Kaman Earnings 2018-09-28

KAMN 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 kamn-9282018x10xq.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2018

¨ 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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x 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 x Accelerated filer ¨ Non-accelerated filer ¨

Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

At October 26, 2018, there were 27,958,678 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 28, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	26,222		$	36,904
Accounts receivable, net	235,682			313,451
Contract assets	128,039			—
Contract costs, current portion	5,296			—
Inventories	303,145			367,437
Income tax refunds receivable	4,157			2,889
Other current assets	35,411			27,188
Total current assets	737,952			747,869
Property, plant and equipment, net of accumulated depreciation of $269,241 and $252,611, respectively	189,133			185,452
Goodwill	347,549			351,717
Other intangible assets, net	95,255			117,118
Deferred income taxes	21,026			27,603
Contract costs, noncurrent portion	12,124			—
Other assets	28,610			25,693
Total assets	$	1,431,649		$	1,455,452
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt, net of debt issuance costs	$	8,750		$	7,500
Accounts payable – trade	136,030			127,591
Accrued salaries and wages	47,901			48,352
Contract liabilities, current portion	21,284			—
Advances on contracts	—			8,527
Income taxes payable	—			1,517
Other current liabilities	59,466			52,812
Total current liabilities	273,431			246,299
Long-term debt, excluding current portion, net of debt issuance costs	295,584			391,651
Deferred income taxes	7,218			8,024
Underfunded pension	82,572			126,924
Contract liabilities, noncurrent portion	85,044			—
Other long-term liabilities	49,506			46,898
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding	—			—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 29,524,943 and 29,141,467 shares issued, respectively	29,525			29,141
Additional paid-in capital	198,072			185,332
Retained earnings	592,103			587,877
Accumulated other comprehensive income (loss)	(116,661		)	(115,814		)
Less 1,545,603 and 1,325,975 shares of common stock, respectively, held in treasury, at cost	(64,745		)	(50,880		)
Total shareholders’ equity	638,294			635,656
Total liabilities and shareholders’ equity	$	1,431,649		$	1,455,452

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 Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Net sales	$	443,058		$	447,046		$	1,374,514		$	1,331,993
Cost of sales	314,500			308,581			976,206			934,689
Gross profit	128,558			138,465			398,308			397,304
Selling, general and administrative expenses	110,246			106,497			336,338			325,326
Other intangible assets impairment	10,039			—			10,039			—
Restructuring costs	1,657			2,500			5,304			2,500
Net gain on sale of assets	(640		)	(212		)	(2,228		)	(217		)
Operating income	7,256			29,680			48,855			69,695
Interest expense, net	5,085			5,264			15,439			15,546
Non-service pension and post retirement benefit cost (income)	(2,975		)	(618		)	(9,043		)	(2,203		)
Other expense (income), net	(179		)	(483		)	(160		)	(711		)
Earnings before income taxes	5,325			25,517			42,619			57,063
Income tax expense	3,893			9,237			12,027			21,034
Net earnings	$	1,432		$	16,280		$	30,592		$	36,029

Earnings per share:
Basic earnings per share	$	0.05		$	0.58		$	1.09		$	1.31
Diluted earnings per share	$	0.05		$	0.58		$	1.08		$	1.27
Average shares outstanding:
Basic	28,009			27,907			27,944			27,536
Diluted	28,258			28,219			28,258			28,319
Dividends declared per share	$	0.20		$	0.20		$	0.60		$	0.60

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
Net earnings	$	1,432		$	16,280		$	30,592		$	36,029
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1,522		)	7,731			(7,478		)	24,105
Unrealized gain (loss) on derivative instruments, net of tax expense (benefit) of $0 and ($43) and $1 and $72, respectively	—			(70		)	1			121
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $706 and $1,309 and $2,119 and $3,979, respectively	2,210			2,220			6,630			6,588
Other comprehensive income (loss)	688			9,881			(847		)	30,814
Comprehensive income	$	2,120		$	26,161		$	29,745		$	66,843

See accompanying notes to condensed consolidated financial statements.

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

	For the Nine Months Ended
	September 28, 2018			September 29, 2017
Cash flows from operating activities:
Net earnings	$	30,592		$	36,029
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	31,500			31,919
Amortization of debt issuance costs	1,355			1,564
Accretion of convertible notes discount	1,934			2,769
Provision for doubtful accounts	1,273			743
Net gain on sale of assets	(2,228		)	(217		)
Other intangible assets impairment	10,039			—
Loss on debt extinguishment	—			137
Net loss (gain) on derivative instruments	642			(789		)
Stock compensation expense	4,989			4,917
Deferred income taxes	8,094			6,450
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable	46,411			(44,537		)
Contract assets	(45,686		)	—
Contract costs	(6,576		)	—
Inventories	(10,561		)	12,317
Income tax refunds receivable	(1,268		)	5,430
Other assets	(9,720		)	(2,084		)
Accounts payable - trade	7,446			(5,373		)
Contract liabilities	94,935			231
Accrued restructuring costs	(445		)	1,467
Advances on contracts	—			1,458
Other current liabilities	2,687			1,850
Income taxes payable	(3,048		)	3,830
Pension liabilities	(36,185		)	(11,531		)
Other long-term liabilities	1,218			(2,746		)
Net cash provided by operating activities	127,398			43,834
Cash flows from investing activities:
Proceeds from sale of assets	2,433			513
Expenditures for property, plant & equipment	(23,630		)	(19,874		)
Acquisition of businesses (net of cash acquired)	—			(1,365		)
Other, net	(2,435		)	(2,375		)
Net cash used in investing activities	(23,632		)	(23,101		)
Cash flows from financing activities:
Net repayments under revolving credit agreements	(89,727		)	(73,779		)
Debt repayment	(5,625		)	(5,000		)
Proceeds from the issuance of 2024 convertible note	—			200,000
Repayment of 2017 convertible notes	—			(163,654		)
Purchase of capped call - 2024 convertible notes	—			(20,500		)
Proceeds from bond hedge settlement - 2017 convertible notes	—			58,564
Net change in bank overdraft	4,669			1,115
Proceeds from exercise of employee stock awards	6,448			5,426
Purchase of treasury shares	(11,996		)	(6,931		)
Dividends paid	(16,751		)	(15,892		)
Debt and equity issuance costs	—			(7,469		)
Other	(729		)	(379		)
Net cash used in financing activities	(113,711		)	(28,499		)
Net decrease in cash and cash equivalents	(9,945		)	(7,766		)
Effect of exchange rate changes on cash and cash equivalents	(737		)	1,990
Cash and cash equivalents at beginning of period	36,904			41,205
Cash and cash equivalents at end of period	$	26,222		$	35,429

Supplemental disclosure of noncash activities:
Value of common shares issued for unwind of warrant transactions	$	7,583		$	30,279

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

1. BASIS OF PRESENTATION

The December 31, 2017, Condensed Consolidated Balance Sheet amounts have been derived from the previously audited Consolidated Balance Sheet of Kaman Corporation and subsidiaries (collectively, the “Company”), but do not include all disclosures required by accounting principles generally accepted in the United States of America ("US GAAP"). 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. 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, 2017. 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 2018 and 2017 ended on September 28, 2018, and September 29, 2017, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting". The objective of this standard update is to address the diversity in practice and reduce the cost and complexity of applying guidance for a change to the terms or conditions of a share-based payment award. This ASU provides guidance on when an entity should apply modification accounting for stock compensation. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption was permitted. The adoption of this standard update had no impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715) - Improving the Net Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The objective of this standard update is to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This standard update requires employers to disaggregate the service cost component from the other components of net benefit cost. This ASU also provides guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The other components of net benefit cost, which are expected to more than offset the service cost component, are required to be presented in the income statement separately from the service cost component and outside of operating profit. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This ASU was applied retrospectively for the presentation of the service cost component and the other components of net benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component and the other components of net benefit cost in assets. The standard update allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company applied this practical expedient for prior period presentation. The Company currently estimates that the service cost component to be included in operating profit will be approximately $4.9 million and the other components of net benefit cost presented below operating income will be approximately $12.1 million of income in 2018. See Note 12, Pension Plans, for the service cost component and other components of net benefit in the current period and Note 3, Significant Accounting Policies Update, for the impact to prior period results.

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)". The objective of this standard update is to clarify the scope of asset derecognition guidance and to provide new guidance for partial sales of nonfinancial assets. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption was permitted; however, an entity was required to apply the amendments in this ASU in the same period that it applies the amendments for ASU 2014-09. The adoption of this standard update 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 nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Adopted - continued

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash". The objective of this standard update is to address the diversity in classification and presentation of changes in restricted cash on the statement of cash flows. Under this ASU, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption was permitted. The adoption of this standard update had no impact on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory". Under this ASU, income tax consequences of an intra-entity transfer of an asset other than inventory is recognized when the transfer occurs. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption was permitted. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments". This standard update was issued to address diversity in practice in how certain cash receipts and cash payments are presented and classified. The provisions of ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. Early adoption was permitted. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”. The objective of this standard update is to remove inconsistent practices with regards to the accounting for financial instruments between US GAAP and International Financial Reporting Standards (“IFRS”). The standard update intends to improve the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The provisions of this standard update are effective for interim and annual periods beginning after December 15, 2017. The adoption of this standard update had no impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"). The objective of this standard update is to remove inconsistent practices with regard to revenue recognition between US GAAP and IFRS. The standard intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The provisions of ASU No. 2014-09 are effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. As a result, the Company applied ASC 606 only to contracts that were not completed as of January 1, 2018. The adoption of ASC 606 resulted in a net reduction to opening retained earnings of approximately $9.6 million, net of tax, on January 1, 2018.

Subsequent to the issuance of ASU 2014-09, the FASB issued the following updates: ASU 2015-14, "Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date"; ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing"; ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients"; and ASU 2016-20, "Technical Corrections and Improvements to Topic 606". The amendments in these updates affect the guidance contained within ASU 2014-09 and were similarly adopted on January 1, 2018. See Note 3, Significant Accounting Policies Update, for further information on the impacts of these standard updates.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted

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 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 remove 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 February 2018, the FASB issued 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 Company is currently assessing the potential impact this standard update could have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities". The objective of this standard update is to improve the financial reporting of hedging relationships to better reflect the economic results of an entity's risk management activities in its financial statements. This ASU expands hedge accounting for both nonfinancial and financial risk components and refines the measurement of hedge results to better reflect an entity's hedging strategies. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted

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 February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under this ASU as amended, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under this ASU as amended. This standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company has developed a project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, was completed in the third quarter of 2017. The Company began the second phase in the fourth quarter of 2017, which included implementing new lease administration software and entering the Company's lease information and financial data into the software, establishing policies discussed below and understanding the initial financial impact this standard update will have on the Company's consolidated financial statements. Phase three, which the Company will begin in the fourth quarter of 2018, includes integrating the standard update into financial reporting processes and systems and developing a more robust understanding of the financial impact of this standard update. The Company anticipates the ASU will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the ASU to have a material impact on the Company's cash flows, results of operations or debt covenant compliance.

The Company has elected the 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. 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. 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 certain asset groups.

Subsequent to the issuance of ASU 2016-02, the FASB has issued the following updates: ASU 2018-10, "Codification Improvements to Topic 842, Leases", and ASU 2018-11, "Leases (Topic 842): Targeted Improvements - Transition - Comparative Reporting at Adoption". The amendments in these updates affect the guidance contained within ASU 2016-02 and have been assessed as part of the Company's leasing project plan.

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, 2017. Significant changes to the Company's accounting policies as a result of adopting new accounting standards are discussed below:

Revenue Recognition

Under ASC 606, the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued

A contract is accounted for when there has been approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Performance obligations under a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. In certain instances, the Company has concluded distinct goods or services should be accounted for as a single performance obligation when they are a series of distinct goods or services that have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer (the goods or services are distinct) and if the promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (the goods or services are distinct in the context of the contract). If these criteria are not met, the promised services are accounted for as a single performance obligation. The transaction price is determined based on the consideration that the Company will be entitled to in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price, generally utilizing the expected value method. Determining the transaction price requires significant judgment. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. Standalone selling price is determined by the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Performance obligations are satisfied either over time or at a point in time as discussed in further detail below. In addition, the Company's contracts with customers generally do not include significant financing components or non-cash consideration.

In certain instances, the Company has accounted for contracts using the portfolio approach, a practical expedient permissible under the standard. The determination of when the use of the portfolio approach is appropriate requires judgment from management based on consideration of all the facts and circumstances. The Company uses the portfolio approach when the effect of accounting for a group of contracts or a group of performance obligations would not differ materially from considering each contract or performance obligation separately. This determination requires the use of estimates and assumptions that reflect the size and composition of the portfolio. The Company primarily uses the portfolio approach within its over time revenue streams throughout the Distribution segment as well as for its commercial and defense bearings and structures businesses in the Aerospace segment. The Company's primary criteria considered when using the portfolio approach is the commonality of economic factors, which generally follow the product type based on consistent production costs and standard pricing for the products.

Distribution segment

The Distribution segment has historically recognized the majority of its revenue when the sales price was fixed, collectability was reasonably assured and the product's title and risk of loss had transferred to the customer. This method of revenue recognition remains substantially the same as revenue will be recognized at the point in time when title transfers to the customer, as this is when the performance obligations are generally controlled by the customer. A small percentage of revenue within the Distribution segment, specifically certain contracts for value-add services, engineering services and repairs, are accounted for over time under ASC 606. For the over time contracts within the Distribution segment, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of assets to the customer which occurs as cost is incurred under the contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The Company performs detailed quarterly reviews of the progress and execution of its performance obligations under certain larger contracts. As part of this process, management reviews information, primarily its estimated costs at completion and costs incurred to date by its vendors as a majority of production costs at the segment are incurred by third party vendors. These estimated costs are included in the calculation of the measures of progress towards completion.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued

Distribution segment - continued

Additionally, the Company includes freight costs charged to customers in net sales and the correlating expense as a cost of sales. Sales tax collected from customers is excluded from net sales in the Company's Condensed Consolidated Statements of Operations.

Aerospace segment

The majority of long-term contracts in the Aerospace segment were historically accounted for under the percentage-of-completion method using units-of-delivery as a measurement basis. Many of these contracts moved to an over time revenue model under ASC 606. For example, revenue for the Company's Joint Programmable Fuze ("JPF") program with the U.S. Government ("USG") moved from percentage-of-completion using units-of-delivery as the measurement basis to the over time revenue recognition model using input costs as the basis for recognizing progress to completion. Conversely, revenue for the K-MAX® program moved from cost-to-cost revenue recognition under percentage-of-completion accounting to the point-in-time method, with revenue on these aircraft being recognized upon delivery to the end customer. For certain programs, early-contract unit costs in excess of the average expected cost over the life of the contract and general and administrative costs were previously capitalized and amortized over the period of performance of the contract. With the adoption of this standard update, $32.5 million of previously capitalized deferred costs in excess of the contract average and previously contractually recoverable general and administrative costs were adjusted within the cumulative effect to retained earnings and will not be amortized into earnings after January 1, 2018.

To determine the appropriate revenue recognition model for the Aerospace segment's long-term contracts, the Company evaluates whether a contract exists, considering whether multiple contracts should be combined as one single contract and then whether the contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment, as these decisions could change the amount of revenue and profit recorded in a given period. For certain programs, the Company may promise to provide distinct goods or services within a contract, in which case these are separated into more than one performance obligation.

For certain programs in the Aerospace segment, the Company recognizes revenue over time because of continuous transfer of control to the customer. For USG contracts, this continuous transfer of control to the customer is supported by clauses in the contract that provide lien rights to the customer over the work in progress, thereby control transfers as costs are incurred. For non-USG contracts, the customer typically controls the work in progress because the Company is producing products that do not have an alternative use to the Company and where contractual termination clauses provide the Company rights to payment for work performed to date plus a reasonable profit.

Revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of assets to the customer which occurs as cost is incurred under the contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Total estimated contract costs generally include labor, materials and subcontractors’ costs, other direct costs and related overhead costs. These estimates also include the estimated cost of satisfying offset obligations, as required under certain contracts. The complexity of certain programs as well as technical risks and uncertainty as to the future availability of materials and labor resources could affect the Company’s ability to accurately estimate future contract costs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued

Aerospace segment - continued

For contracts that recognize revenue 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 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 changes in the estimates of the stage of completion of Aerospace contracts, more specifically the JPF contract with the USG and the AH-1Z contract. For the three-month and nine-month fiscal periods ended September 29, 2017, there were net increases in the Company's operating income attributable to changes in contract estimates of $1.1 million and $3.2 million, respectively. These increases were primarily a result of improved performance on the JPF USG Program, the AH-1Z program and the SH-2G program with Peru. These improvements were partially offset by cost growth on the K-MAX® and A-10 programs.

Due to the nature of the work required to be performed on many of the Company's performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. From time-to-time the Company enters into long-term contracts with the USG that contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. The Company estimates variable consideration at the most likely amount to which it expects to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company's anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company does not include financing components as variable consideration if less than one year. At September 28, 2018, the Company did not have any significant financing components.

Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or makes changes to the existing enforceable rights and obligations. Contract modifications for goods or services that are not distinct from the existing contract are accounted for as if they were part of that existing contract. In these cases, the effect of the contract modification on the transaction price and the measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis, except when such modifications relate to a performance obligation that is a series of substantially the same distinct goods or services. If the modification relates to a performance obligation for a series of substantially the same distinct goods or services, the modification is treated prospectively. Contract modifications for goods or services that are considered distinct from the existing contract are accounted for as separate contracts. The Company applied the practical expedient for any contracts that were modified prior to January 1, 2018; therefore, the contracts were not restated retrospectively for those modifications.

For other contracts within the Aerospace segment, excluding the long-term contracts discussed above, the method of revenue recognition will remain substantially the same under ASC 606. For these contracts, revenue will be primarily recognized at the point in time when the title transfers to the customer, as this is when the performance obligation is controlled by the customer. Additionally, a small percentage of revenue related to certain contracts for repairs and overhauls within the Aerospace segment is accounted for over time under ASC 606. Under these contracts, revenue is generally recognized as work is performed in proportion to the actual costs incurred as compared to total estimated contract costs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued

The cumulative effect of the changes made to the Company's Consolidated Balance Sheets as of January 1, 2018 as a result of the adoption of ASC 606 was as follows:



	Balance at					Balance at
in thousands	December 31, 2017		Adjustments due to ASC 606			January 1, 2018
Assets
Accounts receivable, net	$	313,451	$	(29,242	)	$	284,209
Contract assets	—		82,699			82,699
Contract costs, current portion	—		3,022			3,022
Inventories	367,437		(73,674		)	293,763
Other current assets	27,188		33			27,221
Deferred income taxes	27,603		4,170			31,773
Contract costs, noncurrent portion	—		7,852			7,852

Liabilities
Accounts payable - trade	$	127,591	$	1,068		$	128,659
Contract liabilities, current portion	—		10,705			10,705
Advances on contracts	8,527		(8,527		)	—
Other current liabilities	52,812		(1,016		)	51,796
Income taxes payable	1,517		1,525			3,042
Contract liabilities, noncurrent portion	—		689			689

Equity
Retained earnings	$	587,877	$	(9,584	)	$	578,293

The reduction to retained earnings of $9.6 million in the cumulative effect adjustment on January 1, 2018 primarily reflects the reduction of $32.5 million in costs previously capitalized in inventory, which included deferred unit costs in excess of the contract average and previously capitalized general and administrative costs, partially offset by the acceleration of net sales of $62.3 million and associated gross profit of $20.2 million for deliveries that would have occurred in 2018, but are now recognized over time as costs are incurred.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued

The following tables summarize the impacts of ASC 606 on the Company's condensed consolidated financial statements.



	September 28, 2018
	As reported		Adjustments			Balances without adoption of ASC 606
In thousands
Assets
Accounts receivable, net	$	235,682	$	20,453		$	256,135
Contract assets	128,039		(128,039		)	—
Contract costs, current portion	5,296		(5,296		)	—
Inventories	303,145		118,777			421,922
Income tax refunds receivable	4,157		5,643			9,800
Other current assets	35,411		(182		)	35,229
Deferred income taxes	21,026		(4,567		)	16,459
Contract costs, noncurrent portion	12,124		(12,124		)	—

Liabilities
Accounts payable - trade	$	136,030	$	(1,563	)	$	134,467
Contract liabilities, current portion	21,284		(21,284		)	—
Advances on contracts, current portion	—		19,025			19,025
Other current liabilities	59,466		561			60,027
Deferred income taxes	7,218		—			7,218
Contract liabilities, noncurrent portion	85,044		(85,044		)	—
Advances on contracts, noncurrent portion	—		85,044			85,044

Equity
Retained earnings	$	592,103	$	(2,074	)	$	590,029

For the nine-month fiscal period ended September 28, 2018, the Company realized changes of asset and liability accounts as described above, with no impact to the Company's cash flows from operating activities.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Revenue Recognition - continued



	For the Three Months Ended
	September 28, 2018
	As reported			Adjustments			Balances without adoption of ASC 606
In thousands
Net sales	$	443,058		$	(10,780	)	$	432,278
Cost of sales	314,500			(5,856		)	308,644
Gross profit	128,558			(4,924		)	123,634
Selling, general and administrative expenses	110,246			(2,369		)	107,877
Other intangible assets impairment	10,039			—			10,039
Restructuring costs	1,657			—			1,657
Net gain on sale of assets	(640		)	—			(640		)
Operating income	7,256			(2,555		)	4,701
Interest expense, net	5,085			—			5,085
Non-service pension and post retirement benefit cost (income)	(2,975		)	—			(2,975		)
Other expense (income), net	(179		)	—			(179		)
Earnings before income taxes	5,325			(2,555		)	2,770
Income tax expense	3,893			(607		)	3,286
Net earnings	$	1,432		$	(1,948	)	$	(516	)



	For the Nine Months Ended
	September 28, 2018
	As reported			Adjustments			Balances without adoption of ASC 606
In thousands
Net sales	$	1,374,514		$	(72,754	)	$	1,301,760
Cost of sales	976,206			(52,484		)	923,722
Gross profit	398,308			(20,270		)	378,038
Selling, general and administrative expenses	336,338			(4,890		)	331,448
Other intangible assets impairment	10,039			—			10,039
Restructuring costs	5,304			—			5,304
Net gain on sale of assets	(2,228		)	—			(2,228		)
Operating income	48,855			(15,380		)	33,475
Interest expense, net	15,439			—			15,439
Non-service pension and post retirement benefit cost (income)	(9,043		)	—			(9,043		)
Other expense (income), net	(160		)	—			(160		)
Earnings before income taxes	42,619			(15,380		)	27,239
Income tax expense	12,027			(3,721		)	8,306
Net earnings	$	30,592		$	(11,659	)	$	18,933

For the three-month and nine-month fiscal periods ended September 28, 2018, the only adjustments to comprehensive income when comparing the balances with ASC 606 and the balances without ASC 606 included the adjustments to net earnings presented above.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Accounts Receivable

The Company's receivables, net, consist of amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses inherent in the trade accounts receivable and billed contracts balance. Management determines the allowance based on known troubled accounts, historical experience and other currently available evidence.

Contract Assets

The Company's contract assets include unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is applied and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts do not exceed their net realizable value. Contract assets are generally classified as current as such amounts are billable and collectible within twelve months.

Contract Costs

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. If these costs are determined to have an amortization period of less than one year, the Company applies the practical expedient and the related costs are expensed as incurred. If the amortization period is determined to be greater than a year and the incremental costs to obtaining the contract qualify as an asset, then the contract costs are recorded and amortized over the estimated contract revenue. At September 28, 2018, costs to fulfill a contract and costs to obtain a contract were $9.6 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 28, 2018.

Contract Liabilities

The Company's contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue. Advance payments and billings in excess of revenue recognized are classified as current or noncurrent based on the timing of when recognition of revenue is expected. At September 28, 2018, the noncurrent portion of contract liabilities was $85.0 million, which is included in contract liabilities, noncurrent portion in the Company's Condensed Consolidated Balance Sheets.

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 28, 2018, the aggregate amount of the transaction price allocated to backlog was $1.0 billion. The Company expects to recognize revenue on approximately $612.9 million of this amount over the next 12 months, with the remaining amount to be recognized thereafter.

Pension

The Company accounts for its defined benefit pension plan by recognizing the overfunded or underfunded status of the plan, calculated as the difference between the plan assets and the projected benefit obligation, as an asset or liability on the balance sheet, with changes in the funded status recognized in comprehensive income in the year in which they occur.

Expenses and liabilities associated with the plan are determined based upon actuarial valuations. Integral to the actuarial valuations are a variety of assumptions including expected return on plan assets and discount rate. The Company regularly reviews the assumptions, which are updated at the measurement date, December 31^st. The impact of differences between actual results and the assumptions are accumulated and generally amortized over future periods, which will affect expense recognized in future periods. The service cost component of net benefit cost is recorded in cost of sales and selling, general and administrative expenses separately from the other components of net benefit cost, which are recorded to non-service pension and postretirement benefit cost (income). See Note 12, Pension Plans, for further information.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

3. SIGNIFICANT ACCOUNTING POLICIES UPDATE (CONTINUED)

Pension - continued

The following tables summarize the impacts of the adoption of ASU 2017-07 on the Company's Condensed Statement of Operations and segment operating income.



	For the Three Months Ended
	September 29, 2017
	As previously reported			Adjustments			As adjusted
In thousands
Cost of sales	$	308,111		$	470		$	308,581
Gross profit	138,935			(470		)	138,465
Selling, general and administrative expenses	106,349			148			106,497
Operating income	30,298			(618		)	29,680
Non-service pension and post retirement benefit cost (income)	—			(618		)	(618		)

Segment operating income
Distribution	$	13,369		$	(277	)	$	13,092
Aerospace	31,877			(559		)	31,318
Corporate expenses	(15,160		)	218			(14,942		)



	For the Nine Months Ended
	September 29, 2017
	As previously reported			Adjustments			As adjusted
In thousands
Cost of sales	$	933,279		$	1,410		$	934,689
Gross profit	398,714			(1,410		)	397,304
Selling, general and administrative expenses	324,533			793			325,326
Operating income	71,898			(2,203		)	69,695
Non-service pension and post retirement benefit cost (income)	—			(2,203		)	(2,203		)

Segment operating income
Distribution	$	40,997		$	(832	)	$	40,165
Aerospace	74,736			(1,676		)	73,060
Corporate expenses	(44,052		)	305			(43,747		)

4. 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 the first half of 2019. The Company currently expects these actions to result in approximately $7.0 million to $8.5 million in pre-tax restructuring and transition charges and, beginning in 2019, will result in total cost savings of approximately $4.0 million annually.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

4. RESTRUCTURING COSTS (CONTINUED)

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, 2017	$	1,172		$	179		$	1,351
Provision	1,080			2,174			3,254
Cash payments	(1,722		)	(2,157		)	(3,879		)
Changes in foreign currency exchange rates	(10		)	(11		)	(21		)
Restructuring accrual balance at September 28, 2018	$	520		$	185		$	705

⁽¹⁾ Includes costs associated with consolidation of facilities.

The above accrual balance was included in other current liabilities on the Company's Consolidated Balance Sheets. For the three-month and nine-month fiscal periods, the Aerospace segment incurred $1.2 million and $3.5 million in costs, respectively, associated with the restructuring activities described above. Included in this expense is approximately $0.2 million of cost that primarily relates to the write-off of inventory for various small order programs that the Company will no longer continue to manufacture as a result of the consolidation of operations. Since the announcement of these restructuring activities, restructuring expense as of September 28, 2018 was $6.1 million. Included in this expense is approximately $1.2 million of cost that primarily relates to the write-off of inventory for various small order programs that the Company will no longer continue to manufacture as a result of the consolidation of operations.

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. The Distribution segment incurred $0.4 million and $0.6 million in separation costs for certain employees in the three-month and nine-month fiscal periods ended September 28, 2018, respectively. These amounts are not included in the table above.

5. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consists of the following:



	September 28, 2018			December 31, 2017
In thousands
Trade receivables	$	172,999		$	152,078
U.S. Government contracts:
Billed	22,008			26,093
Cost and accrued profit - not billed	1,251			862
Commercial and other government contracts
Billed	43,012			107,962
Cost and accrued profit - not billed	818			30,590
Less allowance for doubtful accounts	(4,406		)	(4,134		)
Accounts receivable, net	$	235,682		$	313,451

The decrease in commercial and other government contracts - billed was primarily due to the receipt of payments related to a JPF direct commercial sales ("DCS") contract and the Company's bearings products. The decrease in commercial and other government contracts cost and accrued profit - not billed was primarily attributable to the adoption of ASC 606.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

5. ACCOUNTS RECEIVABLE, NET (CONTINUED)

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 28, 2018		December 31, 2017
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	900	$	900

6. 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 is as follows:



	September 28, 2018		January 1, 2018⁽¹⁾		$ Change		% Change
In thousands
Contract assets	$	128,039	$	82,699	$	45,340	54.8	%

Contract costs, current portion	$	5,296	$	3,022	$	2,274	75.2	%
Contract costs, noncurrent portion	$	12,124	$	7,852	$	4,272	54.4	%

Contract liabilities, current portion	$	21,284	$	10,705	$	10,579	98.8	%
Contract liabilities, noncurrent portion	$	85,044	$	689	$	84,355	12,243.1	%

⁽¹⁾ These amounts include the impact of the cumulative effect adjustment resulting from the adoption of ASC 606.

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 28, 2018. This increase is primarily related to work performed and not yet billed on the JPF program with the USG, legacy fuze programs and the SH-2G program with Peru in the Aerospace segment and the automation, control and energy product line at the Distribution segment. There were no significant impairment losses related to the Company's contract assets during the nine-month fiscal period ended September 28, 2018.

Contract assets includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:



	September 28, 2018		December 31, 2017
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	2,941	$	—

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

6. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES (CONTINUED)

Contract Assets - continued

On January 1, 2018, $4.3 million in claims previously included in inventory were reclassified to contract assets as part of the cumulative effect adjustment resulting from the adoption of ASC 606. This amount was partially offset by the settlement of claims in the nine-month fiscal period ended September 28, 2018.

Contract Costs

The increase in contract costs, current portion was primarily related to costs to obtain a JPF DCS contract and costs to fulfill certain metallic structures and composite structures programs, partially offset by amortization of contract costs. 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 increase in contract costs, noncurrent portion was primarily related to costs to obtain a JPF DCS contract.

Contract Liabilities

The increase in contract liabilities, current portion was primarily due to advance payments received for a JPF DCS contract and the K-MAX® program, partially offset by revenue recognized in excess of payments received on these performance obligations, primarily associated with deliveries under a JPF DCS contract and the K-MAX® program. For the three-month and nine-month fiscal periods ended September 28, 2018, revenue recognized related to contract liabilities, current portion at January 1, 2018 was $1.4 million and $7.8 million.

The increase in contract liabilities, noncurrent portion was due to advance payments received for a JPF DCS contract. For the three-month and nine-month fiscal periods ended September 28, 2018, the Company did not recognize revenue against contract liabilities, noncurrent portion.

7. 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 28, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
In thousands
Debt ⁽¹⁾	$	310,067	$	362,943	$	405,602	$	428,432

⁽¹⁾ These amounts are classified within Level 2.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

7. FAIR VALUE MEASUREMENTS (CONTINUED)

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.

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.

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 28, 2018, the derivative instruments have been included in other current liabilities on the Condensed Consolidated Balance Sheets. At December 31, 2017, the derivative instruments were included in other current assets and other assets on the Condensed 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 28, 2018, such credit risks have 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 10, Goodwill and Other Intangible Assets, Net for further information regarding the calculation of fair value.

8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair values of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for speculative purposes.

Forward Exchange Contracts

The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts are designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction. These contracts were not material to the Company's Condensed Consolidated Balance Sheets as of September 28, 2018 and December 31, 2017. The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

9. INVENTORIES

Inventories consist of the following:



	September 28, 2018		December 31, 2017
In thousands
Merchandise for resale	$	155,430	$	151,520
Raw materials	14,338		18,871
Contracts and other work in process (including certain general stock materials)	114,555		171,403
Finished goods	18,822		25,643
Total	$	303,145	$	367,437

The decrease in contracts and other work in process (including certain general stock materials) was primarily attributable to the adoption of ASC 606.

Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:



	September 28, 2018		December 31, 2017
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	880	$	4,375

As a result of the adoption of ASC 606, $4.3 million of claims in inventory at December 31, 2017 were reclassified to contract assets as part of the cumulative effect adjustment on January 1, 2018.

At September 28, 2018, and December 31, 2017, $44.9 million and $25.5 million, respectively, of K-MAX® inventory, including inventory associated with the new build aircraft, was included in contracts and other work in process inventory and finished goods on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $12.7 million of the K-MAX® inventory will be sold after September 28, 2019, based upon the anticipation of additional aircraft manufacturing and supporting the fleet for the foreseeable future.

At September 28, 2018, and December 31, 2017, $5.4 million and $6.2 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $5.1 million of the SH-2G(I) inventory will be sold after September 28, 2019. This balance represents spares requirements and inventory to be used on SH-2G programs.

10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company:



	Distribution		Aerospace			Total
In thousands
Gross balance at December 31, 2017	$	149,204	$	218,765		$	367,969
Accumulated impairment	—		(16,252		)	(16,252		)
Net balance at December 31, 2017	149,204		202,513			351,717
Additions	—		—			—
Impairments	—		—			—
Foreign currency translation	—		(4,168		)	(4,168		)
Ending balance at September 28, 2018	$	149,204	$	198,345		$	347,549

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

Goodwill - continued

In accordance with ASC 350, Intangibles - Goodwill and Other ("ASC 350"), the Company evaluates goodwill for possible impairment on at least an annual basis. The Company is currently in the process of preparing its forecast, which it will use to complete its annual evaluation during the fourth quarter. Based upon information obtained at this point in the forecast process, management has determined that the Company will perform a quantitative assessment, rather than a qualitative assessment, for the Aerosystems reporting unit. The quantitative assessment could result in the determination that there has been an impairment of some or all of the goodwill associated with the reporting unit. The goodwill associated with the Aerosystems reporting unit is $51.0 million.

Other Intangibles

Other intangible assets consisted of:



		At September 28,					At December 31,
		2018					2017
	Amortization Period	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
In thousands
Customer lists / relationships	6-26 years	$	136,811	$	(62,425	)	$	159,592	$	(65,036	)
Developed technologies	10-20 years	19,842		(3,704		)	20,148		(2,790		)
Trademarks / trade names	3-15 years	8,813		(4,223		)	8,995		(3,905		)
Non-compete agreements and other	1-9 years	8,309		(8,249		)	8,345		(8,319		)
Patents	17 years	523		(442		)	523		(435		)
Total		$	174,298	$	(79,043	)	$	197,603	$	(80,485	)

In accordance with ASC 360 - Property, Plant, and Equipment ("ASC 360"), the Company is required to evaluate long-lived intangible assets for possible impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. During the third quarter of 2018, management identified a triggering event for possible impairment at a certain asset group in its U.K. business based on a review of its historical performance, the current forecast for the remainder of the year and the loss of future orders from one of its significant customers, requiring the Company to evaluate the intangible assets for impairment. The Company performed a recoverability test as defined under ASC 360 by comparing the undiscounted cash flows of the asset group to its carrying value. The estimated undiscounted future cash flows of the business did not exceed the carrying value of the assets. Based on these results, the Company calculated the fair value of the asset group, using an income approach based on the estimated future cash flows, discounted to present value using a rate commensurate with the risks associated with the asset group's weighted average cost of capital. This calculation resulted in a write-off of $10.0 million for a certain asset group at the U.K. business. This charge has been included in the operating results of the Company's Aerospace segment. Other intangible assets, gross, and accumulated amortization decreased by $21.0 million and $11.0 million, respectively, as a result of the $10.0 million impairment of customer lists/relationships at the asset group within the Company's U.K. business incurred in the three-month and nine-month fiscal periods ended September 28, 2018.

11. DEBT

Convertible Notes

During 2017, the Company settled the Convertible Notes due 2017 ("2017 Notes"), the associated bond hedge transactions and a portion of the associated warrant transactions. A portion of the existing warrant transactions associated with the 2017 Notes remained outstanding as of December 31, 2017. During the first half of 2018, the remaining warrant transactions were settled with 114,778 shares of the Company's common stock.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

12. PENSION PLANS

Components of net pension cost for the Qualified Pension Plan and Supplemental Employees’ Retirement Plan ("SERP") are as follows:



	For the Three Months Ended
	Qualified Pension Plan						SERP
	September 28, 2018			September 29, 2017			September 28, 2018		September 29, 2017
In thousands
Service cost	$	1,224		$	1,198		$	—	$	—
Interest cost on projected benefit obligation	5,951			6,089			72		70
Expected return on plan assets	(11,960		)	(10,512		)	—		—
Amortization of net loss	2,843			3,486			73		43
Additional amount recognized due to curtailment/settlement	—			—			46		206
Net pension (income) cost	$	(1,942	)	$	261		$	191	$	319



	For the Nine Months Ended
	Qualified Pension Plan						SERP
	September 28, 2018			September 29, 2017			September 28, 2018		September 29, 2017
In thousands
Service cost	$	3,672		$	3,595		$	—	$	—
Interest cost on projected benefit obligation	17,853			18,268			189		193
Expected return on plan assets	(35,880		)	(31,536		)	—		—
Amortization of net loss	8,529			10,458			220		109
Additional amount recognized due to curtailment/settlement	—			—			46		305
Net pension (income) cost	$	(5,826	)	$	785		$	455	$	607

During the nine-month fiscal period ended September 28, 2018, the Company contributed $30.0 million to the qualified pension plan. No further contributions are expected to be made to the qualified pension plan during 2018. During the nine-month fiscal period ended September 28, 2018, the Company contributed $0.8 million to the SERP. The Company plans to contribute an additional $0.1 million to the SERP in 2018. For the 2017 plan year, the Company contributed $10.0 million to the qualified pension plan and $3.1 million to the SERP.

Other

In accordance with ASU 2017-07, "Compensation - Retirement Benefits (Topic 715) - Improving the Net Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", the Company disaggregated the service cost component from the other components of net benefit cost, which were presented in the income statement separately from the service cost component outside of operating profit. This ASU was applied retrospectively. See Note 3, Significant Accounting Policies Update, for further information.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

13. COMMITMENTS AND CONTINGENCIES

Pension Freeze

Effective December 31, 2015, the Company's qualified pension plan was frozen with respect to future benefit accruals. Under USG Cost Accounting Standard (“CAS”) 413 the Company must determine the USG’s share of any pension curtailment adjustment calculated in accordance with CAS. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability representing its estimate of the amount due to the USG based on the Company's pension curtailment adjustment calculation, which was submitted to the USG for review in December 2016. The Company has maintained its accrual at $0.3 million as of September 28, 2018. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

New Hartford Property

In connection with the sale of the Company’s Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to the transfer of the New Hartford, Connecticut, facility leased by that segment for guitar manufacturing purposes (“Ovation”). Under the Transfer Act, those responsibilities essentially consist of assessing the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental assessment process, which began in 2008, has been completed and site remediation is in process.

The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $1.6 million. At September 28, 2018, the Company had $0.7 million accrued for these environmental remediation activities. A portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.

Bloomfield Property

In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and is currently remediating the property under the guidance of the Connecticut Department of Environmental Protection ("CTDEP"). The assumed environmental liability of $10.3 million was determined by taking the undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. The total amount paid to date in connection with these environmental remediation activities is $13.5 million. At September 28, 2018, the Company had $2.3 million accrued for these environmental remediation activities. A portion ($0.5 million) of the accrual related to this property is included in other current liabilities, and the balance is included in other long-term liabilities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.

Rimpar Property

In connection with the Company's purchase of GRW, the Company assumed responsibility for the environmental remediation at the Rimpar, Germany facility. In 2016, the Company completed an assessment which determined the estimated remediation liability was $0.5 million. The total amount paid to date in connection with these environmental remediation activities is $0.2 million. The balance ($0.3 million) of the accrual related to this property is included in other current liabilities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Aerospace Claim Matter

On June 29, 2016, the Company received notification from a customer of their intent to file a claim for recovery of costs and expenses related to rework on certain aerostructure components previously delivered by the Company to the customer. The original notification did not indicate the extent of the rework undertaken by the customer, the cost or expenses incurred by the customer or the time frame in which the customer anticipated filing its formal claim. On October 17, 2017, the Company received a letter from the customer seeking to recover $12.4 million associated with the rework of these components and related costs incurred by the customer. The Company estimates the cost to rework the aerostructure components delivered to the customer over the time period in question is approximately $0.2 million. In the first nine months of 2018, the parties continued to exchange correspondence and supporting documentation to support their respective positions. The parties continue to seek resolution of this claim through further discussions and negotiations. The Company does not believe the claim has merit and will continue to vigorously defend against the claim, and will pursue appropriate legal remedies necessary to protect its position. Based on this analysis, the Company has accrued $0.2 million, the estimated cost to rework the aerostructure components, as of September 28, 2018; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

Offset Agreement

During January 2018, the Company entered into an offset agreement as a condition to obtaining orders from a foreign customer for the Company's JPF product. This agreement is designed to return economic value to the foreign country by requiring the Company to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreement may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects and the purchase by third parties of supplies from in-country vendors. This agreement may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. At September 28, 2018, the offset agreement had an outstanding notional value of approximately $194.0 million, which is equal to sixty percent of the contract value of $324.0 million as defined by the agreement between the customer and the Company. The amount ultimately applied against the offset agreement is based on negotiations with the customer and may require cash outlays that represent only a fraction of the notional value in the offset agreement.

The Company is currently in the process of developing a proposal to satisfy the offset requirements that will be submitted to the customer before the end of the year. The Company expects approval of the proposal during the first half of 2019. The satisfaction of the offset requirements will be determined by the customer and is expected to occur over a seven-year period. In the event the offset requirements of the contract are not met, the Company could be liable for potential penalties up to $16.5 million payable to the customer. The Company has not recognized any revenue associated with this contract and has considered the potential penalties of $16.5 million as a reduction to the transaction price in its determination of the value of the remaining performance obligations within this contract.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

14. COMPUTATION OF EARNINGS PER SHARE

The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each period. The computation of diluted earnings per share reflects the common stock equivalency of dilutive options granted to employees under the Company's stock incentive plan, shares issuable on redemption of its convertible notes and shares issuable upon redemption of outstanding warrants.



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
In thousands, except per share amounts
Net earnings	$	1,432	$	16,280	$	30,592	$	36,029

Basic:
Weighted average number of shares outstanding	28,009		27,907		27,944		27,536
Basic earnings per share	$	0.05	$	0.58	$	1.09	$	1.31

Diluted:
Weighted average number of shares outstanding	28,009		27,907		27,944		27,536
Weighted average shares issuable on exercise of dilutive stock options	208		148		222		152
Weighted average shares issuable on redemption of convertible notes	41		117		49		457
Weighted average shares issuable on redemption of warrants related to the 2017 Notes	—		47		43		174
Total	28,258		28,219		28,258		28,319

Diluted earnings per share	$	0.05	$	0.58	$	1.08	$	1.27

Equity awards

For the three-month and nine-month fiscal periods ended September 28, 2018, respectively, 169,235 and 183,595 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period. For the three-month and nine-month fiscal periods ended September 29, 2017, respectively, 230,272 and 267,653 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period.

2017 Convertible Notes

For the three-month and nine-month fiscal periods ended September 29, 2017, shares issuable under the 2017 Notes that were dilutive during the period were included in the calculation of earnings per share as the conversion price for the 2017 Notes was less than the average share price of the Company's stock.

2024 Convertible Notes

For the three-month and nine-month fiscal periods ended September 28, 2018, shares issuable under the Convertible Notes due 2024 were included in the diluted earnings per share calculation because the conversion price was less than the average market price of the Company's stock during the periods. For the three-month and nine-month fiscal periods ended September 29, 2017, shares issuable under the Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because the conversion price was greater than the average market price of the Company's stock during the periods.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

14. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)

Warrants

For the nine-month fiscal period ended September 28, 2018, shares issuable under the warrants issued in connection with the Company's 2017 Notes were included in the calculation for diluted earnings per share as the strike price of the warrants was less than the average price of the Company's stock. For the three-month and nine-month fiscal periods ended September 29, 2017, shares issuable under the warrants issued in connection with the Company's 2017 Notes were included in the calculation for diluted earnings per share as the strike price of the warrants was less than the average price of the Company's stock.

15. SHARE-BASED ARRANGEMENTS

General

The Company accounts for stock options, restricted stock awards, restricted stock units and performance shares as equity awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan which is accounted for as a liability award.

Compensation expense for stock options, restricted stock awards and restricted stock units is recognized on a straight-line basis over the vesting period of the awards. Share-based compensation expense recorded for the three-month and nine-month fiscal periods ended September 28, 2018, was $1.2 million and $5.0 million, respectively. Share-based compensation expense recorded for the three-month and nine-month fiscal periods ended September 29, 2017, was $1.2 million and $4.9 million, respectively.

From time-to-time, the Company has issued stock awards with market and performance based conditions. Currently, there are three awards with these conditions that have not been settled. The number of shares earned under an award granted in 2014 has been determined at a 139.9% achievement level, representing 1,506 shares to be delivered in 2019. The number of shares earned under an award granted in 2015 has been determined at a 142.3% achievement level, representing 1,573 shares to be delivered in 2019. The remaining shares for the award granted in 2016 has not yet been determined; however, assuming a 100% achievement level, the number of shares would be 1,060. The Company measures the cost of these awards based on their grant date fair value to the extent of the probable number of shares to be earned upon vesting. Amortization of this cost is recorded on a straight-line basis over the requisite service period. Throughout the course of the requisite service period, the Company monitors the level of achievement compared to the target and adjusts the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the updated most probable outcome. Compensation expense for these awards for the three-month and nine-month fiscal periods ended September 28, 2018, and September 29, 2017, was not material.

Stock option activity was as follows:



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2018				September 28, 2018
	Options		Weighted - average exercise price		Options		Weighted - average exercise price
Options outstanding at beginning of period	965,435		$	45.73	925,385		$	40.43
Granted	—		$	—	199,510		$	62.46
Exercised	(13,112	)	$	23.09	(160,388	)	$	34.42
Forfeited or expired	(10,983	)	$	57.54	(23,167	)	$	49.44
Options outstanding at September 28, 2018	941,340		$	45.90	941,340		$	45.90

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

15. SHARE-BASED ARRANGEMENTS (CONTINUED)

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The following table indicates the weighted-average assumptions used in estimating fair value:



	For the Nine Months Ended
	September 28, 2018			September 29, 2017
Expected option term (years)	4.9			5.0
Expected volatility	18.1		%	19.9		%
Risk-free interest rate	2.6		%	1.9		%
Expected dividend yield	1.5		%	1.6		%
Per share fair value of options granted		$10.65			$8.61

Restricted stock award and restricted stock unit activity was as follows:



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2018				September 28, 2018
	Restricted Stock		Weighted- average grant date fair value		Restricted Stock		Weighted- average grant date fair value
Restricted Stock outstanding at beginning of period	151,226		$	49.96	154,882		$	44.50
Granted	—		$	—	60,247		$	62.73
Vested	(200	)	$	50.85	(61,666	)	$	48.76
Forfeited or expired	(3,289	)	$	54.00	(5,726	)	$	51.60
Restricted Stock outstanding at September 28, 2018	147,737		$	49.87	147,737		$	49.87

Plan Amendments

On April 18, 2018, the shareholders of the Company approved the amendment and restatement of the 2013 Management Incentive Plan (“the 2013 Plan”). The amendment increased the number of authorized shares by 2,250,000 shares. As of September 28, 2018, 2,470,701 shares were available for grant under the plan.

Also on April 18, 2018, the shareholders of the Company approved the amendment and restatement of the Kaman Corporation Employee Stock Purchase Plan (“ESPP”). The amendment increased the number of shares of common stock available under the ESPP by 500,000 shares. As of September 28, 2018, 628,105 shares were available for purchase under the plan.

16. SEGMENT AND GEOGRAPHIC INFORMATION

The Company is organized based upon the nature of its products and services, and is composed of two operating segments each overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its Chief Operating Decision Maker (“CODM”), reviews operating results for the purposes of allocating resources and assessing performance. The Company has not aggregated operating segments for purposes of identifying reportable segments.

The Distribution segment is a leading power transmission, motion control and fluid power industrial distributor with operations throughout the United States. The segment provides electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components, along with engineered integrated solutions to its customers' most challenging applications serving a broad spectrum of industrial markets, including both maintenance, repair and overhaul ("MRO") and original equipment manufacturer ("OEM") customers.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month and nine-month fiscal periods ended September 28, 2018 and September 29, 2017

(Unaudited)

16. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

The Aerospace segment produces and markets aerospace solutions consisting of military and defense, missile and bomb fuze and commercial aerospace products. These solutions include proprietary aircraft bearings and components; super precision, miniature ball bearings for the medical, industrial and aerospace markets; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the U.S. and allied militaries. The segment also markets the design and supply of aftermarket parts to businesses performing MRO in aerospace markets; performs helicopter subcontract work; restores, modifies and supports the Company's SH-2G Super Seasprite maritime helicopters; manufactures and supports the Company's K-MAX® manned and unmanned medium-to-heavy lift helicopters; and provides engineering design, analysis and certification services.

Summarized financial information by business segment is as follows:



	For the Three Months Ended				For the Nine Months Ended
In thousands	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
Net sales:
Distribution	$	285,924	$	267,641	$	859,379	$	817,965
Aerospace	157,134		179,405		515,135		514,028
Net sales	$	443,058	$	447,046	$	1,374,514	$	1,331,993
Operating income:
Distribution⁽¹⁾	$	14,592	$	13,092	$	39,972	$	40,165
Aerospace⁽¹⁾	7,206		31,318

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$59.12	28	$1,650

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

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

PII	Polaris Industries
MSA	MSA Safety
RUN	Sunrun
OFLX	Omega Flex
BOOM	Dynamic Materials
PKOH	Park Ohio Holdings
SPLP	Steel Partners Holdings
SIEN	Sientra
CLGN	Collplant Holdings
IDSA	Industrial Services of America

EX-31.1	kamn-9282018ex311.htm
EX-31.2	kamn-9282018ex312.htm
EX-32.1	kamn-9282018ex321.htm
EX-32.2	kamn-9282018ex322.htm