase in sales absent the adoption impact of ASC 606	0.3	%
% change in net sales	3.8	%

The following table details the components of the above changes as a percentage of consolidated net sales:



	2018		2017		2016

Organic Sales:
Distribution	3.2	%	(1.4	)%	(4.3	)%
Aerospace	0.6	%	1.3	%	2.3	%
Total Organic Sales	3.8	%	(0.1	)%	(2.0	)%

Acquisition Sales:
Distribution	—	%	—	%	0.3	%
Aerospace	—	%	—	%	3.6	%
Total Acquisition Sales	—	%	—	%	3.9	%

% change in net sales	3.8	%	(0.1	)%	1.9	%

Net sales for 2018 increased when compared to 2017. This was a result of higher sales at our Distribution segment and an increase in net sales of $64.3 million resulting from the adoption of the new revenue recognition guidance, primarily at Aerospace. These increases were partially offset by a decrease in net sales at our Aerospace segment absent the adoption impact of ASC 606. Under the new guidance, revenue recognition will generally be accelerated ahead of deliveries for certain aerospace programs and distribution contracts. Foreign currency exchange rates relative to the U.S. dollar had a favorable impact of $5.0 million on net sales.

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.

See Segment Results of Operations and Financial Condition below for further discussion of segment net sales.

Gross Profit



	2018			2017			2016
In thousands
Gross profit	$	550,037		$	545,591		$	547,521
$ change	4,446			(1,930		)	33,172
% change	0.8		%	(0.4		)%	6.4		%
% of net sales	29.3		%	30.2		%	30.3		%

Gross profit for 2018 remained relatively flat when compared to 2017. This was attributable to higher gross profit of $18.7 million resulting from the adoption of the new revenue recognition guidance, primarily at Aerospace, and higher gross profit at the Distribution segment. These increases were mostly offset by a decrease in gross profit of $24.3 million absent the adoption of the new revenue recognition guidance at our Aerospace segment. This decrease was primarily attributable to lower direct commercial sales of our JPF to foreign militaries, lower sales and associated gross profit on the K-MAX® program, and decreases in gross profit under the AH-1Z program and our composite structures products from foreign operations.

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 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.

Selling, General & Administrative Expenses (S,G&A)



	2018			2017			2016
In thousands
S,G&A	$	444,904		$	432,067		$	443,704
$ change	12,837			(11,637		)	28,939
% change	3.0		%	(2.6		)%	7.0		%
% of net sales	23.7		%	23.9		%	24.5		%

S,G&A increased for the year ended December 31, 2018, as compared to 2017. The following table details the components of this change:



	2018		2017		2016

Organic S,G&A:
Distribution	2.4	%	(4.2	)%	0.8	%
Aerospace	0.4	%	(0.1	)%	2.5	%
Corporate	0.2	%	1.7	%	(1.2	)%
Total Organic S,G&A	3.0	%	(2.6	)%	2.1	%

Acquisition S,G&A:
Distribution	—	%	—	%	0.3	%
Aerospace	—	%	—	%	4.6	%
Total Acquisition S,G&A	—	%	—	%	4.9	%

% change in S,G&A	3.0	%	(2.6	)%	7.0	%

The increase in S,G&A expenses for 2018 as compared to 2017 was attributable to higher expenses at both our Distribution and Aerospace segments and an increase in corporate expenses. The increase in expenses at the Distribution segment was mainly driven by higher employee and employee-related costs, including an increase in group health costs and $1.4 million in one-time employee incentives. S,G&A expenses at our Aerospace segment increased when compared to prior year, primarily due to $3.0 million in costs incurred for employee-tax related matters. The increase in corporate expenses was primarily attributable to $3.4 million in corporate development activities, which includes costs associated with the due diligence for an acquisition we elected not to complete, partially offset by the absence of $2.8 million in separation costs associated with senior executives incurred in the prior year.

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).

Other Intangible Assets Impairment



	2018		2017		2016
In thousands
Other intangible assets impairment	$	10,039	$	—	$	—

During the third quarter of 2018, we identified a triggering event for possible impairment of long-lived intangible assets at a certain asset group within the Aerospace segment's U.K. business based on an analysis of historical performance, the current forecast for the remainder of the year and the loss of future orders from one of its customers. We performed a recoverability test by comparing the undiscounted cash flows of the asset group to its carrying value, and the estimated future cash flows of the

business did not exceed the carrying value of the assets. Based on these results, we calculated the fair value of the asset group using an income approach, which resulted in an impairment charge of $10.0 million, or the remaining balance of the customer lists/relationships at a certain asset group within the U.K. business. This charge has been included in the operating results of the Aerospace segment.

Restructuring Costs



	2018		2017		2016
In thousands
Restructuring costs	$	8,008	$	2,661	$	1,032

During the third quarter 2017, we announced 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 2019. In the years ended December 31, 2018 and 2017, we recorded $6.0 million and $2.7 million, respectively, in costs associated with the restructuring activities. In addition to these costs, in 2018, the Aerospace segment incurred $1.4 million in other non-related restructuring costs associated with the termination of certain distributor agreements and separation costs associated with certain employees not included in restructuring activities discussed above. The Distribution segment incurred $0.6 million in separation costs for certain employees in 2018.

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.

Loss on Sale of Business



	2018		2017		2016
In thousands
Loss on sale of business	$	5,722	$	—	$	—

During the fourth quarter of 2018, we sold our U.K. Tooling business to better position the Company for increased profitability. This sale did not qualify for the reporting of discontinued operations within the consolidated financial statements. We incurred a loss of $5.7 million associated with the sale. Of this amount, $1.7 million relates to the foreign currency translation reclassified from accumulated other comprehensive income (loss) to net income.

Operating Income



	2018			2017			2016
In thousands
Operating income	$	83,064		$	111,119		$	102,774
$ change	(28,055		)	8,345			4,358
% change	(25.2		)%	8.1		%	4.4		%
% of net sales	4.4		%	6.2		%	5.7		%

The decrease in operating income for 2018 as compared to 2017 was primarily attributable to lower operating income at our Aerospace segment, driven by the $10.0 million other intangible assets impairment at our U.K business, the loss incurred for the sale of the U.K. Tooling business, higher restructuring costs, the costs incurred for employee-tax related matters and the loss on the sale of substantially all of the assets and liabilities of our Engineering Services business, and higher corporate expenses, as discussed above. These changes were partially offset by an increase in operating income of $17.0 million resulting from the adoption of the new revenue recognition guidance, primarily at Aerospace. 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. See Segment Results of Operations and Financial Condition below for further discussion of segment operating income.

Interest Expense, Net



	2018		2017		2016
In thousands
Interest expense, net	$	20,097	$	20,581	$	15,747

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 decrease in interest expense, net for 2018 as compared to 2017 was primarily due to lower average borrowings, partially offset by an increase in letter of credit fees. At December 31, 2018, the interest rate for outstanding amounts on both the revolving credit facility and term loan agreement was 3.74% compared to 2.84% at December 31, 2017.

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.

Effective Income Tax Rate



	2018		2017		2016
Effective income tax rate	28.0	%	47.2	%	34.4	%

The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The decrease in the effective tax rate for 2018 compared to 2017 was primarily due to the rate reduction resulting from Tax Reform, partially offset by foreign losses for which no tax benefit was recorded. Tax reform was enacted by the federal government during the fourth quarter of 2017 and provided for the reduction in the applicable U.S. corporate tax rate from 35% to 21%, effective January 1, 2018.

The increase in the effective rate for 2017 as compared to 2016 was primarily the result of Tax Reform, which required the Company's U.S. net deferred tax assets 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.

Backlog



	2018		2017		2016
In thousands
Aerospace	$	851,814	$	616,090	$	581,619
Distribution	134,332		126,025		108,681
Total	$	986,146	$	742,115	$	690,300

Backlog increased from 2017 to 2018, primarily driven by activity at our Aerospace segment. The increase in backlog at Aerospace was primarily associated with orders of our JPF and bearings products and orders under our AH-1Z program and composite structures programs. These increases were partially offset by a decrease in backlog primarily due to the acceleration of revenue for which delivery has not yet occurred resulting from the adoption of the new revenue recognition guidance, deliveries of direct commercial JPF orders and bearings products, customer acceptance of our K-MAX® aircraft and work performed on various programs.

Other Matters

Information regarding our various environmental remediation activities and associated accruals can be found in Note 17, 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:



	2018			2017			2016
In thousands
Net sales	$	1,139,431		$	1,080,965		$	1,106,322
$ change	58,466			(25,357		)	(71,217		)
% change	5.4		%	(2.3		)%	(6.0		)%

Operating income	$	51,529		$	51,372		$	40,813
$ change	157			10,559			(6,104		)
% change	0.3		%	25.9		%	(13.0		)%
% of net sales	4.5		%	4.8		%	3.7		%

The following table details the components of the ASC 606 changes as a percentage of net sales and operating income at the Distribution segment as compared to the corresponding period in 2017:



	2018
Net sales:
Increase in sales associated with ASC 606	0.4	%
Increase in sales absent the adoption impact of ASC 606	5.0	%
% change in net sales	5.4	%

Operating income:
Increase in operating income associated with ASC 606	2.1	%
Decrease in operating income absent the adoption impact of ASC 606	(1.8	)%
% change in operating income	0.3	%

Net sales

2018 versus 2017

Net sales for 2018 increased when compared to 2017, with $4.6 million of the increase resulting from the adoption of the new revenue recognition guidance. Within our product lines, the increase in sales was attributable to an increase in sales associated with our automation, control and energy product line, less significant increases in our bearings and power transmission and fluid power product lines and an additional sales day in 2018. The increase in net sales was mostly attributable to higher sales volume to our MRO customers and a less significant increase in sales volume to our OEM customers. Net sales were higher in the majority of the markets we serve, most notably the machinery manufacturing, paper manufacturing, food manufacturing and merchant wholesalers, durable goods markets.

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.

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.



		2018			2017			2016
Organic Sales Per Sales Day (in thousands, except numbers of sales days)
Current period
Net sales		$	1,139,431		$	1,080,965		$	1,106,322
Acquisition sales ^(a)		—			—			5,171
Organic sales		$	1,139,431		$	1,080,965		$	1,101,151
Sales days		253			252			253
Organic sales per sales day for the current period	a	$	4,504		$	4,290		$	4,352

Prior period
Net sales from the prior year		$	1,080,965		$	1,106,322		$	1,177,539
Sales days in the prior year		252			253			253
Organic sales per sales day from the prior year	b	$	4,290		$	4,373		$	4,654

% change in organic sales per sales day	(a-b)/b	5.0		%	(1.9		)%	(6.5		)%


(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

2018 versus 2017

Operating income for 2018 remained relatively flat when compared to the corresponding period in 2017. This was primarily due to higher sales and associated gross profit in all our product lines, mostly offset by an increase in employee and employee-related costs, including $1.9 million in higher group health costs, $1.4 million in one-time employee incentives, and $0.6 million in separation costs for certain employees.

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.

Other Matters

Enterprise Resource Planning System

We continue to make progress in implementing a new ERP business system at our Distribution segment. Since the initial announcement, a couple of factors have delayed the full implementation of the ERP at this segment. The first of these factors is the acquisition of nine businesses leading to additional scope from the initial project plan. Second, multiple upgraded versions of the software have been released and we have elected to install these major upgrades in order to benefit from the improved functionality, the enhanced features these upgrades offer and the new user interface they provide. Each of these upgrades required additional development, integration and extensive testing. A major upgrade of the ERP system was successfully completed during 2018. The Distribution segment is now proceeding to the next step of implementation in 2019. As a result of these factors, the total project cost is currently estimated between $51.0 million and $54.0 million.

For the years ended December 31, 2018, 2017 and 2016, expenses incurred totaled approximately $1.1 million, $1.2 million and $1.4 million, respectively, and capital expenditures totaled $2.1 million, $3.6 million and $3.7 million, respectively. Total to date ERP system capital expenditures as of December 31, 2018 were $40.2 million. Depreciation expense for the ERP system for the years ended December 31, 2018, 2017 and 2016, totaled $2.8 million, $2.5 million and $2.8 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, innovation processes, investments in automation, and process expertise to develop unique products and manufacturing processes within our global manufacturing facilities, 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:



	2018			2017			2016
In thousands
Net sales	$	735,994		$	724,944		$	702,054
$ change	11,050			22,890			104,468
% change	1.5		%	3.3		%	17.5		%

Operating income	$	94,357		$	117,654		$	112,846
$ change	(23,297		)	4,808			5,953
% change	(19.8		)%	4.3		%	5.6		%
% of net sales	12.8		%	16.2		%	16.1		%

The following table details the components of the ASC 606 changes as a percentage of net sales and operating income at the Aerospace segment as compared to the corresponding period in 2017:



	2018
Net sales:
Increase in sales associated with ASC 606	8.2	%
Decrease in sales absent the adoption impact of ASC 606	(6.7	)%
% change in net sales	1.5	%

Operating income:
Increase in operating income associated with ASC 606	13.1	%
Decrease in operating income absent the adoption impact of ASC 606	(32.9	)%
% change in operating income	(19.8	)%

Net Sales

2018 versus 2017

Aerospace segment net sales for 2018 increased when compared to 2017, due to an increase in net sales of $59.7 million resulting from the adoption of the new revenue recognition guidance, as discussed below, partially offset by a decrease in net sales of $48.6 million absent the adoption of ASC 606. The decrease in net sales absent the adoption of the new revenue recognition guidance was primarily attributable to lower direct commercial sales of our JPF to foreign militaries, decreases in sales under the K-MAX® program and certain metallic structures programs and lower sales volume of our composite structures products from foreign operations. These decreases, totaling $70.8 million, were partially offset by higher sales volume of our bearings products, an increase in sales under the AH-1Z program and higher sales under the Sikorsky Combat Rescue Helicopter program. Foreign currency exchange rates relative to the U.S. dollar had a favorable impact of $5.0 million on net sales.

The increase in sales resulting from the adoption of the new revenue recognition guidance was primarily related to recognizing sales under our JPF program with the USG on an over time method using the cost-to-cost basis in the current period compared to percentage-of-completion using units-of-delivery in 2017 and the recognition of sales for our K-MAX® program at a point in time in the current period compared to a percentage-of-completion on a cost-to-cost basis in 2017.

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.

Operating Income

2018 versus 2017

Operating income decreased for 2018 as compared to 2017. The decrease was primarily attributable to a $38.7 million decrease in operating income absent the adoption of the new revenue recognition guidance, partially offset by a $15.4 million increase in operating income resulting from the adoption of the new revenue recognition guidance, as discussed below.

The decrease in operating income absent the adoption of the new revenue recognition guidance was primarily attributable to costs incurred at our U.K. business, including a $10.0 million impairment charge for definite-lived intangible assets, lower direct commercial sales of our JPF to foreign militaries, lower sales and associated gross profit under the K-MAX® program and our composite structures products from foreign operations, decreases in gross profit on the AH-1Z program and our bearings products and an increase in restructuring costs in the current period.

The increase in operating income resulting from the adoption of the new revenue recognition guidance was primarily related to recognizing sales and the associated gross profit under our JPF program with the USG on a cost-to-cost basis in the current period compared to percentage-of-completion using units-of-delivery in 2017 and the recognition of sales and associated gross profit under the K-MAX® program at a point in time in the current period compared to on a cost-to-cost basis in the comparable period in 2017.

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.

Additionally, offsetting some of the increase in operating income in 2017 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. Under ASC 605, for certain USG contracts, S,G&A expenses were capitalized in inventory until revenue was recognized, to the extent that gross profit was 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.



	2018		2017		2016
In thousands
S,G&A expensed (capitalized), net	$	—	$	372	$	2,465

Long-Term Contracts

For long-term aerospace contracts, we generally recognize sales and cost of sales over time because of continuous transfer of control to the customer, which allows for recognition of revenue as work on a contract progresses. For those programs for which there is a continuous transfer of control to the customer, we recognize sales and profit on a cost-to-cost basis, in which case sales and profit are recorded based upon the ratio of costs incurred to date to the total estimated costs to complete the contract. Conversely, revenue on certain programs, such as the K-MAX® program and on direct commercial sales under our JPF program, is recognized at a point in time, with revenue being recognized upon transfer to the end customer.

Revenue and cost estimates for all significant long-term contracts for which revenue is recognized over time are reviewed and reassessed quarterly. Based upon these reviews, we record the effects of adjustments in profit estimates each period. If at any time we determine that for a particular contract total costs will exceed total contract revenue, we will record a provision for the entire anticipated contract loss at that time. The amount of revenue recognized for the year ended December 31, 2018 from performance obligations satisfied (or partially satisfied) in previous periods was $6.7 million. This amount was primarily related to changes in estimates of the stage of completion of Aerospace contracts, more specifically the JPF contract with the

USG and the AH-1Z contract. 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.

Major Programs/Product Lines

Defense Markets

A-10

The segment was previously under contract with Boeing to produce the wing control surfaces (inboard and outboard flaps, slats and deceleron assemblies) for the USAF’s A-10 fleet. Initial deliveries under this program began in 2010 and full rate production began in late 2012. Through December 31, 2018, we received orders and delivered 173 shipsets equivalent to the number of orders Boeing has received from the USAF over the life of the program. Final production and deliveries under this contract were completed during the third quarter of 2018. Revenues for the year ended December 31, 2018 were not material. Included in contract costs at December 31, 2018 were nonrecurring costs of $2.1 million related to this program to be utilized on future shipset orders, which may not be recoverable in the event of an extended break in production or program termination. At December 31, 2017, our program backlog was $1.2 million.

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. In March 2018, the 2018 Appropriations Act was enacted, authorizing the USAF to spend an additional $103.0 million for A-10 wing replacements. In June 2018, the 2019 Defense Authorization Act was passed, authorizing $65.0 million for A-10 wing replacements. We have not received any additional orders beyond 173 shipsets; however, we are currently in negotiations with the customer and expect to be awarded a contract under this program in the first half of 2019.

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 61 cockpits in 2018 as compared to the 77 cockpits delivered in 2017. 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, 2018 and 2017, was $81.0 million and $126.3 million, respectively, for orders on this program. We anticipate cockpit deliveries to total 66 in 2019.

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. We delivered ten ship sets in 2018. As of December 31, 2018, our backlog for this program was not material. 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 16. As of December 31, 2018 and 2017, our backlog for this program was $46.6 million and $49.1 million, respectively.

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, totals $50.5 million. Total backlog at December 31, 2018 and 2017, was $4.3 million and $17.5 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. The Company currently provides the FMU-152 A/B to the USAF and thirty-six other nations. Sales of these fuzes can be direct to the USAF, Foreign Military Sales ("FMS") through the USG and DCS to foreign militaries that, although not funded by the USG, require regulatory approvals from the USG.

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.

A total of 17,467 fuzes were delivered to our customers during the fourth quarter of 2018. A total of 32,216 fuzes were delivered in 2018. We expect to deliver 40,000 to 45,000 fuzes in 2019, primarily consisting of orders from the USG in order to meet the USG's current demand.

Total JPF backlog at December 31, 2018 was $454.1 million. Of this amount, $308.7 million in JPF backlog require future export approvals, licenses or authorizations from the USG before we are permitted to sell these products outside of the United States. The receipt of these export approvals, licenses or authorizations are subject to political and geopolitical conditions which could impact the timing and/or our ability to sell these products outside of the United States. Total JPF backlog at December 31, 2017 was $128.2 million.

JPF - USG

Under the new revenue recognition standard adopted January 1, 2018, revenue is recognized over time when costs are incurred as work progresses on the program.

The Company currently provides the FMU-152 A/B to the USAF, 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 had 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, and two orders under Option 14 which have a total value of approximately $121.4 million. Additionally, the USAF issued a Notice of Contract Action announcing its intent to award us Options 15 and 16, which, if and when awarded, would extend FMU-152 A/B deliveries into 2022.

JPF - DCS

Revenue for DCS programs is generally recognized at the point in time when control is transferred to the customer under the new revenue recognition guidance. The Company continues to see strong demand for DCS fuzes. During the third quarter of 2018, we were awarded a DCS contract totaling approximately $48.6 million. During the first quarter of 2018, we were awarded a DCS contract totaling approximately $324.0 million, of which $307.5 million was included in backlog as of December 31, 2018. The remaining $16.5 million relates to potential penalties payable to the customer in the event the offset requirements of the contract are not met. This agreement is designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreement may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects and the purchase by third parties of supplies from in-country vendors. This agreement may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. The offset requirements associated with this contract could extend for several years and have a notional value of approximately $194.0 million, which is equal to sixty percent of the total contract value as defined by the agreement with the customer. The amount ultimately applied against the offset agreement is based on negotiations with the customer and may require cash outlays that represent only a fraction of the notional value in the offset agreement. We are currently in the process of developing a proposal to satisfy the offset requirements that will be submitted to the customer within the first half of 2019. We expect approval of the proposal before the end of 2019. The satisfaction of the offset requirements will be determined by the customer and is expected to occur over a seven-year period. Additionally, this contract provides for potential penalties payable to the customer of up to 10% of the total contract value in the event that we default on the contract and we are unable to fulfill our contractual commitments. Any delay in the receipt of necessary export approvals, licenses or authorizations from the USG could result in customer cancellation of the contract, the incurrence of significant penalties by the Company and the return of advance payments to our customer, which could have a material adverse effect our results of operations, financial condition and cash flows.

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. The first nine helicopters from the newly reopened commercial production line were accepted by our customers through December 2018, of which five aircraft were accepted by our customers in 2018. We received three orders for K-MAX® aircraft during the fourth quarter of 2018, of which two were delivered during the fourth quarter and the third is expected to be delivered in the first half of 2019. During the fourth quarter of 2018, we announced that we will continue production of the commercial K-MAX® aircraft into 2020 at a minimum due to continued interest in the capabilities of the K-MAX®. As of December 31, 2018 and 2017, our backlog for this program was $14.9 million and $4.1 million, respectively.

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 1,250 FTE kits and assemblies for each of the 777 and 767 programs since 1995 and 1986, respectively. During 2018, on average, we delivered three shipsets per month on the Boeing 777 platform and three shipsets per month on the Boeing 767 platform, which includes one shipset per month associated with a military tanker derivative of the 767. For 2019, we estimate deliveries on the 777 program to be four shipsets per month and on the 767 program to be three 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 $90 million; however, annual quantities will vary, as they are dependent upon the orders Boeing receives from its customers. As of December 31, 2018 and 2017, our backlog for these programs was $9.3 million and $14.2 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, Airbus and Bombardier platforms, such as the Boeing 737, 747, 777 and 787, the Airbus A320, A330, A350 and A380, and the Bombardier Global 7500.

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 2018, we were awarded a follow-on contract with Bell Helicopter to manufacture skin and skin-to-core components for several of Bell’s commercial helicopter models. At December 31, 2018 and 2017, $1.2 million and $3.9 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.

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, 2018, we had total accounts receivable and contract assets related to the program of $3.6 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 17, 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 17, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, including the cost of existing environmental remediation matters discussed in Note 11, Environmental Costs;


•	contributions to our qualified pension plan and Supplemental Employees’ Retirement Plan (“SERP”);


•	deferred compensation payments to officers;


•	interest payments on outstanding debt;


•	income tax payments;


•	capital and operating lease payments;


•	capital expenditures;


•	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.

In addition to the items listed above, we have received $97.2 million in advance payments, which relate to $129.6 million in letters of credit for a JPF DCS contract in 2018. In the event that we default on the contract and we are unable to fulfill our contractual commitments, our customer has the ability to draw on the letters of credit.

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 U.S. Government Cost Accounting Standard ("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 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. We have maintained our accrual at $0.3 million as of December 31, 2018. 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:



	2018			2017			2016			18 vs. 17			17 vs.16
(in thousands)
Total cash provided by (used in):
Operating activities	$	162,368		$	79,885		$	107,707		$	82,483		$	(27,822	)
Investing activities	(29,961		)	(31,835		)	(37,583		)	1,874			5,748
Financing activities	(141,362		)	(54,736		)	(43,959		)	(86,626		)	(10,777		)

Free Cash Flow⁽¹⁾:
Net cash provided by operating activities	$	162,368		$	79,885		$	107,707		$	82,483		$	(27,822	)
Expenditures for property, plant and equipment	(29,871		)	(27,631		)	(29,777		)	(2,240		)	2,146
Free cash flow	$	132,497		$	52,254		$	77,930		$	80,243		$	(25,676	)

(1) 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.

2018 vs. 2017

Net cash provided by operating activities increased $82.5 million in 2018 compared to 2017, primarily due to advance payments received under a JPF DCS contract, partially offset by higher pension contributions in the current period.

Net cash used in investing activities decreased $1.9 million in 2018 compared to 2017 primarily due to proceeds received from the sale of assets and the absence of an earnout payment associated with a previous acquisition incurred in the prior period.

Net cash used in financing activities increased in 2018 by $86.6 million compared to 2017, primarily due to the absence of the convertible notes transactions and higher net repayments of our revolving credit facility in the current period. In the prior period, convertible notes transactions consisted of $200.0 million in proceeds received from the issuance of our 2024 Notes and $58.6 million in proceeds related to the unwind of a portion of the convertible note hedge transactions related to our 2017 Notes, which were partially offset by the cost to repurchase a portion of the 2017 Notes, the purchase of the capped call transactions related to our 2024 Notes and higher debt issuance costs associated with the issuance of our 2024 Notes.

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 2017.

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.

Financing Arrangements

Refer to Note 12, 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 on our Financing Arrangements.

Convertible Notes

2024 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. 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 dilutive effect of securities issued under the 2024 Notes at various theoretical average share prices for our stock as of December 31, 2018:



	Theoretical Average Share Price of Kaman Stock
	$65.26	$70.00	$75.00	$80.00	$84.84
Dilutive Shares associated with:
Convertible Debt	—	207,399	397,876	564,542	707,164

2017 Notes

In November 2010, the Company issued convertible senior unsecured notes due on November 15, 2017 ("2017 Notes"), 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, 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. The remaining portion of the 2017 Notes and bond hedge were settled in November 2017. A portion of the existing warrant transactions associated with the 2017 Notes remained outstanding at December 31, 2017. During the first half of 2018, the remaining warrant transactions were settled with 114,778 shares of the Company's common stock.

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, 2018 and 2017, the interest rates for the outstanding amounts on the Credit Agreement were 3.74% and 2.84%, 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.

Total average bank borrowings under our revolving credit facility and term loan facility during the year ended December 31, 2018, were $151.6 million compared to $256.5 million for the year ended December 31, 2017. As of December 31, 2018 and 2017, there was $408.9 million and $453.3 million available for borrowing, respectively, net of letters of credit. However, based on EBITDA levels at December 31, 2018 and 2017, amounts available for borrowings were limited to $323.5 million and $246.0 million, respectively. Letters of credit are generally considered borrowings for purposes of calculating available borrowings. As of December 31, 2018, $152.6 million letters of credit were outstanding, all of which were under the revolving credit facility. Of this amount, $146.2 million letters of credit relate to a JPF DCS contract. As of December 31, 2017, $6.7 million letters of credit were outstanding, of which, $6.5 million were under the revolving credit facility.

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. As of December 31, 2017, these interest rate swap agreements had all matured and were not outstanding. As such, there was no activity related to these contracts for the year ended December 31, 2018. 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.

Other Sources/Uses of Capital

Pension

We contributed $30.0 million and $10.0 million to the qualified pension plan during 2018 and 2017, respectively. We do not anticipate making any contributions to the qualified pension plan in 2019. We paid $0.9 million and $3.1 million in SERP benefits during 2018 and 2017, respectively. We expect to pay $0.5 million in SERP benefits in 2019.

Acquisitions

The following table illustrates the cash paid for acquisitions:



	For the year ended December 31,
	2018		2017		2016
In thousands
Cash paid for holdback payments during the year	$	—	$	—	$	1,014
Earn-out and other payments during the year	—		1,365		5,617
Total cash paid for acquisitions	$	—	$	1,365	$	6,631

No acquisitions were completed in 2018, 2017 or 2016. We 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, 2018, we had repurchased 1,097,853 shares under the 2015 Share Repurchase Program and approximately $45.7 million remained available for repurchases under this authorization.

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)
	2018		2017		2016
Distribution
Net sales	$	1,139,431	$	1,080,965	$	1,106,322
Less: Acquisition Sales	—		—		5,171
Organic Sales	$	1,139,431	$	1,080,965	$	1,101,151
Aerospace
Net sales	$	735,994	$	724,944	$	702,054
Less: Acquisition Sales	—		—		63,483
Organic Sales	$	735,994	$	724,944	$	638,571
Consolidated
Net sales	$	1,875,425	$	1,805,909	$	1,808,376
Less: Acquisition Sales	—		—		68,654
Organic Sales	$	1,875,425	$	1,805,909	$	1,739,722

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

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$60.61	28	$1,690

10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-28	Quarter: 2018-09-28
10-Q	2018-06-29	Quarter: 2018-06-29
10-Q	2018-03-30	Quarter: 2018-03-30
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-29	Quarter: 2017-09-29
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-07-01	Quarter: 2016-07-01
10-Q	2016-04-01	Quarter: 2016-04-01
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-10-02	Quarter: 2015-10-02
10-Q	2015-07-03	Quarter: 2015-07-03
10-Q	2015-04-03	Quarter: 2015-04-03
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-26	Quarter: 2014-09-26
10-Q	2014-06-27	Quarter: 2014-06-27
10-Q	2014-03-28	Quarter: 2014-03-28
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-02-25	Earnings, Exhibits
8-K	2018-11-15	Officers, Exhibits
8-K	2018-11-01	Earnings, Exhibits
8-K	2018-09-12	Regulation FD, Exhibits
8-K	2018-08-08	Earnings, Exhibits
8-K	2018-06-05	Officers
8-K	2018-05-17	Regulation FD, Exhibits
8-K	2018-04-18	Officers
8-K	2018-03-13	Regulation FD, Exhibits
8-K	2018-02-16	Enter Agreement, Exhibits

NWS	News Corp	7,460
CARG	Cargurus	4,170
CNOB	Connectone Bancorp	740
PCOM	Points International	164
PLBC	Plumas Bancorp	131
ALRT	ALR Technologies	0
NXEO	Nexeo Solutions	0
SFEF	Santa Fe Financial	0
CDIF	Cardiff Lexington	0
KLXI	KLX	0

EX-21	kamn-12312018ex21.htm
EX-23	kamn-12312018ex23.htm
EX-24	kamn-12312018ex24.htm
EX-31.1	kamn-12312018ex311.htm
EX-31.2	kamn-12312018ex312.htm
EX-32.1	kamn-12312018ex321.htm
EX-32.2	kamn-12312018ex322.htm


ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS