Kaman Earnings 2020-07-03

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

kamn-20200703

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	July 3, 2020


☐			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)			243-7100
(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 July 31, 2020, there were			27,663,517			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)


	July 3, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	235,608	$	471,540
Restricted cash	25,130		—
Accounts receivable, net	176,565		156,492
Contract assets	131,061		121,614
Contract costs, current portion	7,132		6,052
Inventories	207,340		156,353
Income tax refunds receivable	11,418		8,069
Other current assets	14,687		16,368
Total current assets	808,941		936,488
Property, plant and equipment, net of accumulated depreciation of $223,553 and $210,549, respectively	218,202		140,450
Operating right-of-use assets, net	13,732		15,159
Goodwill	304,768		195,314
Other intangible assets, net	141,630		53,439
Deferred income taxes	30,176		35,240
Contract costs, noncurrent portion	5,861		6,099
Other assets	36,774		36,754
Total assets	$	1,560,084	$	1,418,943
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable – trade	$	58,267	$	70,884
Accrued salaries and wages	49,727		43,220
Contract liabilities, current portion	43,739		42,942
Operating lease liabilities, current portion	4,535		4,306
Income taxes payable	2,302		4,722
Other current liabilities	39,573		37,918
Total current liabilities	198,143		203,992
Long-term debt, excluding current portion, net of debt issuance costs	384,609		181,622
Deferred income taxes	6,723		6,994
Underfunded pension	78,782		97,246
Contract liabilities, noncurrent portion	26,056		37,855
Operating lease liabilities, noncurrent portion	9,940		11,617
Other long-term liabilities	52,435		56,415
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding	—		—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,214,005 and 30,058,455 shares issued, respectively	30,214		30,058
Additional paid-in capital	235,195		228,153
Retained earnings	809,769		820,666
Accumulated other comprehensive income (loss)	(151,210)		(150,893)
Less 2,554,617 and 2,219,332 shares of common stock, respectively, held in treasury, at cost	(120,572)		(104,782)
Total shareholders’ equity	803,396		823,202
Total liabilities and shareholders’ equity	$	1,560,084	$	1,418,943

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands, except per share amounts) (Unaudited)


	For the Three Months Ended						For the Six Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Net sales	$	177,890	$	174,712	$	385,212	$	341,146
Cost of sales	121,222		122,123		260,842		234,036
Gross profit	56,668		52,589		124,370		107,110
Selling, general and administrative expenses	44,880		41,808		105,869		83,759
Costs from transition services agreement	4,373		—		8,513		—
Cost of acquired retention plans	5,704		—		11,407		—
Restructuring costs	4,484		206		6,279		472
Gain on sale of business	—		—		(493)		—
Net gain on sale of assets	(3)		—		(13)		(65)
Operating (loss) income	(2,770)		10,575		(7,192)		22,944
Interest expense, net	5,808		5,236		9,055		10,537
Non-service pension and post retirement benefit income	(4,062)		(100)		(8,125)		(199)
Income from transition services agreement	(3,050)		—		(6,024)		—
Other (income) expense, net	(108)		(463)		110		(552)
(Loss) earnings from continuing operations before income taxes	(1,358)		5,902		(2,208)		13,158
Income tax (benefit) expense	(1,258)		(487)		(1,701)		947
(Loss) earnings from continuing operations	(100)		6,389		(507)		12,211
Earnings from discontinued operations before gain on disposal, net of tax	—		7,077		—		15,380
Gain on disposal of discontinued operations, net of tax	—		—		692		—
Total earnings from discontinued operations	—		7,077		692		15,380
Net (loss) earnings	$	(100)	$	13,466	$	185	$	27,591

Earnings per share:
Basic (loss) earnings per share from continuing operations	$	0.00	$	0.23	$	(0.02)	$	0.44
Basic earnings per share from discontinued operations	0.00		0.25		0.03		0.55
Basic (loss) earnings per share	$	0.00	$	0.48	$	0.01	$	0.99
Diluted (loss) earnings per share from continuing operations	$	0.00	$	0.23	$	(0.02)	$	0.43
Diluted earnings per share from discontinued operations	0.00		0.25		0.03		0.55
Diluted (loss) earnings per share	$	0.00	$	0.48	$	0.01	$	0.98
Average shares outstanding:
Basic	27,659		27,961		27,734		27,935
Diluted	27,659		28,123		27,734		28,097

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)


	For the Three Months Ended						For the Six Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
Net (loss) earnings	$	(100)	$	13,466	$	185	$	27,591
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other	8,295		1,329		(2,531)		(1,588)
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $330 and $940 and $660 and $1,880, respectively	1,107		2,936		2,214		5,872
Other comprehensive income (loss)	9,402		4,265		(317)		4,284
Comprehensive income (loss)	$	9,302	$	17,731	$	(132)	$	31,875

See accompanying notes to condensed consolidated financial statements.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS KAMAN CORPORATION AND SUBSIDIARIES (In thousands) (Unaudited)


	For the Six Months Ended
	July 3, 2020		June 28, 2019
Cash flows from operating activities:
Net earnings	$	185	$	27,591
Less: Total earnings from discontinued operations	692		15,380
(Loss) earnings from continuing operations	$	(507)	$	12,211
Adjustments to reconcile net earnings from continuing operations to net cash (used in) provided by operating activities of continuing operations:
Depreciation and amortization	19,814		12,365
Amortization of debt issuance costs	907		906
Accretion of convertible notes discount	1,412		1,347
Provision for doubtful accounts	314		204
Gain on sale of business	(493)		—
Net gain on sale of assets	(13)		(65)
Net loss on derivative instruments	404		3
Stock compensation expense	3,590		3,557
Deferred income taxes	4,124		(3,252)
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable	(11,368)		48,270
Contract assets	(9,158)		(19,572)
Contract costs	(842)		2,355
Inventories	(38,029)		(31,662)
Income tax refunds receivable	(3,382)		(3,656)
Operating right of use assets	1,974		2,140
Other assets	135		(892)
Accounts payable - trade	(13,872)		(2,673)
Contract liabilities	(11,002)		(4,640)
Operating lease liabilities	(1,916)		(2,115)
Other current liabilities	528		(4,606)
Income taxes payable	(2,658)		(147)
Pension liabilities	(15,775)		2,087
Other long-term liabilities	(3,587)		(1,303)
Net cash (used in) provided by operating activities of continuing operations	(79,400)		10,862
Net cash used in operating activities of discontinued operations	—		(9,134)
Net cash (used in) provided by operating activities	(79,400)		1,728
Cash flows from investing activities:
Proceeds from sale of assets	71		71
Proceeds from sale of discontinued operations	5,223		—
Proceeds from sale of business	493		—
Expenditures for property, plant & equipment	(9,592)		(11,375)
Acquisition of businesses, net of cash acquired	(304,661)		—
Other, net	(437)		(1,618)
Net cash used in investing activities of continuing operations	(308,903)		(12,922)
Net cash used in investing activities of discontinued operations	—		(3,662)
Net cash used in investing activities	(308,903)		(16,584)
Cash flows from financing activities:
Net borrowings under revolving credit agreements	201,100		16,700
Debt repayment	—		(4,375)
Net change in bank overdraft	131		724
Proceeds from exercise of employee stock awards	1,986		3,546
Purchase of treasury shares	(14,168)		(3,063)
Dividends paid	(11,144)		(11,160)
Other, net	(718)		(663)
Net cash provided by financing activities of continuing operations	177,187		1,709
Net cash provided by financing activities of discontinued operations	—		4,458
Net cash provided by financing activities	177,187		6,167
Net decrease in cash and cash equivalents	(211,116)		(8,689)
Cash and cash equivalents of discontinued operations	—		(1,957)
Effect of exchange rate changes on cash and cash equivalents	314		(49)
Cash and cash equivalents and restricted cash at beginning of period	471,540		27,711
Cash and cash equivalents and restricted cash at end of period	$	260,738	$	17,016

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

1. BASIS OF PRESENTATION

During the third quarter of 2019, Kaman Corporation ("the Company") completed the sale of its Distribution business for total cash consideration of approximately $700.0 million, excluding certain working capital adjustments which were finalized in the first quarter of 2020 and transaction costs. The Distribution business' 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. See Note 3, Discontinued Operations, to the Condensed Consolidated Financial Statements for further information.

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, 2019. 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 second quarters for 2020 and 2019 ended on July 3, 2020, and June 28, 2019, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 post-implementation 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 was 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 did not 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 was permitted. An entity was 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 did not have a material impact on the Company's consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Adopted - continued

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 was permitted. There was no impact to the Company upon adoption of this standard.

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 was 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 did not have a material impact on the Company's consolidated financial statements.

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", ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief", ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" and ASU 2020-03, "Codification Improvements to Financial Instruments". The amendments in these updates affect the guidance within ASU 2016-13 and have been assessed with ASU 2016-13.

Recent Accounting Standards Yet to be Adopted

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity". The objective of this standard update is to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. The update removes certain separation models between a debt component and equity or derivative component for certain convertible instruments, adds new disclosure requirements for convertible instruments to improve the decision usefulness and relevance of the information being provided to users of financial statements, clarifies the guidance for determining whether a contract qualifies for a scope exception from derivative accounting, and amends EPS guidance to improve consistency. The standard update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption of the standard is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. An entity should adopt the guidance as of the beginning of its annual fiscal year and can do so using a modified retrospective method or fully retrospective method of transition. The Company is currently assessing the potential impact this standard update could have on its consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted - continued

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The objective of the standard is to address operational challenges likely to arise in accounting for contract modifications and hedge accounting due to reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The standard update is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected for a topic or industry subtopic, the amendments in this standard update must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. An entity may elect to apply the amendments for eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of that interim period. If an entity elects to apply any of the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020 and March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship. The impact of the adoption of this standard update is dependent on the Company's contracts modifications as a result of reference rate reform; however, the Company does not expect the adoption of the amendments associated with hedging relationships to have a material impact on the Company's consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes". The objective of the standard is to simplify the accounting for income taxes by removing certain exceptions and to improve consistent application of Topic 740 by clarifying and amending existing guidance. The standard update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in any interim period for which financial statements have not yet been issued. If early adopted in an interim period, the adjustments should be reflected as of the beginning of the annual period that includes that interim period. All amendments under the standard must be adopted in the same period. The Company is currently assessing the potential impact this standard update could have on its 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 post-retirement 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.

3. DISCONTINUED OPERATIONS

On August 26, 2019, the Company completed the sale of its Distribution business for total cash consideration of approximately$700.0 million, excluding certain working capital adjustments which were finalized in the first quarter of 2020. The sale of the Distribution business 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 business met the criteria set forth in Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations for discontinued operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

3. DISCONTINUED OPERATIONS (CONTINUED)

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 ("IT"), human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. The buyer has exercised the option to extend the support period for up to an additional year for certain IT services. The buyer has the right to terminate individual services at any point over the renewal term and has began to terminate certain services in the third quarter of 2020. Since the sale of the Distribution business, costs associated with the TSA were $13.2 million through July 3, 2020. The Company incurred $4.4 million and $8.5 million in costs associated with the TSA in the three-month and six-month fiscal periods ended July 3, 2020, which was included in costs from transition services agreement on the Company's Condensed Consolidated Statements of Operations. Since the sale of the Distribution business, the Company earned $9.7 million in income associated with the TSA through July 3, 2020. The Company earned $3.1 million and $6.0 million in income associated with the TSA in the three-month and six-month fiscal periods ended July 3, 2020, which was included in income from transition services on the Company's Condensed Consolidated Statements of Operations.

Since the sale of the Distribution business, cash outflows from the Company to its former Distribution business totaled $8.1 million through July 3, 2020, which primarily related to Distribution employee and employee-related costs incurred prior to the sale. Cash outflows from the Company to its former Distribution business after the sale totaled $0.3 million for the six-month fiscal period ended July 3, 2020. Since the sale of the Distribution business, cash inflows from the Company's former Distribution business to the Company totaled $14.1 million through July 3, 2020, which primarily related to cash received for services performed under the TSA and the $5.2 million working capital adjustment settled in the first quarter of 2020. Cash inflows from the Company's former Distribution business received in the six-month fiscal period ended July 3, 2020 totaled $10.5 million.

The results of operations for the Distribution business 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 Six Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
In thousands
Net sales from discontinued operations	$	—	$	289,863	$	—	$	580,817
Cost of sales from discontinued operations	—		207,574		—		416,264
Gross profit from discontinued operations	—		82,289		—		164,553
Selling, general and administrative expenses from discontinued operations	—		73,231		—		144,496
Net loss on sale of assets from discontinued operations	—		4		—		8
Operating income from discontinued operations	—		9,054		—		20,049
Interest expense, net from discontinued operations	—		8		—		20
Other income, net from discontinued operations	—		(10)		—		(12)
Earnings from discontinued operations before income taxes	—		9,056		—		20,041
Income tax expense	—		1,979		—		4,661
Earnings from discontinued operations before gain on disposal	—		7,077		—		15,380
Gain on disposal of discontinued operations, pretax	—		—		925		—
Income tax benefit on gain on disposal	—		—		233		—
Gain on disposal of discontinued operations, net of tax	—		—		692		—
Earnings from discontinued operations	$	—	$	7,077	$	692	$	15,380

In the six-month fiscal period ended July 3, 2020, the Company recorded a gain on disposal of discontinued operations as a result of the final settlement of the working capital adjustment, partially offset by transaction costs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

4. BUSINESS COMBINATIONS

On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering, LLC ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.5 million. Bal Seal is a leader in the design, development, and manufacturing of highly engineered products, including precision springs, seals, and contacts. With this acquisition, the Company has significantly expanded its portfolio of engineered products and offerings while creating new opportunities to reach customers in medical technology, aerospace and defense, and industrial end markets.

This acquisition was accounted for as a purchase transaction. The assets acquired and liabilities assumed were recorded based

on their fair values at the date of acquisition as follows (in thousands):


Cash	$	10,953
Restricted cash	1,932
Accounts receivable	9,525
Contract assets	784
Inventories	13,500
Property, plant and equipment	81,997
Operating right-of-use asset	653
Other tangible assets	2,492
Goodwill	110,789
Other intangible assets	94,600
Liabilities	(9,679)
Net assets acquired	317,546
Less cash received	(12,885)
Net consideration	$	304,661

The preliminary purchase price allocation for the acquisition of Bal Seal was based upon a preliminary valuation and the Company's estimates and assumptions for this acquisition are subject to change as the Company obtains additional information during the measurement period. During the second quarter, the Company adjusted certain assumptions used to value the identifiable intangible assets and the Company finalized the working capital adjustment. These changes resulted in an increase to goodwill of $6.0 million and a decrease to other intangible assets of $5.4 million. The principal areas of the purchase price allocation that are not yet finalized relate to the validation of certain forecasted cash flows used to value the identifiable intangible assets. These purchase price allocations will be finalized within the one-year measurement period.

The goodwill associated with this acquisition is tax deductible and is the result of expected synergies from combining the operations of the acquired business with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce.

The fair value of the identifiable intangible assets of $94.6 million, consisting of customer relationships, developed technologies, trade name and acquired backlog, was determined using the income approach. Specifically, a multi-period, excess earnings method was utilized for the customer relationships and backlog and the relief-from-royalty method was utilized for the trade name and developed technologies. The fair value of the customer relationships, $56.7 million, is being amortized based on the economic pattern of benefit over periods ranging from 28 to 36 years; the fair value of the developed technologies, $25.3 million, is being amortized on a straight-line basis over periods ranging from 7 to 13 years; the fair value of the trade name, $11.0 million, is being amortized on a straight-line basis over a 40 year term; and the fair value of the acquired backlog, $1.6 million, is being amortized on a straight-line basis over a period of 1 year. These amortization periods represent the estimated useful lives of the assets.

As of the acquisition date, Bal Seal had $1.9 million in costs accrued for its employee retention plans in other long term liabilities. Upon closing, the Company funded $24.7 million associated with these employee retention plans into escrow accounts. This amount and related interest was included in restricted cash on the Company's Condensed Consolidated Balance Sheets as of July 3, 2020. Eligible participants will receive an allocation of the escrow balance one year following the acquisition date. In addition to the purchase price of $317.5 million, the Company will incur $22.8 million in compensation expense associated with these retention plans in the year ended December 31, 2020. Of this amount, $5.7 million and $11.4 million was incurred in the three-month and six-month fiscal periods ended July 3, 2020, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019

(Unaudited)

4. BUSINESS COMBINATIONS (CONTINUED)

Bal Seal's results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on January 3, 2020. Bal Seal contributed $18.1 million and $41.4 million of revenue and $8.1 million and $13.9 million of operating loss for the three-month and six-month fiscal periods ended July 3, 2020. The following table reflects the unaudited pro forma operating results of the Company for the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019, which gives effect to the acquisition of Bal Seal as if the company had been acquired on January 1, 2019. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisitions been effective January 1, 2019, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and the acquired business adjusted for certain items discussed below. The pro forma information does not include the effects of any synergies, cost reduction initiatives or anticipated integration costs related to the acquisitions.


	For the Three Months Ended						For the Six Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
In thousands
Net sales	$	177,890	$	198,493	$	385,212	$	388,052
Earnings from continuing operations	$	5,243	$	2,024	$	16,925	$	(3,695)
Net earnings	$	5,243	$	9,101	$	17,617	$	11,685

Adjustments to pro forma earnings for the three-month fiscal period ended July 3, 2020, include a $5.7 million reduction in compensation expense associated with Bal Seal's employee retention plans, a $1.2 million reduction in costs associated with the inventory step-up, $1.4 million in lower amortization of intangible assets and $3.0 million in higher income tax expense. Adjustments to pro forma earnings for the three-month fiscal period ended June 28, 2019, include a $1.0 million reduction in net expenses associated with buildings purchased by the Company that were previously leased by Bal Seal, $2.5 million in incremental amortization of intangible assets, $5.7 million incremental compensation expense associated with Bal Seal's employee retention plans, $1.2 million in additional costs associated with the inventory step-up and 1.6 million in lower income tax expense.

Adjustments to pro forma earnings for the six-month fiscal period ended July 3, 2020, include a $11.4 million reduction in compensation expense associated with Bal Seal's employee retention plans, the absence of $8.5 million in acquisition-related costs, a $2.4 million reduction in costs associated with the inventory step-up, $1.8 million in lower amortization of intangible assets and $6.6 million in higher income tax expense. Adjustments to pro forma earnings for the six-month fiscal period ended June 28, 2019, include a $2.1 million reduction in net expenses associated with buildings purchased by the Company that were previously leased by Bal Seal, $4.2 million in incremental amortization of intangible assets, $11.4 million incremental compensation expense associated with Bal Seal's employee retention plans, $8.5 million of acquisition-related costs, $2.4 million in additional costs associated with the inventory step-up and $4.5 million in lower income tax expense.

Price	59.45	EPS	6
Shares	28	P/E	10
MCap	1,672	P/FCF	418
Net Debt	-329	EBIT	191
TEV	1,342	TEV/EBIT	7
TTM 2019-09-27, in MM, except price, ratios

10-Q	2020-07-03	Filed 2020-08-10
10-Q	2020-04-03	Filed 2020-05-11
10-K	2019-12-31	Filed 2020-02-24
10-Q	2019-09-27	Filed 2019-11-04
10-Q	2019-06-28	Filed 2019-07-31
10-Q	2019-03-29	Filed 2019-05-01
10-K	2018-12-31	Filed 2019-02-25
10-Q	2018-09-28	Filed 2018-11-01
10-Q	2018-06-29	Filed 2018-08-08
10-Q	2018-03-30	Filed 2018-05-07
10-K	2017-12-31	Filed 2018-02-27
10-Q	2017-09-29	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-31
10-Q	2017-03-31	Filed 2017-05-03
10-K	2016-12-31	Filed 2017-02-28
10-Q	2016-09-30	Filed 2016-10-27
10-Q	2016-07-01	Filed 2016-07-28
10-Q	2016-04-01	Filed 2016-05-03
10-K	2015-12-31	Filed 2016-02-29
10-Q	2015-10-02	Filed 2015-10-29
10-Q	2015-07-03	Filed 2015-07-30
10-Q	2015-04-03	Filed 2015-04-29
10-K	2014-12-31	Filed 2015-02-23
10-Q	2014-09-26	Filed 2014-11-03
10-Q	2014-06-27	Filed 2014-08-04
10-Q	2014-03-28	Filed 2014-04-28
10-K	2013-12-31	Filed 2014-02-27
10-Q	2013-09-27	Filed 2013-10-28
10-Q	2013-06-28	Filed 2013-07-29
10-Q	2013-03-29	Filed 2013-04-29
10-K	2012-12-31	Filed 2013-02-25
10-Q	2012-09-28	Filed 2012-10-31
10-Q	2012-06-29	Filed 2012-07-26
10-Q	2012-03-30	Filed 2012-04-30
10-K	2011-12-31	Filed 2012-02-27
10-Q	2011-09-30	Filed 2011-11-02
10-Q	2011-07-01	Filed 2011-08-04
10-Q	2011-04-01	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-02-28
10-Q	2010-10-01	Filed 2010-11-01
10-Q	2010-07-02	Filed 2010-08-05
10-Q	2010-04-02	Filed 2010-05-06
10-K	2009-12-31	Filed 2010-02-25

8-K	2020-09-10	Regulation FD, Exhibits
8-K	2020-08-20	Officers, Exhibits
8-K	2020-08-10	Earnings, Exhibits
8-K	2020-08-04	Officers, Regulation FD, Exhibits
8-K	2020-06-10
8-K	2020-05-26
8-K	2020-05-11
8-K	2020-04-10
8-K	2020-04-08
8-K	2020-03-30
8-K	2020-03-24
8-K	2020-03-19
8-K	2020-03-16
8-K	2020-02-25
8-K	2020-02-24
8-K	2020-01-03
8-K	2019-12-13
8-K	2019-12-11
8-K	2019-11-04
8-K	2019-11-04
8-K	2019-09-04
8-K	2019-08-26
8-K	2019-08-06
8-K	2019-07-31
8-K	2019-07-24
8-K	2019-07-15
8-K	2019-07-08
8-K	2019-06-25
8-K	2019-06-04
8-K	2019-05-01
8-K	2019-04-17
8-K	2019-02-27
8-K	2019-02-25
8-K	2018-11-15
8-K	2018-11-01
8-K	2018-09-12
8-K	2018-08-08
8-K	2018-06-05
8-K	2018-05-17
8-K	2018-05-07
8-K	2018-04-18
8-K	2018-04-18
8-K	2018-03-13
8-K	2018-02-27
8-K	2018-02-16

EX-31.1	ex311-732020.htm
EX-31.2	ex312-732020.htm
EX-32.1	ex321-732020.htm
EX-32.2	ex322-732020.htm

KAMN 10Q Quarterly Report

Kaman Earnings 2020-07-03