QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 27, 2019
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number:
001-35419
KAMAN CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut
06-0613548
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1332 Blue Hills Avenue,
Bloomfield,
Connecticut
06002
(Address of principal executive offices)
(Zip Code)
(860)
743-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock ($1 par value)
KAMN
New York Stock Exchange LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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
☒
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.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
At October 25, 2019, there were
27,861,419
shares of Common Stock outstanding.
PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share and per share amounts) (Unaudited)
September 27, 2019
December 31, 2018
Assets
Current assets:
Cash and cash equivalents
$
509,990
$
25,895
Accounts receivable, net
130,246
149,338
Contract assets
119,221
99,261
Contract costs, current portion
5,705
5,993
Inventories
173,143
131,569
Income tax refunds receivable
1,585
1,752
Assets held for sale, current portion
—
351,261
Other current assets
13,868
8,036
Total current assets
953,758
773,105
Property, plant and equipment, net of accumulated depreciation of $203,787 and $192,285, respectively
136,229
137,112
Operating right-of-use assets, net
16,001
—
Goodwill
191,218
196,161
Other intangible assets, net
53,903
58,567
Deferred income taxes
39,337
38,040
Contract costs, noncurrent portion
7,820
10,666
Assets held for sale, noncurrent portion
—
229,238
Other assets
32,081
31,173
Total assets
$
1,430,347
$
1,474,062
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt, net of debt issuance costs
$
—
$
9,375
Accounts payable – trade
57,143
56,826
Accrued salaries and wages
40,461
32,795
Contract liabilities, current portion
35,975
28,865
Operating lease liabilities, current portion
4,642
—
Income taxes payable
58,493
139
Liabilities held for sale, current portion
—
131,047
Other current liabilities
41,859
39,429
Total current liabilities
238,573
298,476
Long-term debt, excluding current portion, net of debt issuance costs
180,653
284,256
Deferred income taxes
7,182
7,146
Underfunded pension
96,710
104,988
Contract liabilities, noncurrent portion
55,096
78,562
Operating lease liabilities, noncurrent portion
12,295
—
Liabilities held for sale, noncurrent portion
—
15,602
Other long-term liabilities
50,894
51,875
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding
—
—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 29,850,039 and 29,544,714 shares issued, respectively
29,850
29,545
Additional paid-in capital
216,655
200,474
Retained earnings
786,798
610,103
Accumulated other comprehensive income (loss)
(159,357
)
(134,898
)
Less 1,904,262 and 1,672,917 shares of common stock, respectively, held in treasury, at cost
(85,002
)
(72,067
)
Total shareholders’ equity
788,944
633,157
Total liabilities and shareholders’ equity
$
1,430,347
$
1,474,062
See accompanying notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts) (Unaudited)
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
Net sales
$
182,670
$
157,134
$
523,816
$
515,135
Cost of sales
121,537
109,446
355,573
360,826
Gross profit
61,133
47,688
168,243
154,309
Selling, general and administrative expenses
43,855
43,403
127,614
132,274
Other intangible assets impairment
—
10,039
—
10,039
Costs from transition services agreement
1,154
—
1,154
—
Restructuring costs
81
1,214
553
4,711
Net loss (gain) on sale of assets
416
30
351
(1,559
)
Operating income (loss)
15,627
(6,998
)
38,571
8,844
Interest expense, net
4,058
5,084
14,595
15,407
Non-service pension and post retirement benefit income
(99
)
(2,975
)
(298
)
(9,043
)
Income from transition services agreement
(944
)
—
(944
)
—
Other expense (income), net
185
(163
)
(367
)
(141
)
Earnings (loss) from continuing operations before income taxes
12,427
(8,944
)
25,585
2,621
Income tax expense
2,297
559
3,244
2,376
Earnings (loss) from continuing operations
10,130
(9,503
)
22,341
245
Earnings from discontinued operations before gain on disposal, net of tax
9,860
10,935
25,240
30,347
Gain on disposal of discontinued operations, net of tax
122,786
—
122,786
—
Total earnings from discontinued operations
132,646
10,935
148,026
30,347
Net earnings
$
142,776
$
1,432
$
170,367
$
30,592
Earnings per share:
Basic earnings per share from continuing operations
$
0.36
$
(0.34
)
$
0.80
$
0.01
Basic earnings per share from discontinued operations
4.75
0.39
5.30
1.08
Basic earnings per share
$
5.11
$
0.05
$
6.10
$
1.09
Diluted earnings per share from continuing operations
$
0.36
$
(0.34
)
$
0.79
$
0.01
Diluted earnings per share from discontinued operations
4.72
0.39
5.27
1.07
Diluted earnings per share
$
5.08
$
0.05
$
6.06
$
1.08
Average shares outstanding:
Basic
27,952
28,009
27,941
27,944
Diluted
28,117
28,258
28,104
28,258
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
Net earnings
$
142,776
$
1,432
$
170,367
$
30,592
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other
(8,585
)
(1,522
)
(10,173
)
(7,477
)
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $940 and $706 and $2,820 and $2,119, respectively
2,936
2,210
8,808
6,630
Other comprehensive (loss) income
(5,649
)
688
(1,365
)
(847
)
Comprehensive income
$
137,127
$
2,120
$
169,002
$
29,745
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
For the Nine Months Ended
September 27, 2019
September 28, 2018
Cash flows from operating activities:
Net earnings
$
170,367
$
30,592
Less: Total earnings from discontinued operations
148,026
30,347
Earnings from continuing operations
22,341
245
Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization
19,308
21,080
Amortization of debt issuance costs
1,401
1,355
Accretion of convertible notes discount
2,067
1,934
Provision for doubtful accounts
384
670
Net loss (gain) on sale of assets
351
(1,559
)
Other intangible assets impairment
—
10,039
Net loss on derivative instruments
549
642
Stock compensation expense
3,969
4,222
Deferred income taxes
(3,743
)
8,094
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable
17,650
67,862
Contract assets
(20,303
)
(41,033
)
Contract costs
3,130
(6,576
)
Inventories
(43,139
)
(6,698
)
Income tax refunds receivable
157
(1,268
)
Operating right of use assets
2,388
—
Other assets
(4,020
)
(3,430
)
Accounts payable - trade
704
(2,720
)
Contract liabilities
(16,647
)
95,331
Operating lease liabilities
(2,256
)
—
Other current liabilities
7,318
2,631
Income taxes payable
15,620
(2,526
)
Pension liabilities
3,128
(36,185
)
Other long-term liabilities
979
992
Net cash provided by operating activities of continuing operations
11,336
113,102
Net cash (used in) provided by operating activities of discontinued operations
(7,341
)
14,296
Net cash (used in) provided by operating activities
3,995
127,398
Cash flows from investing activities:
Proceeds from sale of assets
82
1,666
Proceeds from sale of discontinued operations
656,736
—
Expenditures for property, plant & equipment
(17,411
)
(16,623
)
Other, net
(3,092
)
(2,453
)
Net cash provided by (used in) investing activities of continuing operations
636,315
(17,410
)
Net cash used in investing activities of discontinued operations
(9,838
)
(6,222
)
Net cash provided by (used in) investing activities
626,477
(23,632
)
Cash flows from financing activities:
Net repayments under revolving credit agreements
(38,500
)
(89,727
)
Debt repayment
(76,875
)
(5,625
)
Repayment of convertible notes
(500
)
—
Net change in bank overdraft
2,995
1,701
Proceeds from exercise of employee stock awards
8,616
6,448
Purchase of treasury shares
(12,006
)
(11,996
)
Dividends paid
(16,756
)
(16,751
)
Other, net
(1,092
)
(729
)
Net cash used in financing activities of continuing operations
(134,118
)
(116,679
)
Net cash provided by financing activities of discontinued operations
7,967
2,968
Net cash used in financing activities
(126,151
)
(113,711
)
Net increase (decrease) in cash and cash equivalents
504,321
(9,945
)
Cash and cash equivalents included of discontinued operations
(21,834
)
(1,929
)
Effect of exchange rate changes on cash and cash equivalents
(208
)
(737
)
Cash and cash equivalents at beginning of period
27,711
36,904
Cash and cash equivalents at end of period
$
509,990
$
24,293
Supplemental disclosure of noncash activities:
Value of common shares issued for unwind of warrant transactions
$
—
$
7,583
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
1. BASIS OF PRESENTATION
During the third quarter of 2019, Kaman Corporation ("the Company") completed the sale of its Distribution segment for total cash consideration of $700.0 million, excluding certain working capital adjustments and transaction costs. The Distribution segment's results of operations and the related cash flows have been reclassified to earnings from discontinued operations in the Condensed Consolidated Statement of Operations and cash flows from discontinued operations in the Condensed Consolidated Statement of Cash Flows, respectively, for all periods presented. The assets and liabilities of the Distribution segment have been reclassified to assets held for sale and liabilities held for sale, respectively, in the Condensed Consolidated Balance Sheets as of December 31, 2018. See Note 4, Discontinued Operations, to the Condensed Consolidated Financial Statements for further information.
Prior to the sale of the Distribution segment, the Company was composed of two operating segments. As a result of this transaction, the Company is now composed of one operating segment. As the Company has not made any fundamental changes to its management or organization structure, this segment is reflective of how the Company's Chief Executive Officer, who is its Chief Operating Decision Maker ("CODM"), reviews operating results for the purposes of allocating resources and assessing performance. The Company has not aggregated operating segments for purposes of identifying reportable segments. The 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 manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters and restores, modifies and supports our SH-2G Super Seasprite maritime helicopters.
In the opinion of management, the condensed consolidated financial information reflects all adjustments necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented, but do not include all disclosures required by accounting principles generally accepted in the United States of America ("US GAAP"). All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in prior year financial statements and notes thereto have been reclassified to conform to current year presentation. The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the interim periods presented are not necessarily indicative of trends or of results to be expected for the entire year.
The Company has a calendar year-end; however, its first three fiscal quarters follow a 13-week convention, with each quarter ending on a Friday. The third quarters for 2019 and 2018 ended on September 27, 2019, and September 28, 2018, respectively.
2. RECENT ACCOUNTING STANDARDS
Recent Accounting Standards Adopted
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The objective of this standard is to address the concern that tax effects of items within accumulated other comprehensive income do not appropriately reflect the tax rate because the Tax Cut and Jobs Act of 2017 ("Tax Reform") required the adjustment of deferred taxes be recorded to income. This ASU provides an entity the election to reclassify stranded tax effects resulting from Tax Reform to retained earnings from accumulated other comprehensive income. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The adoption of ASU 2018-02 resulted in an increase to retained earnings of $23.1 million, primarily related to the stranded tax effects resulting from Tax Reform for pension and other post-retirement benefits.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities". The objective of this standard update is to improve the financial reporting of hedging relationships to better reflect the economic results of an entity's risk management activities in its financial statements. This ASU expands hedge accounting for both nonfinancial and financial risk components and refines the measurement of hedge results to better reflect an entity's hedging strategies. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
Recent Accounting Standards Adopted - continued
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes". The Federal Reserve Board and the Federal Reserve Bank of New York initiated an effort to introduce an alternative reference rate to LIBOR in the United States. This standard update permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption was permitted. The amendments in this ASU were required to be adopted concurrently with the amendments in ASU 2017-12. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under this ASU as amended, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under this ASU as amended. This standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. On January 1, 2019, the Company adopted Accounting Standards Codification ("ASC") 842 using the modified retrospective transition method allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result, the Company applied ASC 842 only to leases that existed as of January 1, 2019 and did not restate prior periods. The adoption of ASC 842 resulted in a net increase of approximately $90.0 million to its assets and liabilities as of January 1, 2019 due to the addition of right-of-use assets and lease liabilities for operating leases on the balance sheet; however, it did not have a material impact on the Company's cash flows, results of operations or debt covenant compliance. The majority of the right-of-use assets and lease liabilities recorded on January 1, 2019 for operating leases related to the Distribution segment, which was sold during the third quarter of 2019.
The Company has elected the following practical expedients (which must be elected as a package and applied consistently to all leases): an entity need not reassess whether any expired or existing contracts are or contain leases, an entity need not reassess the lease classification for any expired or existing leases and an entity need not reassess initial direct costs for any existing leases. Additionally, the Company has elected the practical expedient to not separate nonlease components from the associated lease component and account for those components as a single component for real estate leases. Nonlease components for the Company's vehicle and other equipment leases are not material. The Company has elected not to apply the recognition requirements to short-term leases, and will recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable payments in the period in which the obligation for those payments is incurred.
Subsequent to the issuance of ASU 2016-02, the FASB has issued the following updates: ASU 2018-10, "Codification Improvements to Topic 842, Leases", ASU 2018-11, "Leases (Topic 842): Targeted Improvements - Transition - Comparative Reporting at Adoption" and ASU 2019-01, "Leases (Topic 842): Codification Improvements". The amendments in these updates affect the guidance contained within ASU 2016-02 and were similarly adopted on January 1, 2019. See Note 3, Significant Accounting Policies Update, for further information on the impact of these standard updates.
Recent Accounting Standards Yet to be Adopted
In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses". The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
Recent Accounting Standards Yet to be Adopted - continued
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". The objective of the standard update is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract to address the diversity in practice. The ASU requires an entity in a hosting arrangement that is a service arrangement to determine which costs to capitalize as an asset related to a service contract and which costs to expense, and to determine which project stage implementation activities relate to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and postimplementation stages are expensed as the activities are performed. Capitalized implementation costs of a hosting arrangement are expensed over the term of the hosting arrangement in the same line item in the statement of operations as the fees associated with the hosting element of the arrangement. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The amendments in this standard update should be applied either retrospectively or prospectively to all implementation costs incurred after the inception date. The Company has elected to adopt the standard update prospectively. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to Disclosure Requirements for Defined Benefit Plans". The objective of the standard update is to improve the effectiveness of disclosure requirements for defined benefit pension and other postretirement plans. This standard update removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of disclosures and adds new disclosure requirements identified as relevant. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurement". The objective of this standard update is to improve the effectiveness of disclosures for recurring and nonrecurring fair value measurements. This standard update removes certain disclosure requirements that are no longer considered cost beneficial, modifies existing disclosure requirements and adds new disclosure requirements identified as relevant. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The objective of this standard update is to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The standard update is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The impact of the adoption of this standard update is dependent on the Company's goodwill impairment assessment.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The objective of this standard update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
Recent Accounting Standards Yet to be Adopted - continued
Subsequent to the issuance of ASU 2016-13, the FASB has issued the following updates: ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments- Credit Losses", ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" and ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief". The amendments in these updates affect the guidance within ASU 2016-13 and have been assessed with ASU 2016-13.
3. SIGNIFICANT ACCOUNTING POLICIES UPDATE
The Company's significant accounting policies are detailed in Note 1, Summary of Significant Accounting Policies of its Annual Report on Form 10-K for the year-ended December 31, 2018. Significant changes to our accounting policies as a result of adopting new accounting standards are discussed below:
Leasing
Under ASC 842, the Company determines if a contract contains a lease at the inception date of the contract. To determine if the contract contains a lease, the Company evaluates if there is an identified asset in the contract and if the Company has control over the use of the identified asset. There is an identified asset in the contract if the asset is explicitly or implicitly specified in the contract, the asset is physically distinct or the Company has the right to receive substantially all of the asset's capacity, and if the supplier does not have substantive substitution rights. The Company has control over the use of the identified asset if the Company obtains substantially all economic benefits from the use of the asset and can direct the use of the asset. The Company applied the practical expedient for any contracts that existed prior to January 1, 2019; therefore, the contracts were not reassessed to determine if they contain leases.
The Company must classify each lease as a finance lease or operating lease. A lease is classified as a finance lease if the Company will own the asset by the end of the lease term, the Company is reasonably certain to exercise the purchase option, the lease term covers a major part of the asset's economic life, the sum of the present value of the lease payments and the present value of the residual value guarantee not included in the lease payments equal or exceed substantially all of the fair value of the underlying asset at lease commencement or if the lessor has no alternative use for the asset. If any of these criteria are not met, the lease is classified as an operating lease. The Company applied the practical expedient for any leases that existed prior to January 1, 2019; therefore, the lease classifications of existing leases were not reassessed (all existing leases classified as operating leases under ASC 840 were classified as operating leases under ASC 842 on January 1, 2019 and all existing leases classified as capital leases under ASC 840 were classified as finance leases under ASC 842 on January 1, 2019).
The Company's operating leases consist of rent commitments under various leases for office space, warehouses, land and buildings at varying dates from January 2019 to December 2024. The terms of most of these leases are in the range of 3 to 7 years, with certain leases renewable for varying periods and certain leases including options to terminate the leases. While some of the Company's leases include options allowing early termination of the lease, the Company historically has not terminated its lease agreements early unless there is an economic, financial or business reason to do so. It is expected that in the normal course of business leases that expire will be renewed or replaced by leases on other similar property. Some of the Company's leases have fixed amount rent escalations or contingent rent that are recognized on a straight-line basis over the entire lease term. Material leasehold improvements and other landlord incentives are amortized over the shorter of their economic lives or the lease term, including renewal periods, if reasonably assured. Substantially all real estate taxes, insurance and maintenance expenses associated with leased facilities are obligations of the Company. The terms for most machinery and equipment leases range from 3 to 5 years.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
The majority of the Company's finance leases consist of assets purchased under the Company's master leasing agreement with PNC Equipment Finance ("PNC"), and are included in machinery, office furniture and equipment and construction in process. At September 27, 2019, the Company's master leasing agreement with PNC had a maximum capacity of $20.0 million. The terms of these leases are 5 years. Amortization of these assets is included in depreciation and amortization expense.
At the commencement date, the right-of-use asset and lease liability are recorded to the Company's Condensed Consolidated Balance Sheets when the Company obtains control of the use of the asset. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make payments upon entering into a lease agreement. The initial measurement of the lease liability is equal to the present value of the unpaid lease payments. Subsequent to the initial measurement, the lease liability continues to be measured at the present value of unpaid lease payments throughout the lease term. The lease liability is remeasured if the lease is modified and the modification is not accounted for as a separate contract, there is a change in the assessment of the lease term, the assessment of a purchase option exercise or the amount probable of being owed under a residual value guarantee, or a contingency is resolved resulting in some or all of the variable lease payments becoming fixed payments. The initial measurement of the right-of-use asset is equal to the total of the initial measurement of the lease liability, incremental costs to obtain the lease and prepaid lease payments, less any lease incentives received. Subsequent to the initial measurement, the right-of-use asset for a finance lease is equivalent to the initial measurement less accumulated amortization and any accumulated impairment losses. Generally, amortization of finance leases is recorded to cost of sales on a straight-line basis over the lease term. Subsequent to initial measurement, the right-of-use asset for an operating lease is equivalent to initial measurement less accumulated amortization (the difference between the straight-line lease cost for the period and the accretion of the lease liability using the effective interest method). The Company has elected not to apply the recognition requirements of ASC 842 to short-term leases (leases that, at the commencement date, have a lease term of twelve months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise) as permissible under the standard. For short-term leases, the Company recognizes lease payments on a straight-line basis and variable payments in the period in which the obligation for those payments is incurred.
Leasing contracts can be separated into lease components, non-lease components and items that are not components of the contract (items that do not transfer a good or service to the Company). Two or more contracts may be combined if at least one of which is or contains a lease entered into or near the same time with the same counterparty and consider the contracts as a single transaction if the contracts are negotiated as a package with the same objective, the amount of consideration to be paid in one contract depends on the price of performance of the other contract or the rights to use the underlying assets conveyed in the contracts are a single lease component. Lease components are considered separate if the Company can benefit from the right to use either on its own or together with other resources readily available to the Company and the right to use is not highly dependent or highly interrelated with the other rights to use the underlying assets in the contract. Consideration in the contract is allocated only to lease and non-lease components of a contract. The Company has elected the practical expedient allowing the Company to combine lease and non-lease components by class as a single lease component for its real estate leases. Nonlease components for the Company's vehicles and other equipment leases are not material.
The lease term is the noncancellable period for which a lessee has the right to use an underlying asset, including periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. For renewal options, the Company performs an assessment at commencement if it is reasonably likely to exercise the option. The assessment is based on the Company's intentions, past practices, estimates and factors that create an economic incentive for the Company. Generally, the Company is not reasonably certain to exercise the renewal option in a lease contract as it performs an assessment for most real estate leases within six months prior to termination comparing the renewal rents under the option with the fair market returns for equivalent property under similar terms and conditions. Although the Company does not historically change locations often, it is not reasonably certain the Company will exercise the renewal option; therefore, the periods covered by the renewal option are not typically included in the lease term at commencement. While some of the Company's leases include options allowing early termination of the lease, the Company historically has not terminated its lease agreements early unless there is an economic, financial or business reason to do so; therefore, the Company does not typically consider the termination option in its lease term at commencement.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
Consideration in the contract is the sum of lease payments relating to the use of the underlying asset, fixed payments and other in-substance fixed payments, less any incentives received. Remeasurement of variable lease payments based on an index is only required if remeasurement is required for another reason, such as a change in lease term or change in estimates of probable payments under residual value guarantees. If remeasured, the remeasurement date becomes the new date for updating the payments based on the index.
The Company uses the discount rate implicit in a lease contract, if available. As most of the Company's leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. For any leases that existed prior to the adoption of the standard, the Company used the incremental borrowing rate as of January 1, 2019 based on the type of asset and term of the lease. The Company separated its real estate leases by classes of lease terms and used the incremental borrowing rate consistent with its lease term class to determine the present value of lease payments. As most of the Company's vehicles had a four-year lease term at the point of the adoption of the standard, the Company used the incremental borrowing rate consistent with a four-year lease term for all vehicles. For all other equipment leases, the Company used the incremental borrowing rate consistent with a five-year lease term as the majority of the Company's leases for other equipment had a five-year lease term at the point of the adoption of the standard.
4. DISCONTINUED OPERATIONS
On August 26, 2019, the Company completed the sale of its Distribution segment for total cash consideration of $700.0 million, excluding certain working capital adjustments. The sale of the Distribution segment was a result of the Company's shift in strategy to be a highly focused, technologically differentiated aerospace and engineered products company. As a result of the sale, the Distribution segment met the criteria set forth in ASC 205-20, Presentation of Financial Statements - Discontinued Operations for discontinued operations.
Upon closing, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology, human resources and benefits, tax and treasury functions of the the Distribution segment for six to twelve months. The buyer has the option to extend the support period for up to an additional year for certain services. The Company incurred $1.2 million in costs associated with the TSA in both the three-month and nine-month fiscal periods ended September 27, 2019, which was included in costs from transition services agreement on the Company's Condensed Consolidated Statement of Operations. The Company earned $0.9 million in income associated with the TSA in both the three-month and nine-month fiscal periods ended September 27, 2019, which was included in income from transition services on the Company's Condensed Consolidated Statement of Operations.
Cash outflows from the Company to the Distribution segment after the sale totaled $4.8 million for the nine-month fiscal period ended September 27, 2019, which primarily relate to Distribution employee and employee-related costs incurred prior to the sale. Cash inflows from the Distribution segment to the Company after the sale were not material for the nine-month fiscal period ended September 27, 2019.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
4. DISCONTINUED OPERATIONS (CONTINUED)
The related assets and liabilities of the Distribution segment were reclassified to assets held for sale and liabilities held for sale, respectively, as of December 31, 2018 on the Company's Condensed Consolidated Balance Sheets. The following table is a summary of the assets and liabilities held for sale:
December 31, 2018
In thousands
Assets
Cash and cash equivalents
$
1,816
Accounts receivable, net
151,756
Contract assets
9,600
Inventories
163,343
Other current assets
24,746
Total assets held for sale, current portion
351,261
Property, plant and equipment, net of accumulated depreciation of $70,021
47,112
Goodwill
149,204
Other intangible assets, net
32,440
Deferred income taxes
146
Other assets
336
Total assets held for sale
$
580,499
Liabilities
Accounts payable – trade
$
101,801
Accrued salaries and wages
13,839
Other current liabilities
15,407
Total liabilities held for sale, current portion
131,047
Deferred income taxes
13,630
Other long-term liabilities
1,972
Total liabilities held for sale
$
146,649
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
4. DISCONTINUED OPERATIONS (CONTINUED)
The results of operations for the Distribution segment were included in discontinued operations on the Company's Condensed Consolidated Statement of Operations. The following table provides information regarding the results of discontinued operations:
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
In thousands
Net sales from discontinued operations
$
167,634
$
285,923
$
748,451
$
859,378
Cost of sales from discontinued operations
120,485
205,053
536,749
615,379
Gross profit from discontinued operations
47,149
80,870
211,702
243,999
Selling, general and administrative expenses from discontinued operations
32,979
66,843
177,475
204,064
Restructuring costs from discontinued operations
—
443
—
593
Net (gain) loss on sale of assets from discontinued operations
—
(670
)
8
(669
)
Operating income from discontinued operations
14,170
14,254
34,219
40,011
Interest expense, net from discontinued operations
5
1
25
32
Other (income) expense from discontinued operations
—
(16
)
(12
)
(19
)
Earnings from discontinued operations before income taxes
14,165
14,269
34,206
39,998
Income tax expense
4,305
3,334
8,966
9,651
Earnings from discontinued operations before gain on disposal
9,860
10,935
25,240
30,347
Gain on disposal of discontinued operations, pretax
165,484
—
165,484
—
Income tax expense on gain on disposal
42,698
—
42,698
—
Gain on disposal of discontinued operations, net of tax
122,786
—
122,786
—
Earnings from discontinued operations
$
132,646
$
10,935
$
148,026
$
30,347
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
4. DISCONTINUED OPERATIONS (CONTINUED)
The following table provides information on the gain recorded on the sale of the Distribution segment for the three-month and nine-month fiscal periods ended September 27, 2019. These amounts reflect the closing balance sheet of the Distribution segment upon the closing of the sale on August 26, 2019.
Net proceeds received from sale of Distribution(1)
$
656,736
Distribution assets
Cash and cash equivalents
21,834
Accounts receivable, net
150,317
Contract assets
9,128
Inventories
163,995
Other current assets
20,289
Property plant and equipment, net of accumulated depreciation of $73,795
51,039
Operating right-of-use assets, net
68,049
Goodwill
149,204
Other intangible assets, net
28,361
Deferred income taxes
133
Other assets
195
Total Distribution assets
$
662,544
Distribution liabilities
Accounts payable - trade
67,975
Accrued salaries and wages
12,916
Operating lease liabilities, current portion
19,981
Other current liabilities
22,024
Deferred income taxes
78
Operating lease liabilities, noncurrent portion
48,130
Other long-term liabilities
188
Total Distribution liabilities
$
171,292
Gain on sale of Distribution before income taxes
$
165,484
(1) The proceeds received from the sale of the Distribution segment were included in net cash provided by (used in) investing activities of continuing operations on the Company's Condensed Consolidated Statement of Cash Flows. These proceeds were net of transaction costs of $31.4 million and working capital adjustments. The final consideration and gain on sale is subject to a working capital adjustment expected to be settled in the fourth quarter of 2019.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
5. REVENUE
Disaggregation of Revenue
The following table disaggregates total revenue by major product line.
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
In thousands
Military and Defense, excluding safe and arm devices
$
45,124
$
45,798
$
128,445
$
145,297
Safe and Arm Devices
56,167
39,004
152,874
133,590
Commercial Aerospace and Other
81,379
72,332
242,497
236,248
Total revenue(1)(2)
$
182,670
$
157,134
$
523,816
$
515,135
(1) Service revenue was not material for the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018.
(2) Sales of the Distribution segment were included in earnings from discontinued operations, net of tax on the Company's Condensed Consolidated Statement of Operations. See Note 4, Discontinued Operations, for further information on the Company's sale of the Distribution segment.
The following table disaggregates total revenue by product types.
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
In thousands
Original Equipment Manufacturer
$
98,387
$
89,396
$
289,160
$
289,945
Aftermarket
28,116
28,734
81,782
91,600
Safe and Arm Devices
56,167
39,004
152,874
133,590
Total revenue
$
182,670
$
157,134
$
523,816
$
515,135
The following table illustrates the approximate percentage of revenue recognized for performance obligations satisfied over time versus the amount of revenue recognized for performance obligations satisfied at a point in time:
For the Three Months Ended
For the Nine Months Ended
September 27, 2019
September 28, 2018
September 27, 2019
September 28, 2018
Revenue recognized for performance obligations satisfied:
Over time
32
%
55
%
41
%
51
%
Point-in-time
68
%
45
%
59
%
49
%
Total revenue
100
%
100
%
100
%
100
%
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
5. REVENUE (CONTINUED)
Disaggregation of Revenue - continued
For contracts in which revenue is recognized over time, the Company performs detailed quarterly reviews of the progress and execution of its performance obligations under these contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g. the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g. to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. Based upon these reviews, the Company will record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, a provision for the entire anticipated contract loss is recorded at that time. The Company recognized reductions in revenue of $1.3 million and $1.6 million in the three-month and nine-month fiscal periods ended September 27, 2019, respectively. These amounts were primarily related to cost growth on the SH-2G program for Peru, certain legacy fuzing contracts, and certain structures contracts. For the nine-month fiscal period ended September 27 2019, the cost growth was partially offset by favorable cost performance on certain Aerospace contracts, more specifically the Joint Programmable Fuze ("JPF") contract with the U.S. Government ("USG") and the FMU-139 fuzing contract. The amount of revenue recognized in the three-month and nine-month fiscal periods ended September 28, 2018 from performance obligations satisfied (or partially satisfied) in previous periods was $1.8 million and $4.8 million, respectively. These amounts were primarily related to favorable performance of Aerospace contracts, more specifically the JPF contract with the USG and the AH-1Z contract.
Unfulfilled Performance Obligations
Unfulfilled performance obligations ("backlog") represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. As of September 27, 2019, the aggregate amount of the transaction price allocated to backlog for continuing operations was $855.4 million. The Company expects to recognize revenue on approximately $580.2 million of this amount over the next 12 months, with the remaining amount to be recognized thereafter. At December 31, 2018, the aggregate amount of the transaction price allocated to backlog for continuing operations was $851.8 million.
6. RESTRUCTURING COSTS
During the third quarter of 2017, the Company initiated restructuring activities at its Aerospace segment to support the ongoing effort of improving capacity utilization and operating efficiency to better position the Company for increased profitability and growth. Such actions include workforce reductions and the consolidation of operations, beginning in the third quarter of 2017 through the planned completion of restructuring activities in 2019. The Company currently expects these actions to result in approximately $9.5 million in pre-tax restructuring and transition charges. The Company has begun realizing total cost savings in excess of $8.0 million annually as a result of these restructuring activities.
The following table summarizes the accrual balances by cost type for the restructuring actions:
Severance
Other (1)
Total
In thousands
Restructuring accrual balance at December 31, 2018
$
1,022
$
558
$
1,580
Provision
(15
)
198
183
Cash payments
(927
)
(380
)
(1,307
)
Changes in foreign currency exchange rates
(8
)
(26
)
(34
)
Restructuring accrual balance at September 27, 2019
$
72
$
350
$
422
(1) Includes costs associated with consolidation of facilities.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
6. RESTRUCTURING COSTS (CONTINUED)
The above accrual balance was included in other current liabilities on the Company's Consolidated Balance Sheets. Since the announcement of these restructuring activities, restructuring expense through September 27, 2019 was $9.2 million. The Aerospace segment incurred $0.1 million and $0.6 million in costs associated with the restructuring activities described above in the three-month and nine-month fiscal periods ended September 27, 2019, respectively. Included in the three-month and nine-month fiscal periods ended September 27, 2019 was $0.1 million in depreciation expense associated with an enterprise resource planning ("ERP") system that will no longer be utilized as a result of the restructuring activities. Additionally, included in the expense for the nine-month fiscal period ended September 27, 2019 was $0.3 million of cost that relates to the write-off of inventory for various small order programs that the Company will no longer continue to manufacture as a result of the consolidation of operations. For the three-month and nine-month fiscal periods ended September 28, 2018, the Aerospace segment incurred $1.2 million and $3.5 million in costs, respectively, associated with the restructuring activities described above.
Other Matters
In addition to the restructuring above, for the nine-month fiscal period ended September 28, 2018, the Aerospace segment incurred $1.2 million in costs associated with the termination of certain distributor agreements and separation costs for certain employees not covered by the restructuring activities noted above. This amount is not included in the table above.
7. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
September 27, 2019
December 31, 2018
In thousands
Trade receivables
$
12,424
$
11,380
U.S. Government contracts:
Billed
18,046
38,173
Cost and accrued profit - not billed
1,024
780
Commercial and other government contracts
Billed
91,237
100,603
Cost and accrued profit - not billed
9,602
900
Less allowance for doubtful accounts
(2,087
)
(2,498
)
Accounts receivable, net(1)
$
130,246
$
149,338
(1) Accounts receivable, net attributable to the Distribution segment were included in assets held for sale, current portion as of December 31, 2018 on the Company's Condensed Consolidated Balance Sheets. See Note 4, Discontinued Operations, for further information on the Company's sale of the Distribution segment.
The decrease in accounts receivable, net was primarily attributable to the receipts of payments under the Company's JPF program with the USG, K-MAX® program and the Company's bearings products. These decreases were partially offset by an increase in receivables related to a JPF Direct Commercial Sales ("DCS") contract.
Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
September 27, 2019
December 31, 2018
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs
$
900
$
900
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
8. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES
Contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract costs consist of costs to obtain and fulfill a contract. Costs to fulfill a contract primarily consist of nonrecurring engineering costs incurred at the start of a new program for which such costs are expected to be recovered under existing and future contracts. Such costs are amortized over the estimated revenue amount of the contract. Costs to obtain a contract consist of commissions and agent fees paid in connection with the award of a contract. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue.
Reconciliation of Contract Balances
Activity related to contract assets, contract costs and contract liabilities was as follows:
September 27, 2019
December 31, 2018
$ Change
% Change
In thousands
Contract assets(1)
$
119,221
$
99,261
$
19,960
20.1
%
Contract costs, current portion
$
5,705
$
5,993
$
(288
)
(4.8
)%
Contract costs, noncurrent portion
$
7,820
$
10,666
$
(2,846
)
(26.7
)%
Contract liabilities, current portion(1)
$
35,975
$
28,865
$
7,110
24.6
%
Contract liabilities, noncurrent portion(1)
$
55,096
$
78,562
$
(23,466
)
(29.9
)%
(1) Contract assets and contract liabilities of the Distribution segment were included in assets held for sale and liabilities held for sale, respectively, as of December 31, 2018 on the Company's Condensed Consolidated Balance Sheets. See Note 4, Discontinued Operations, for further information on the Company's sale of the Distribution segment.
Contract Assets
The increase in contract assets was primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the nine-month fiscal period ended September 27, 2019. This increase was primarily related to work performed and not yet billed on the JPF program with the USG and certain structures programs, partially offset by amounts billed on the SH-2G program for Peru. There were no significant impairment losses related to the Company's contract assets during the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018.
Contract assets includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts were as follows:
September 27, 2019
December 31, 2018
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs
$
3,588
$
2,909
Contract Costs
At September 27, 2019, costs to fulfill a contract and costs to obtain a contract were $6.9 million and $6.6 million, respectively. At December 31, 2018, costs to fulfill a contract and costs to obtain a contract were $8.9 million and $7.8 million, respectively. These amounts are included in contract costs, current portion and contract costs, noncurrent portion on the Company's Condensed Consolidated Balance Sheets at September 27, 2019 and December 31, 2018.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
8. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES (CONTINUED)
Contract Costs - continued
The decrease in contract costs, current portion was primarily attributable to the amortization of contract costs, partially offset by the reclassification of a portion of costs to obtain a JPF DCS contract and costs to fulfill certain structures programs from contract costs, noncurrent portion. For the three-month and nine-month fiscal periods ended September 27, 2019, amortization of contract costs was $2.2 million and $5.2 million, respectively. For the three-month and nine-month fiscal periods ended September 28, 2018, amortization of contract costs was $0.8 million and $2.5 million, respectively.
The decrease in contract costs, noncurrent portion was due to the reclassification of a portion of costs to obtain a JPF DCS contract and costs to fulfill certain structures programs to contract costs, current portion, partially offset by costs to fulfill the K-MAX® program.
Contract Liabilities
The increase in contract liabilities, current portion was primarily due to the reclassification of a portion of the advance payments received for a JPF DCS contract from contract liabilities, noncurrent portion, partially offset by revenue recognized on a JPF DCS contract and the K-MAX® program. For the three-month and nine-month fiscal periods ended September 27, 2019, revenue recognized related to contract liabilities, current portion was $14.2 million and $28.2 million, respectively. For the three-month and nine-month fiscal periods ended September 28, 2018, revenue recognized related to contract liabilities, current portion was $1.4 million and $7.8 million, respectively.
The decrease in contract liabilities, noncurrent portion was due to the reclassification of a portion of the advance payments received for a JPF DCS contract to contract liabilities, current portion. For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018, the Company did not recognize revenue against contract liabilities, noncurrent portion.
9. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:
September 27, 2019
December 31, 2018
Carrying Value
Fair Value
Carrying Value
Fair Value
In thousands
Debt (1)
$
185,315
$
230,423
$
299,124
$
325,251
(1) These amounts are classified within Level 2.
The above fair values were computed based on quoted market prices and discounted future cash flows (observable inputs), as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transactions occurred.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended September 27, 2019 and September 28, 2018
(Unaudited)
9. FAIR VALUE MEASUREMENTS (CONTINUED)
The fair values of cash and cash equivalents, accounts receivable, net and accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments. The Company's cash and cash equivalents at September 27, 2019 included $480.0 million of Level 1 money market funds.
Recurring Fair Value Measurements
The Company holds derivative instruments for foreign exchange contracts that are measured at fair value using observable market inputs such as forward rates and its counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At September 27, 2019, the derivative instruments were included in other current assets and other current liabilities on the Consolidated Balance Sheets. At December 31, 2018, the derivative instruments were included in other current liabilities on the Consolidated Balance Sheets. Based on the Company's continued ability to trade and enter into forward contracts and interest rate swaps, the Company considers the markets for its fair value instruments to be active.
The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of September 27, 2019, such credit risks had not had an adverse impact on the fair value of these instruments.
Nonrecurring Fair Value Measurements
During the third quarter of 2018, the Company incurred a $10.0 million impairment charge for a certain asset group at its U.K. business. Refer to Note 12, Goodwill and Other Intangible Assets, Net for further information regarding the calculation of fair value.