KAMAN Corp [KAMN] Filings

10-Q 1 kamn-20220401.htm 10-Q kamn-20220401

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	April 1, 2022


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

For the transition period from _____ to ______


Commission File Number:			001-35419


KAMAN CORPORATION
(Exact name of registrant as specified in its charter)


Connecticut			06-0613548
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1332 Blue Hills Avenue,

Bloomfield,

Connecticut

06002

(Address of principal executive offices)

(Zip Code)


(860)			243-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock ($1 par value)

KAMN

New York Stock Exchange LLC

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


Yes			☒			No			☐

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


Yes			☒			No			☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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


			☐

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


Yes			☐			No			☒


At April 22, 2022, there were			27,977,507			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)


	April 1, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	129,097	$	140,800
Accounts receivable, net	68,824		73,524
Contract assets	99,360		112,354
Contract costs, current portion	841		850
Inventories	209,527		193,100
Income tax refunds receivable	14,241		13,832
Other current assets	14,506		12,083
Total current assets	536,396		546,543
Property, plant and equipment, net of accumulated depreciation of $256,512 and $251,888, respectively	197,073		197,822
Operating right-of-use assets, net	10,066		11,011
Goodwill	238,074		240,681
Other intangible assets, net	134,990		138,074
Deferred income taxes	15,601		15,717
Contract costs, noncurrent portion	10,114		10,249
Other assets	37,941		38,385
Total assets	$	1,180,255	$	1,198,482
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable – trade	$	41,446	$	42,134
Accrued salaries and wages	27,668		38,892
Contract liabilities, current portion	2,808		2,945
Operating lease liabilities, current portion	4,333		4,502
Income taxes payable	443		386
Other current liabilities	35,002		32,076
Total current liabilities	111,700		120,935
Long-term debt, excluding current portion, net of debt issuance costs	197,297		189,421
Deferred income taxes	6,137		6,506
Underfunded pension	16,310		21,786
Contract liabilities, noncurrent portion	16,528		16,528
Operating lease liabilities, noncurrent portion	6,380		7,140
Other long-term liabilities	39,155		39,837
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding	—		—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,550,123 and 30,434,269 shares issued, respectively	30,550		30,434
Additional paid-in capital	238,417		248,153
Retained earnings	755,519		750,445
Accumulated other comprehensive income (loss)	(115,841)		(111,385)
Less 2,591,242 and 2,573,896 shares of common stock, respectively, held in treasury, at cost	(121,897)		(121,318)
Total shareholders’ equity	786,748		796,329
Total liabilities and shareholders’ equity	$	1,180,255	$	1,198,482

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
	April 1, 2022		April 2, 2021
Net sales	$	158,048	$	171,616
Cost of sales	107,461		118,711
Gross profit	50,587		52,905
Selling, general and administrative expenses	39,721		38,128
Research and development costs	5,113		4,226
Intangible asset amortization expense	2,467		2,637
Costs from transition services agreement	—		705
Restructuring and severance costs	169		1,352
Loss on sale of business	—		234
Net loss on sale of assets	60		10
Operating income	3,057		5,613
Interest expense, net	2,481		4,251
Non-service pension and post retirement benefit income	(5,263)		(6,643)
Income from transition services agreement	—		(475)
Other expense, net	504		289
Earnings before income taxes	5,335		8,191
Income tax expense	1,307		207
Net earnings	$	4,028	$	7,984

Earnings per share:
Basic earnings per share	$	0.14	$	0.29
Diluted earnings per share	$	0.14	$	0.29
Average shares outstanding:
Basic	27,950		27,815
Diluted	28,082		27,867

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)


	For the Three Months Ended
	April 1, 2022		April 2, 2021
Net earnings	$	4,028	$	7,984
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other	(5,218)		15,513
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $228 and $250, respectively	762		842
Other comprehensive (loss) income	(4,456)		16,355
Comprehensive (loss) income	$	(428)	$	24,339

See accompanying notes to condensed consolidated financial statements.


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


	For the Three Months Ended
	April 1, 2022		April 2, 2021
Cash flows from operating activities:
Net earnings	$	4,028	$	7,984
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	8,832		9,209
Amortization of debt issuance costs	442		424
Accretion of convertible notes discount	—		738
Provision for doubtful accounts	135		173
Loss on sale of business	—		234
Net loss on sale of assets	60		10
Net loss on derivative instruments	449		590
Stock compensation expense	2,081		1,743
Deferred income taxes	(1,247)		1,793
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable	4,307		50,254
Contract assets	12,973		(5,704)
Contract costs	144		(432)
Inventories	(17,285)		(13,655)
Income tax refunds receivable	(410)		418
Operating right of use assets	915		799
Other assets	(2,249)		1,042
Accounts payable - trade	(612)		(14,707)
Contract liabilities	(137)		(5,439)
Operating lease liabilities	(899)		(908)
Acquired retention plan payments	—		(25,108)
Other current liabilities	(10,581)		(6,796)
Income taxes payable	53		1,173
Pension liabilities	(1,876)		(5,452)
Other long-term liabilities	(140)		(798)
Net cash used in operating activities	(1,017)		(2,415)
Cash flows from investing activities:
Proceeds from sale of business, net of cash on hand	—		(3,428)
Expenditures for property, plant & equipment	(6,877)		(4,678)
Other, net	424		6
Net cash used in investing activities	(6,453)		(8,100)
Cash flows from financing activities:
Purchase of treasury shares	(575)		(344)
Dividends paid	(5,572)		(5,545)
Other, net	2,112		1,205
Net cash used in financing activities	(4,035)		(4,684)
Net decrease in cash and cash equivalents	(11,505)		(15,199)
Effect of exchange rate changes on cash and cash equivalents	(198)		(166)
Cash and cash equivalents and restricted cash at beginning of period (See Note 3)	140,800		136,089
Cash and cash equivalents and restricted cash at end of period	$	129,097	$	120,724

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

1. BASIS OF PRESENTATION

Following the sale of the Company's Distribution business in 2019, the Company operated as one segment. In the fourth quarter of 2021, our Chief Operating Decision Maker ("CODM") established a new structure for the Company to better align the Company's businesses to support capital allocation plans, portfolio management and growth. This new structure resulted in the introduction of three reportable segments: Engineered Products, Precision Products and Structures. See Note 5, Revenue and Segment Information, for 2022 financial results by segment and a recast of financial results by segment for the three-month fiscal period ended April 2, 2021.

In the opinion of management, the condensed consolidated financial information reflects all adjustments necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented, but do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in prior year financial statements and notes thereto have been reclassified to conform to current year presentation. The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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 first quarters for 2022 and 2021 ended on April 1, 2022, and April 2, 2021, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In May 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)". The objective of this standard update is to clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as either an adjustment to equity and, if so, the related earnings per share ("EPS") effects, if any, or as an expense and, if so, the manner and pattern of recognition. The standard update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption was permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2022. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity". The objective of this standard update is to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. The update removes certain separation models between a debt component and equity or derivative component for certain convertible instruments. Entities that previously required separate accounting for conversion features will report less interest expense as those conversion features were recorded as debt discounts which were amortized over the term of the debt. In addition, this ASU adds new disclosure requirements for convertible instruments to improve the decision usefulness and relevance of the information being provided to users of financial statements, clarifies the guidance for determining whether a contract qualifies for a scope exception from derivative accounting, and requires the application of the if-converted method when calculating diluted EPS guidance to improve consistency. The standard update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption of the standard was permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. An entity should adopt the guidance as of the beginning of its annual fiscal year and can do so using a modified retrospective method or fully retrospective method of transition. On January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective basis which resulted in a cumulative effect adjustment to the opening balance sheet. The prior period condensed consolidated financial statements have not been retroactively adjusted and continue to be reported under the accounting standard in effect for the period.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Adopted - continued

The cumulative effect of the adjustments recorded to the opening balance sheet on January 1, 2022 for the adoption of ASU 2020-06 was as follows:


in thousands	Balance at December 31, 2021		Adjustments due to ASU 2020-06		Balance at January 1, 2022
Assets
Deferred income taxes	$	15,717	$	1,770	$	17,487

Liabilities
Long-term debt, excluding current portion, net of debt issuance costs	$	189,421	$	7,624	$	197,045

Equity
Additional paid-in capital	$	248,153	$	(12,489)	$	235,664
Retained earnings	750,445		6,635		757,080

Beginning in 2022, the Company will calculate diluted EPS using the if-converted method for its convertible debt instruments, which is not expected to have a material impact on the consolidated results. Historically, the Company used the treasury stock method to calculate diluted EPS for its convertible debt instruments. In the first quarter of 2022, there was no impact as diluted EPS calculated to $0.14 using both the if-converted method and treasury stock method.

Refer to Note 13, Debt, for further information on the Company's convertible notes.

Recent Accounting Standards Yet to be Adopted

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method". The amendments in this standard update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. This standard update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of this update for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future hedging activity.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". The amendments in this standard update address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This standard update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the standard is permitted, including adoption in an interim period. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future business combinations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted - continued

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The objective of the standard is to address operational challenges likely to arise in accounting for contract modifications and hedge accounting due to reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The standard update is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected for a topic or industry subtopic, the amendments in this standard update must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. An entity may elect to apply the amendments for eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of that interim period. If an entity elects to apply any of the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020 and March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship. In December 2021, the Company amended its credit agreement to move its LIBOR benchmark for non-USD borrowings to other non-USD benchmark rates. Future USD borrowings under this current Credit Agreement will continue be based on LIBOR. The impact of the adoption of this standard update is dependent on the Company's contracts modifications as a result of reference rate reform; however, the Company does not expect the adoption of the amendments associated with hedging relationships to have a material impact on the Company's consolidated financial statements.

Subsequent to the issuance of ASU 2020-04, the FASB issued the following update: ASU 2021-01, "Reference Rate Reform (Topic 848) - Scope". The amendments in this update affect the guidance within ASU 2020-04 and are being assessed with ASU 2020-04.

3. DISPOSALS

UK Composites Business

In the fourth quarter of 2020, the Company received approval from its Board of Directors to sell its United Kingdom ("UK") Composites division. The sale of the UK Composites business did not meet the criteria set forth in ASC 205-20 for discontinued operations as it did not reflect a significant shift in the Company's strategy. As a result of the approved plan, the UK Composites division met the criteria set forth in ASC 205-20 for held for sale presentation at December 31, 2020. At December 31, 2020, the assets of the UK Composites business were considered impaired as the estimated fair value of the disposal group was lower than the estimated carrying value of the UK Composites business. As such, the assets of the UK Composites business were written off and the related liabilities of the UK division to be sold were reclassified to liabilities held for sale, as of December 31, 2020 on the Company's Consolidated Balance Sheets. The Company recorded an impairment loss of $36.3 million in the year ended December 31, 2020. The Company sold its UK Composites division in a transaction that closed on February 2, 2021. In the three-month fiscal period ended April 2, 2021, when the sale was finalized, the Company recorded an additional loss of $0.2 million, resulting in a total loss on the sale of the UK Composites business of $36.5 million.

Cash and cash equivalents and restricted cash at the beginning of the period on the Company's Condensed Consolidated Statement of Cash Flows for the three-month fiscal period ended April 2, 2021 included $6.6 million of cash that was included in the UK Composites business disposal group. Given the assets of the disposal group were recognized net of the impairment recorded in the year ended December 31, 2020, such amounts were not reflected on the Company's Condensed Consolidated Balance Sheet at December 31, 2020.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

3. DISPOSALS (CONTINUED)

Distribution Business

On August 26, 2019, the Company completed the sale of its Distribution business. Upon closing, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology ("IT"), human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. The buyer exercised an option to extend the support period for up to one additional year for certain services. During the third quarter of 2021, the TSA expired and all services were completed as of the end of the period. As such, there was no activity associated with the TSA in 2022. Through the term of the TSA, the Company incurred $18.9 million in costs and earned $13.0 million in income associated with the TSA. Of these amounts, $0.7 million in costs were incurred and $0.5 million in income was earned in three-month fiscal period ended April 2, 2021. These amounts were included in costs from transition services agreement and income from transition services agreement on the Company's Condensed Consolidated Statements of Operations, respectively.

Since the sale of the Distribution business, cash outflows from the Company to its former Distribution business totaled $8.7 million through April 1, 2022, which primarily related to Distribution employee and employee-related costs incurred prior to the sale. There were no cash flows from the Company to its former Distribution business in the three-month fiscal periods ended April 1, 2022 and April 2, 2021. Since the sale of the Distribution business, cash inflows from the Company's former Distribution business to the Company totaled $18.9 million through April 1, 2022, which primarily related to cash received for services performed under the TSA and the $5.2 million working capital adjustment settled in the first quarter of 2020. Cash inflows from the Company's former Distribution business received in the three-month fiscal period ended April 2, 2021 totaled $0.5 million. Cash inflows from the former Distribution business were not material in 2022.

4. BUSINESS COMBINATIONS

On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.5 million. Upon closing, the Company funded $24.7 million associated with employee retention plans at Bal Seal. This amount and related interest was included in restricted cash on the Company's Consolidated Balance Sheets as of December 31, 2020. Eligible participants received an allocation of the escrow balance one year following the acquisition date, which was reflected in the Company's cash flows from operating activities for the three-month fiscal period ended April 2, 2021.

5. REVENUE AND SEGMENT INFORMATION

The Company is organized based upon the nature of its products and services, and is composed of three operating segments, each overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its 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 Engineered Products segment serves the aerospace and defense, industrial and medical markets providing sophisticated proprietary aircraft bearings and components; super precision, miniature ball bearings; and proprietary spring energized seals, springs and contacts.

The Precision Products segment serves the aerospace and defense markets providing precision safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; restoration, modification and support of the Company's SH-2G Super Seasprite maritime helicopters; manufacture and support of the heavy lift K-MAX® manned helicopter, the K-MAX TITAN unmanned aerial system and the KARGO UAV unmanned aerial system, a purpose built autonomous medium lift logistics vehicle.

The Structures segment serves the aerospace and defense and medical end markets providing sophisticated complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft, and medical imaging solutions.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

5. REVENUE AND SEGMENT INFORMATION (CONTINUED)

Summarized financial information by business segment is as follows:


	For the Three Months Ended
	April 1, 2022		April 2, 2021
In thousands
Net sales:
Engineered Products	$	81,452	$	71,779
Precision Products	47,549		60,533
Structures	29,047		39,304
Net sales	$	158,048	$	171,616
Operating income (loss):
Engineered Products	$	11,042	$	4,906
Precision Products	3,409		13,053
Structures	(617)		320
Corporate expense	(10,548)		(10,365)
Other unallocated expenses, net(1)	(229)		(2,301)
Operating income	$	3,057	$	5,613

(1) Other unallocated expenses, net include costs from the TSA, restructuring and severance costs, loss on sale of business, and net loss on sale of assets.

Disaggregation of Revenue

The following table disaggregates segment revenue by major product line:


	For the Three Months Ended
	April 1, 2022
	Engineered Products		Precision Products		Structures		Total
In thousands
Defense	$	9,653	$	5,322	$	16,255	$	31,230
Safe and Arm Devices	—		37,322		—		37,322
Commercial, Business & General Aviation	32,378		3,767		10,813		46,958
Medical	21,149		—		1,979		23,128
Industrial & Other	18,272		1,138		—		19,410
Total revenue	$	81,452	$	47,549	$	29,047	$	158,048

	For the Three Months Ended
	April 2, 2021
	Engineered Products		Precision Products		Structures		Total
In thousands
Defense	$	11,228	$	6,994	$	25,389	$	43,611
Safe and Arm Devices	—		41,586		—		41,586
Commercial, Business & General Aviation	25,072		10,902		11,984		47,958
Medical	18,652		—		1,931		20,583
Industrial & Other	16,827		1,051		—		17,878
Total revenue	$	71,779	$	60,533	$	39,304	$	171,616

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

5. REVENUE AND SEGMENT INFORMATION (CONTINUED)

Disaggregation of Revenue - continued

COVID-19

The impact of the novel coronavirus (“COVID-19”) and the precautionary measures instituted by governments and businesses to mitigate the spread, including limiting non-essential travel, have contributed to a general slowdown in the global economy. The Company has implemented strategies to limit the risk to its operations with a continued focus on the health of its employees and the satisfaction of its customers’ requirements. Despite all of these efforts to mitigate the risks associated with COVID-19, the effects of the pandemic have adversely impacted our commercial end markets, more specifically Commercial, Business and General Aviation customers. Management is encouraged by the recoveries for these products and the strong order intake seen in the first three months of 2022. The extent and duration of time to which COVID-19 may adversely impact the Company depends on future developments, which continue to be uncertain and unpredictable.

The following table disaggregates total revenue by product types.


	For the Three Months Ended
	April 1, 2022
	Engineered Products		Precision Products		Structures		Total
Original Equipment Manufacturer	41	%	2	%	18	%	61	%
Aftermarket	11	%	4	%	—	%	15	%
Safe and Arm Devices	—	%	24	%	—	%	24	%
Total revenue	52	%	30	%	18	%	100	%

	For the Three Months Ended
	April 2, 2021
	Engineered Products		Precision Products		Structures		Total
Original Equipment Manufacturer	32	%	8	%	23	%	63	%
Aftermarket	10	%	3	%	—	%	13	%
Safe and Arm Devices	—	%	24	%	—	%	24	%
Total revenue	42	%	35	%	23	%	100	%

Disaggregation of Research and Development Costs

The following table presents research and development costs by segment:


	For the Three Months Ended
	April 1, 2022		April 2, 2021
In thousands
Engineered Products	$	2,243	$	2,822
Precision Products	2,803		1,402
Structures	67		2
Total research and development costs	$	5,113	$	4,226

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

5. REVENUE AND SEGMENT INFORMATION (CONTINUED)

Other

For contracts in which revenue is recognized over time, the Company performs detailed quarterly reviews of the progress and execution of its performance obligations under these contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. Based upon these reviews, the Company will record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, a provision for the entire anticipated contract loss is recorded at that time.

Net changes in revenue associated with cost growth on the Company's over time contracts were as follows:


	For the Three Months Ended
	April 1, 2022		April 2, 2021
In thousands
Net change in revenue due to change in profit estimates	$	905	$	2,865

In the three-month fiscal periods ended April 1, 2022 and April 2, 2021, the net increases in revenue were primarily related to favorable cost performance on the joint programmable fuze ("JPF") contract with the U.S. Government ("USG"), partially offset by cost growth on certain structures programs and legacy fuzing contracts.

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. Backlog at April 1, 2022 and December 31, 2021, and the portion of backlog the Company expects to recognize revenue on over the next twelve months is as follows:


	April 1, 2022(1)		December 31, 2021
In thousands
Backlog	$	705,023	$	700,923

(1) The Company expects to recognize revenue on approximately 62% of backlog as of April 1, 2022 over the next twelve months.

6. RESTRUCTURING AND SEVERANCE COSTS

Cost Reduction Initiative

The Company continues to evaluate its cost structure with the objective of a lean organizational structure that improves operational efficiency and provides a scalable infrastructure which facilitates future growth opportunities. We have identified workforce reductions and other reductions in certain general and administrative expenses to support the cost savings initiative. In the three-month fiscal periods ended April 1, 2022 and April 2, 2021, the Company incurred $0.2 million and $1.4 million in severance costs associated with these cost reduction efforts, which were included in restructuring and severance costs on the Company's Condensed Consolidated Statements of Operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

7. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consisted of the following:


	April 1, 2022		December 31, 2021
In thousands
Trade receivables	$	24,239	$	19,228
U.S. Government contracts:
Billed	13,386		14,748
Cost and accrued profit - not billed	149		167
Commercial and other government contracts
Billed	31,486		36,787
Cost and accrued profit - not billed	900		4,141
Less allowance for doubtful accounts	(1,336)		(1,547)
Accounts receivable, net	$	68,824	$	73,524

The Company performs ongoing evaluations of its customers’ current creditworthiness, as determined by the review of their credit information, to determine if events have occurred subsequent to the recognition of revenue and the related receivable that provide evidence that such receivable will be realized in an amount less than that recognized at the time of sale. Estimates of credit losses are based on historical losses, current economic conditions, geographic considerations, and in some cases, evaluating specific customer accounts for risk of loss.

The following table summarizes the activity in the allowance for doubtful accounts in the three-month fiscal period ended April 1, 2022:


In thousands
Balance at December 31, 2021	$	(1,547)
Provision	(135)
Amounts written off	137
Recoveries	208
Changes in foreign currency exchange rates	1
Balance at April 1, 2022	$	(1,336)

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


	April 1, 2022		December 31, 2021
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	900	$	900

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

8. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES

Activity related to contract assets, contract costs and contract liabilities was as follows:


	April 1, 2022		December 31, 2021		$ Change		% Change
In thousands
Contract assets	$	99,360	$	112,354	$	(12,994)	(11.6)	%

Contract costs, current portion	$	841	$	850	$	(9)	(1.1)	%
Contract costs, noncurrent portion	$	10,114	$	10,249	$	(135)	(1.3)	%

Contract liabilities, current portion	$	2,808	$	2,945	$	(137)	(4.7)	%
Contract liabilities, noncurrent portion	$	16,528	$	16,528	$	—	—	%

Contract Assets

The decrease in contract assets was primarily due to higher amounts billed in the current period compared to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for work performed and not yet billed on the JPF program, the KAflex® program and certain structures programs. There were no significant impairment losses related to the Company's contract assets during the three-month fiscal periods ended April 1, 2022 and April 2, 2021.

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


	April 1, 2022		December 31, 2021
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	695	$	682

Contract Costs

At April 1, 2022 and December 31, 2021, costs to fulfill a contract were $11.0 million and $11.1 million, respectively. These amounts were included in contract costs, current portion and contract costs, noncurrent portion on the Company's Condensed Consolidated Balance Sheets at April 1, 2022 and December 31, 2021. There were no costs to obtain a contract at April 1, 2022 and December 31, 2021.

Contract costs, current portion at April 1, 2022 remained relatively flat compared to the balance at December 31, 2021. This was primarily attributable to the amortization of contract costs, mostly offset by the reclassification of a portion of costs to fulfill certain structures programs from contract costs, noncurrent portion. For the three-month fiscal periods ended April 1, 2022 and April 2, 2021, amortization of contract costs was $0.1 million and $1.9 million, respectively.

The decrease in contract costs, noncurrent portion was attributable to the reclassification of costs on certain structures programs to contract costs, current portion.

Contract Liabilities

The decrease in contract liabilities, current portion was primarily due to revenue recognized on our seals, springs and contacts, partially offset by advances received for the SH-2G program for New Zealand. Revenue recognized related to contract liabilities, current portion was $0.5 million and $9.4 million in the three-month fiscal periods ended April 1, 2022 and April 2, 2021, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

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

Contract Liabilities - continued

Contract liabilities, noncurrent portion at April 1, 2022 remained flat compared to the balance at December 31, 2021. For the three-month fiscal periods ended April 1, 2022 and April 2, 2021, the Company did not recognize revenue against contract liabilities, noncurrent portion.

9. FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

•Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:


	April 1, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
In thousands
Debt (1)	$	199,500	$	203,470	$	191,876	$	213,222

(1) These amounts are classified within Level 2.

The above fair values were computed based on quoted market prices and discounted future cash flows (observable inputs), as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transactions occurred.

The fair values of cash and cash equivalents, accounts receivable, net and accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments. The Company's cash and cash equivalents at April 1, 2022 and December 31, 2021 included $65.5 million of Level 1 money market funds in both periods.

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 April 1, 2022 and December 31, 2021, the derivative instruments were included in other current assets and other current liabilities on the Company's 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 April 1, 2022, such credit risks had not had an adverse impact on the fair value of these instruments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

10. 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 (loss) 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 (loss) 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 April 1, 2022 and December 31, 2021. The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month fiscal periods ended April 1, 2022 and April 2, 2021.

11. INVENTORIES

Inventories consisted of the following:


	April 1, 2022		December 31, 2021
In thousands
Raw materials	$	21,119	$	19,123
Contracts and other work in process (including certain general stock materials)	151,927		138,737
Finished goods	36,481		35,240
Inventories	$	209,527	$	193,100

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


	April 1, 2022		December 31, 2021
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	622	$	552

At April 1, 2022 and December 31, 2021, $73.5 million and $69.2 million, respectively, of K-MAX® inventory 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 $41.2 million of the K-MAX® inventory will be sold after April 1, 2023, based upon the anticipation of additional aircraft manufacturing and the requirements to support the fleet for the foreseeable future.

At April 1, 2022 and December 31, 2021, $5.7 million and $6.0 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 $4.1 million of the SH-2G(I) inventory will be sold after April 1, 2023. This balance represents spares requirements and inventory to be used on SH-2G programs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

12. 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:


	Engineered Products		Precision Products		Structures		Total
In thousands
Gross balance at December 31, 2021	$	199,306	$	41,375	$	66,559	$	307,240
Accumulated impairment	—		—		(66,559)		(66,559)
Net balance at December 31, 2021	199,306		41,375		—		240,681
Additions	—		—		—		—
Impairments	—		—		—		—
Foreign currency translation	(2,607)		—		—		(2,607)
Ending balance at April 1, 2022	$	196,699	$	41,375	$	—	$	238,074

Accumulated impairment at end of period	$	—	$	—	$	(66,559)	$	(66,559)

Other Intangible Assets

Other intangible assets consisted of:


		At April 1,				At December 31,
		2022				2021
	Amortization Period	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
In thousands
Customer lists / relationships	6-38 years	$	126,540	$	(36,095)	$	127,206	$	(35,096)
Developed technologies	7-20 years	44,922		(14,513)		45,170		(13,591)
Trademarks / trade names	15-40 years	16,834		(2,756)		16,982		(2,659)
Non-compete agreements and other	1-15 years	4,583		(4,572)		4,629		(4,617)
Patents	17 years	523		(476)		523		(473)
Total		$	193,402	$	(58,412)	$	194,510	$	(56,436)

13. DEBT

Convertible Notes

During May 2017, the Company issued $200.0 million aggregate principal amount of convertible senior unsecured notes due May 2024 (the "2024 Notes") pursuant to an indenture (the "Indenture"), dated May 12, 2017, between the Company and U.S. Bank National Association, as trustee. In connection therewith, the Company entered into certain capped call transactions that cover, collectively, the number of shares of the Company's common stock underlying the 2024 Notes.

On May 12, 2017, the Company issued $175.0 million in principal amount of 2024 Notes, in a private placement offering. On May 24, 2017, the Company issued an additional $25.0 million in principal amount of 2024 Notes pursuant to the initial purchasers' exercise of their overallotment option, resulting in the issuance of an aggregate $200.0 million principal amount of 2024 Notes. The 2024 Notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2017. The 2024 Notes will mature on May 1, 2024, unless earlier repurchased by the Company or converted. The Company will settle any conversions of the 2024 Notes in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

13. DEBT (CONTINUED)

Convertible Notes - continued

The sale of the Distribution business in the third quarter of 2019 was deemed to be a "Fundamental Change" and a "Make-Whole Fundamental Change" pursuant to the terms and conditions of the indenture governing the 2024 Notes. As a result, the sale triggered the right of the holders of our 2024 Notes to require us to repurchase all of the 2024 Notes, or any portion thereof that is a multiple of $1,000 principal amount on September 27, 2019. The aggregate principal amount of the 2024 Notes validly tendered and not validly withdrawn was $0.5 million, representing 0.25% of all outstanding notes. Holders of such notes receive the purchase price equal to 100% of the principal amount of the 2024 Notes being purchased, plus accrued and unpaid interest.

The following table illustrates the conversion rate at the date of issuance of the 2024 Notes:


2024 Notes
Conversion Rate per $1,000 principal amount (1)						15.3227
Conversion Price (2)						65.2626
Contingent Conversion Price (3)						84.8413
Aggregate shares to be issued upon conversion (4)						3,056,879

(1) Represents the number of shares of Common Stock hypothetically issuable per each $1,000 principal amount of 2024 Notes, subject to adjustments upon the occurrence of certain specified events in accordance with the terms of the Indenture.

(2) Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option within the 2024 Notes. If the Company's share price exceeds the conversion price at conversion, the noteholders would be entitled to receive additional consideration either in cash, shares or a combination thereof, the form of which is at the sole discretion of the Company.

(3) Prior to November 1, 2023, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after July 1, 2017, and only during any such fiscal quarter, if the last reported sale price of the Company's common stock was greater than or equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, (2) during the five consecutive business day period following any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change (as defined in the Indenture), holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount to be repurchased, plus any accrued and unpaid interest. As of April 1, 2022, none of the conditions permitting the holders of the 2024 Notes to convert had been met. Therefore, the 2024 Notes are classified as long-term debt.

(4) This represents the number of shares hypothetically issuable upon conversion of 100% of the outstanding aggregate principal amount of the 2024 Notes at each date; however, the terms of the 2024 Notes state that the Company may pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The Company currently intends to settle the aggregate principal amount in cash. Amounts due in excess of the principal, if any, also may be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.

In connection with the 2024 Notes offering, the Company entered into capped call transactions with certain of the initial purchasers or their respective affiliates. These transactions are intended to reduce the potential dilution to the Company's shareholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon any future conversion of the notes in the event that the market price per share of the Company's common stock is greater than the strike price of the capped call transactions, with such reduction and/or offset subject to a cap based on the cap price of the capped call transactions. Under the terms of the capped call transactions, the strike price ($65.2626) and the cap price ($88.7570) are each subject to adjustment in certain circumstances. In connection with establishing their initial hedges of the capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with respect to the Company’s common stock concurrently with or shortly after the pricing of the notes. The capped call transactions, which cost an aggregate $20.5 million, were recorded as a reduction of additional paid-in capital.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

13. DEBT (CONTINUED)

Convertible Notes - continued

ASC Topic 815 - Derivatives and Hedging ("ASC 815") provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of our capped call transactions require net-share settlement. Based on the guidance in ASC 815, the capped call transactions were recorded as a reduction of equity as of the trade date. ASC 815 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in shareholders' equity in its balance sheet. The Company concluded the capped call transactions should be accounted for in shareholders' equity and are, therefore, not to be considered a derivative instrument.

At issuance, ASC 470-20 "Debt with Conversion and Other Options" (“ASC 470-20”) clarified the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specified that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflects the issuer's non-convertible debt borrowing rate which interest costs are to be recognized in subsequent periods. The note payable principal balance for the 2024 Notes at the date of issuance of $200.0 million was bifurcated into the debt component of $179.5 million and the equity component of $20.5 million. The difference between the note payable principal balance and the fair value of the debt component representing the debt discount was being accreted to interest expense over the term of the 2024 Notes. The fair value of the debt component was recognized using a 5.0% discount rate, representing the Company's borrowing rate at the date of issuance for a similar debt instrument without a conversion feature with an expected life of seven years. At January 1, 2022, the Company adopted ASU 2020-06, which removed certain separation models between a debt component and equity component for certain convertible instruments. As a result, the convertible notes balance consists solely of a debt component as of the adoption. Refer to Note 2, Recent Accounting Standards, for further information on the cumulative effect adjustment recorded at adoption.

The Company incurred $7.4 million of debt issuance costs in connection with the sale of the 2024 Notes, which was allocated between the debt and equity components of the instrument at issuance. Of the total amount, $0.7 million was recorded as an offset to additional paid-in capital. The balance, $6.7 million, was recorded as a contra-debt balance and was being amortized over the term of the 2024 Notes. As a result of the adoption of ASU 2020-06, the amount recorded to additional paid-in capital was reclassified to retained earnings in the cumulative effect adjustment. The remaining balance of debt issuance costs is being amortized over the term of the convertible notes. Total amortization expense for the three-month fiscal periods ended April 1, 2022 and April 2, 2021 was $0.2 million in both periods.

The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount and the net carrying value of the liability are as follows:


	2024 Notes
	April 1, 2022		December 31, 2021
In thousands
Principal amount of liability	$	199,500	$	199,500
Unamortized discount(1)	—		7,624
Carrying value of liability	$	199,500	$	191,876

Equity component(1)	$	—	$	20,408

(1)At January 1, 2022, the Company adopted ASU 2020-06, which removed certain separation models between a debt component and equity component for certain convertible instruments. Refer to Note 2, Recent Accounting Standards, for further information on the cumulative effect adjustment recorded at adoption.

Because the embedded conversion option is indexed to the Company’s own stock and would be classified in shareholders’ equity, it does not meet the criterion under ASC 815 that would require separate accounting as a derivative instrument.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

13. DEBT (CONTINUED)

Convertible Notes - continued

Interest expense associated with the 2024 Notes consisted of the following:


	For the Three Months Ended
	April 1, 2022		April 2, 2021
In thousands
Contractual coupon rate of interest	$	1,621	$	1,621
Accretion of convertible notes discount(1)	—		737
Interest expense - convertible notes	$	1,621	$	2,358

(1)In accordance with ASU 2020-06, entities that previously required separate accounting for conversion features will report less interest expense as those conversion features were recorded as debt discounts which were amortized over the term of the debt. Refer to Note 2, Recent Accounting Standards, for further information on the adoption of ASU 2020-06.

The weighted average interest rate on long-term borrowings outstanding as of April 1, 2022 and December 31, 2021 was 3.25% in both periods.

14. PENSION PLANS

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


	For the Three Months Ended
	Qualified Pension Plan				SERP
	April 1, 2022		April 2, 2021		April 1, 2022		April 2, 2021
In thousands
Service cost	$	800	$	1,300	$	—	$	—
Interest cost on projected benefit obligation	4,250		3,525		22		15
Expected return on plan assets	(10,525)		(11,275)		—		—
Amortization of net loss	975		1,075		15		17
Net pension (income) cost	$	(4,500)	$	(5,375)	$	37	$	32

No contributions are expected to be made to the qualified pension plan during 2022. The Company contributed $0.1 million to the SERP through the end of the first quarter of 2022 and plans to contribute an additional $0.4 million to the SERP in 2022. For the 2021 plan year, the Company contributed $10.0 million to the qualified pension plan and $2.7 million to the SERP.

15. 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 maintained its accrual at $0.3 million as of April 1, 2022. 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 remediation has been nearly completed and the Company continues to monitor the results of the remediation. The total amount paid to date in connection with these environmental remediation activities is $1.7 million. At April 1, 2022, the Company had $0.6 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. 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 $14.9 million. At April 1, 2022, the Company had $2.3 million accrued for these environmental remediation activities. A portion ($0.2 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.

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 April 1, 2022, 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Offset Agreement - continued

The Company continues to work with the customer to further define the requirements to satisfy the offset agreement. The satisfaction of the offset requirements will be determined by the customer and is expected to occur over a seven-year period. Deliveries under the contract were completed prior to satisfaction of the offset requirements. 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. Failure to satisfy the offset requirement could also negatively impact the Company's ability to attract future orders from this customer. The Company began recognizing revenue associated with this contract in the third quarter of 2019 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 performance obligations within this contract. At April 1, 2022, $16.5 million in contract liabilities associated with the potential penalties of the offset requirements were included on the Company's Condensed Consolidated Balance Sheets.

Guarantee

During 2020, the Company and the USG entered into a Guaranty Agreement, pursuant to which the Company agreed to guarantee the full, complete and satisfactory performance of its subsidiary, Kaman Precision Products, Inc. ("KPPI") under all current and future contracts with the USG. As of the date of this filing, the only contract in place between KPPI and the USG relates to the production and sale of the JPF. KPPI is currently fulfilling the requirements of Option 15 and Option 16. The guarantee was provided in lieu of a periodic financial capability review by the Financial Capacity Team ("FCT") of the Defense Contract Management Agency ("DCMA"). The Company is unable to estimate the maximum potential amount of future payments under the guarantee as it is dependent on costs incurred by the USG in the event of default. Although the Company believes the risk of default is low given the maturity and operational performance of the JPF program, there can be no assurance that the guarantee will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

16. COMPUTATION OF EARNINGS PER SHARE

The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each 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
	April 1, 2022		April 2, 2021
In thousands, except per share amounts
Net earnings	$	4,028	$	7,984

Basic:
Weighted average number of shares outstanding	27,950		27,815
Basic earnings per share	$	0.14	$	0.29

Diluted(1):
Weighted average number of shares outstanding	27,950		27,815
Weighted average shares issuable on exercise of dilutive stock options	132		52
Total	28,082		27,867

Diluted earnings per share	$	0.14	$	0.29

(1)As a result of the adoption of ASU 2020-06, the Company began calculating diluted earnings per share using the if-converted method for its convertible debt instruments in 2022. Prior to the adoption, the Company calculated diluted earnings per share for its convertible debt instruments using the treasury stock method. The Company adopted ASU 2020-06 using the modified retrospective approach; therefore, prior period results have not been retroactively adjusted. Refer to Note 2, Recent Accounting Standards, for further information on the adoption of ASU 2020-06.

Equity awards

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021, respectively, 645,403 and 440,959 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 periods.

2024 Convertible Notes

For the three-month fiscal period ended April 1, 2022, 3,056,879 shares issuable under Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because their effect was antidilutive. For the three-month fiscal period ended April 2, 2021, shares issuable under the Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because the conversion price was more than the average market price of the Company's stock during the periods.

17. SHARE-BASED ARRANGEMENTS

The Company accounts for stock options, restricted stock awards ("RSAs"), restricted stock units and performance stock units ("PSUs") 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, RSAs, restricted stock units and PSUs is recognized on a straight-line basis over the vesting period of the awards. Throughout the course of the vesting period, the Company monitors the achievement level for the ROIC metric of the PSUs compared to the ROIC target and adjusts the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the most probable outcome. Share-based compensation expense recorded for the three-month fiscal periods ended April 1, 2022 and April 2, 2021 was $2.1 million and $1.7 million, respectively. These amounts were recorded to selling, general and administrative expenses on the Company's Condensed Consolidated Statements of Operations.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 1, 2022 and April 2, 2021

(Unaudited)

17. SHARE-BASED ARRANGEMENTS (CONTINUED)

Stock option activity was as follows:


	For the Three Months Ended
	April 1, 2022
	Options	Weighted - average exercise price
Options outstanding at beginning of period	746,240	$	55.14
Granted	—	$	—
Exercised	(9,676)	$	41.63
Forfeited or expired